How a Capital Gains Tax Hike Could Affect the Home-Based Care M&A Market

The M&A market is heating up again now that uncertainty tied to the COVID-19 crisis is waning. Another factor that could increase transactions and shift the market, though, has nothing to do with home-based care.

Instead, it’s President Joe Biden’s proposed increase to the capital gains tax.

Broadly, a capital gains tax is applied to profits realized on the sale of non-inventory assets. A hike in the tax would not only take from the wallets of home-based care owners generally. It could also affect the total value they receive for their businesses once a transaction is finalized.


The proposed increase would take the top rate — for individuals making more than $1 million per year — from 20% to 39.6%.

“There’s no question that the capital gains tax is affecting the market,” Al Veach, the founder and CEO of Agenda Health, told Home Health Care News. “The Democratic Party, historically speaking, has typically raised the capital gains. Knowing that it was reduced under the Trump administration, your first expectation is that’s going to go back to where it was.”

Austin, Texas-based Agenda Health is an M&A advisory services firm that works with home health, hospice, home care and behavioral health providers.


“Those that are selling their businesses are hoping to leverage capital gains versus personal income, to reduce their tax burden on selling their business,” Veach continued. “So if that number goes up, then that’s just less money they’re going to get out of their business. Almost every seller that I’ve talked to is monitoring that incredibly closely.”

The proposed hike is not law yet, and there’s a chance it will never come to fruition. But for those concerned about being affected by it, they may not want to wait.

If the change is implemented, it could take effect as early as the beginning of 2022. Even for those that aren’t in the top tax bracket, they could still be affected if the sale of their business brings that over that threshold, even temporarily.

“My gut sense now is that there’s a lot of pent-up demand to sell businesses suddenly,” Daniel Gottschalk, the president and co-owner of Family Tree In-Home Care, recently told HHCN. “One reason is that people actually believe that they’re going to make less money selling their business in 2022. So we have seen a flurry of activity due to owners looking to sell their business, more than ever before. But there’s probably multiple drivers to that.”

Family Tree In-Home Care is a concierge home care agency with locations in Texas and Colorado.

Gottschalk is right that capital gains expectations are just one of multiple factors influencing the current environment. Others are the Patient-Driven Groupings Model (PDGM) in home health, COVID-19 and relief that agencies have received from the government during the pandemic.

“I have been watching this closely and honestly am not sure I can really say if the potential capital gains tax increase is having any impact one way or another,” Paul VerHoeve, Mission Healthcare’s CEO, told HHCN in an email. “Obviously activity is higher right now, but I feel it’s more tied to coming out of the pandemic and increased valuations.”

PE-back Mission Healthcare is a San Diego, California-based provider of home health, hospice and palliative care.

Still, the wait-and-see approach could prove costly. If a rush of sellers come to the market at the same time, value could be driven down by that.

There were at least 28 home health deals in Q3 and Q4 2020, according to data from M&A advisory firm Mertz Taggart. In Q1 2021, there were at least 23 transactions in home health, hospice and home care.

But insiders believe that the quarters ahead will produce a “record-breaking” amount of deals in those segments.

“What I anticipate is that if it gets released, and there’s some kind of tax increase that is approved — or looks like it will be approved — by the House and the Senate, then you’re going to see a rush of sellers trying to get their deal done before the end of the year, assuming they don’t retro it back,” Veach said.

It’s a hard equation to solve for some agencies. The question is whether growth and forthcoming demand is more enticing than getting out before realized gains are potentially taxed at a higher rate.

“Whether it be home care, home health or hospice, most of my clients are doing really well after rebounding from COVID,” Veach said. “They’re doing well, and they want to realize those gains. But they don’t want to grow only to find out that a big chunk of that’s going to be taken back. So, it depends on how fast they’re growing and what their expectation is in terms of capital gains increase. But that’s all crystal ball stuff there.”

Capital gains tax fears are likely good for buyers. If there’s more sellers, after all, the M&A market turns more to a buyers’ one.

If sellers flood the market and there becomes an array of options for buyers, those valuations won’t likely be as high on the seller’s end.

“It becomes a supply-and-demand type situation where if there’s more supply of sellers, then that lends itself more to an advantage of buyers,” Veach said. “And that’s why if you’re planning on selling anyway, start now and lock your numbers in, because you don’t want to be one of the many cows in the field, so to speak. You want to go ahead and get in front of that.”

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