In M&A – where discipline is king – communication between potential buyers and home-based care sellers is as critical as it’s ever been.
“The more conversations that buyers and sellers are having pre-LOI, the better for everybody,” Cliff Blessing, EVP and chief development officer at Addus HomeCare Corporation (Nasdaq: ADUS), said during Home Health Care News’ Capital + Strategy event. “Sellers become more informed by what buyers are looking for and they’re then able to adjust to their operating strategy or to the way they present the information. Those touch points with the brokerage advising community are really helpful.”
Building a knowledge base and setting expectations have become paramount between buyers and sellers.
Addus is a Frisco, Texas-based in-home care services provider. It delivers care to about 46,500 consumers through 202 locations across 22 states.
Right now, the company is primarily focused on growing its personal care and skilled home health service lines.
With that in mind, it has had to become more disciplined in the way it approaches its M&A strategy.
“Buyers are becoming more disciplined and I think it’s because of the market that we operate in today,” Blessing said. “Trading multiples from publicly traded companies are lower than what they were a few years ago. The reimbursement uncertainty for skilled home health creates that environment, the debt markets are a little bit tighter and there are some operational challenges from a staffing perspective. In this general market, buyers are just pickier.”
Despite some of those headwinds, M&A experts are extremely bullish on the home-based care space moving forward.
The important thing is to note 2021 – a monster year in home-based care M&A – as an outlier.
“Buyers are not willing to take on the same risk that they were before,” David Berman, managing principal at SimiTree, said during the event. “In 2020, 2021 and early 2022, there were inflated multiples. People were chasing deals because they had to get deals done. They had to deploy capital so they were willing to take on risk. Now, with interest rates rising, with the cost of capital rising, they can’t be as risk tolerant as they were before.”
If both sides of a deal are on the same page about where the market is and isn’t, quality and high-value deals will still get done. That’s where communication and expectation setting comes into play.
“Today is different than it was yesterday,” Blessing said. “It may get back to there at some point, but we all just need to be aware of what kind of environment we’re operating in today and be realistic about the expectations that are set on the front end. If super high expectations are set on the front end — from a valuation perspective — it may be a little bit harder to achieve that actual target.”
It would be shortsighted to expect deal-making to mirror that of 2021. The demand and capital for the high-end of the market aren’t there.
However, private equity firms have to grow and expand. That’s why the lower end of the market is seeing a value boost right now.
“All of the values are still very strong, especially at the low end of the market,” Cory Mertz, managing partner at Mertz Taggart, said during the event. “In some cases, they’re actually stronger than they were in 2021. The competition is pretty fierce for those assets. Right now, if it’s a quality company, there’s still considerable strength across the home health and hospice sectors. But we have seen even more demand than previously in the government-sponsored, non-medical home care.”
The industry had fears, Berman recalled, after the onset of the Prospective Payment System (PPS). The same fears cropped up when the Patient-Driven Grouping Model (PDGM) was introduced.
There were concerns that deals wouldn’t get done leading up to every one of these industry changes. Deals still happened, of course, but the playbook changed.
“They’re always going to happen, but the market changes,” Berman said. “There are ebbs and flows. I remember back in the mid-2000s, we would tell people to expect 5x to 7x EBITDA. That used to be the norm for what people would pay. Now, 12x to 15x has become the norm. We’re just right-sizing the pendulum a little bit, and as soon as seller and buyer expectations get in line, deals are going to happen.”
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