HHCN Capital + Strategy: The Factors Affecting Home-Based Care M&A in 2023

This article is sponsored by Mertz Taggart. This article is based on a Home Health Care News discussion with Cory Mertz, Managing Partner at Mertz Taggart, Cliff Blessing, EVP and Chief Development Officer at Addus HomeCare, and David Berman, Principal at SimiTree. The discussion took place on March 30, 2023 during HHCN Capital + Strategy in Washington D.C.. The article below has been edited for length and clarity.

Home Health Care News: Before we get into some questions, why don’t you all just let the audience know who you are, what you do, and your roles at your companies, and just a general background.

Cory Mertz: I’m a managing partner with Mertz Taggart. We are a health care services mergers and acquisitions firm, we focus on two verticals within health care services. I head up our home-based care vertical, which includes home care, home health, hospice, and then my business partner, Kevin, heads up our behavioral health division.


Cliff Blessing: I’m EVP and chief development officer for Addus HomeCare. We are a provider of home care services, including personal care, skilled home health, and hospice. We operate in over 200 locations in 22 states and we are a publicly traded company.

David Berman: I’m one of the management principals at SimiTree. We are an outsourced professional services firm in the post-acute behavioral health firm private equity backed by Sheridan Capital Partners, I have been with the firm for 25 years on the M&A team.

HHCN: Cory, in your experience on the seller side, you’ve said valuations are holding up and that’s not something everyone says in the industry now. Let’s just hear from your perspective on why you think that, and how some of these post-2021 sellers are getting a high price for their business?


Mertz: When I say values are holding up, in fact, in some cases they’re stronger than they were in 2021, I’m talking about the lower end of the market. We consider the higher end of the market in the home-based care world to include transactions that are north of 100 million up to a few billion. The top has come off that high end of the market, when we would regularly see platform transactions selling in the mid-teens to high teens, multiples of EBITDA.

Those multiples are harder to get now because the publicly traded company’s values have come down, and it remains to be seen where they finally normalize. That has taken the top off the high end of the market. On the lower end of the market, it’s a different story. We’re seeing, and this is just based on our current transaction activity, that competition is fierce for quality companies that have an EBITDA of between $750,000 and $5M.

There’s still considerable strength across the home health and hospice sectors, but we’ve seen even more demand than previously in the government-sponsored non-medical home care. When I say government sponsored, I’m talking about Medicaid, home and community-based services, and VA.

HHCN: Cliff, on the buyer’s side, buyers are saying that they are becoming more disciplined and we’ve already heard a little bit about that earlier this morning. What does that approach mean? What does that look like and are you seeing inflated asking prices?

Blessing: I’d agree that buyers are becoming more disciplined. I don’t think it’s because of the market that we operate in today. 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 just environment that we’re in today as well. Then the debt markets are a little bit tighter and there’s some operational challenges too from a staffing perspective.

This general market that this creates just makes it tougher for buyers because they are more selective in what they’re looking at, and so they want to be more disciplined. They’re just pickier, so buyers are going to be much more selective in what they’re going to look at. I would say that there are still inflated asking prices despite everything that I just said. Despite everyone looking at Dexter’s chart a few minutes ago, I wish more buyers would see that chart, and would know that these headwinds should create some market pressures and valuations should come down. Expectations are still very high from what I’m seeing.

HHCN: Speaking about what you’re seeing, can you explain at a high-level Addus’ approach to M&A right now?

Blessing: We have a growth strategy, as I’ve mentioned before, that we have three different service lines. We’re focusing on growing the personal care service line and skilled home health. For personal care, we like to continue to add and scale and density in the markets that we do serve and continue to add in strategic geographies that we’re not in today. On the skilled home health side, we like to add locations where we have personal care opportunities and also be able to build out the value-based footprint that we have in those markets where we have personal care and skilled home health.

Very optimistic about the M&A strategy that we have, and hopefully executing the strategy where we have a goal of spending between or requiring somewhere between $75 million and $100 million revenue per year.

HHCN: David, I want to hear your perspective on when deals are falling through, why are they, what does that look like and what are some of the reasons for that?

Berman: You’re seeing more deals fall through for compliance issues. It doesn’t mean providers are any less compliant, but buyers are more disciplined. They’re not willing to take the same risk that they were before. In 2020, 2021, early 2022, there were inflated multiples. People were chasing deals. They had to get deals done, they had to deploy capital and they were willing to take a risk.

Now with interest rates rising, with the cost of capital rising, they can’t be as risk tolerant as they were before. We’re seeing a big uptick in deals falling through for compliance issues and we’re seeing a big uptick in cell-side clinical diligence before they even go to market. People trying to figure out what skeletons they might have in their closet before they get out to the market. Once you get to the market and the deal falls through for compliance, you need to pause then and go fix those issues before you go back to market. That creates time pressure on the provider.

Blessing: We’re seeing the same thing from a regulatory perspective, deals falling through primarily, but also financial reasons as well. Buyers are more selective in the assets that we’re going after, and because the return threshold is a little bit different given the environment that we’re operating today, numbers have to work. When QV doesn’t stand up or when financial performance is not as strong as what it was presented to be, then buyers walk away or re-trade the deal.

Berman: One thing that bankers love are add-backs. They love all those add-backs and you half the EBITDA is in add-backs. The buyers are less willing to accept all those add-backs at face value now.

Mertz: I would have to agree with both of these gentlemen up here that although the values are still very strong, especially at the low end of the market. Buyers have become more disciplined in a lot of ways. In other words, they become more honed in on what they will consider in terms of geography, size, and payer mix. Whereas a couple years ago, they might look at 50 different opportunities, now they might only look at 30.. They’ve gotten more selective that way. I will say certainly they’ve become less willing to accept potentially subjective adjustments.

There has been some of that, and the same thing on the diligence side with the quality of earnings. If there was a small miss on the quality of earnings a couple of years ago, a lot of buyers might have dismissed that and say, “Let’s move forward with the transaction.” Now they might be a little bit more willing to want to try to renegotiate.

HHCN: That makes sense. David, back to the risk part of this conversation. Why are providers willing to take on less risk now and do you see that changing anytime soon?

Berman: It gets back to the ROI and the return on investment. It costs money to fix compliance issues, and it’s not a short-term fix. It’s fundamental process issues that could be broken takes time and money, and that eats into the ROI. If the cost of debt is higher, you already have that pressure on the return on investment, and you factor in the additional costs of capital, you have to put it into a provider to fix that compliance.

Sometimes it’s too much cost and too much capital going in to get the return that’s needed.

HHCN: Cory, from a seller perspective, how can sellers adjust to these buyers becoming more disciplined? How can they navigate that?

Mertz: If it’s reasonable and affordable, and we’re probably recommending this more now than before, is that sellers that are considering going to market perhaps do a sell-side quality of earnings, to some extent. There are a number of firms out there that can do that, including SimiTree, and the same thing on the billing side. I would recommend to someone that’s considering a sale say in the next 12 to 24 months or less, to get a billing audit done if you can afford it. They’ll pull a current and historical patient sample and review all the documentation and coding. That just helps eliminate those surprises as you get further into the process.

HHCN: Cliff just from a buyer perspective, anything to add on that one?

Blessing: Yes, I would add that just the more conversations that buyers and sellers are having pre-LOI the better for everybody. Sellers become more informed about what buyers are looking for and are able to potentially adjust to their either operating strategy or to the way that they’re presenting the information that they already try to sell. Those touchpoints with the brokerage advisor community are helpful with building that knowledge base with sellers as they’re thinking about going through the process. Also just setting the expectations on what a process looks like and the current environment that we’re in, and making people realize that the 2021 headlines are from 2021. The 2023 headlines are from 2022.

Today is different than it was yesterday. It may get back to there at some point, but we all just need to be aware of the environment we’re operating in today and be realistic about the expectations that are set on the front end, knowing that if super high expectations are set in on the front end from a valuation perspective. It may be a little bit harder to achieve that actual target going through the diligence process given everything else we’ve talked about so far.

HHCN: When you said talking about conversations and having that open dialogue, it made me think of a question, is that just to have those conversations changed? Obviously, they have to, now we’re a new year but were buyers and sellers less open to having those conversations? Are those conversations different these days?

Berman: Not in our process. There’s the conversations we have about a certain process that we go through. The idea there is to find the right partner, share enough information so there’s no surprises after you sign a letter of intent, and get it to close. I don’t know that the conversations have necessarily changed on our end. I would say for the sellers that are going direct or a little less educated, the conversation might be a little different than it was a couple years ago.

What you’re seeing is different in the process of 2021, it was a bidding war. It was a banquet to bring something out there and say look you have 30 days to bid, do all your diligence before your bid. You and three others are going to bid on it. It’s almost unseen, and that’s changed a little bit there. I don’t want to be all doom and gloom. Deals are going to get done, deals are going to continue to get done not to date myself but when PPPs started there was an influx of deals, and then all of a sudden that 10 therapy threshold changed.

They’re like oh my God no deals are going to get done. PDGM came into play, deals aren’t going to get done, they still get done. They’re always going to happen, just the market changes there’s ebbs and flows. You can’t expect 15 X, you might go back to 9X. I remember back in the mid-2000s people would say, “What can we expect?” “We used to say five to seven times.”

Five to seven times EBITDA used to be the norm of what people would pay. Now 12 to 15 has become the norm. We’re just right-sizing the pendulum a little bit. As soon as seller and buyer expectations get in line, deals are going to happen.

HHCN: How frequently are you seeing buyers acquire targets with different EMR than their own?

Mertz: All the time. In my experience buyersthey may have some preferences if they’re hooked onto one, and most are on the same, but yes I would say 90% of the time they’re switching EMRs after closing.

Berman: I’d say EMR doesn’t matter as long as you use it. If you’re picking your EMR, use it to its capabilities, use the compliance checks, make sure you have solid compliance. The buyer who’s a consolidator is going to put you on their own platform.

Blessing: We’ll walk away from the deal because of the EMR platform. It certainly helps if they are on the same platform from a data perspective. You can understand the data analytics side of things a little bit better and training the staff, the workforce to move over to an EMR and just use it a little bit differently than they’ve been using before is helpful, but I agree you shouldn’t walk away from it.

HHCN: Let’s now examine the negative and optimistic takes on just home-based care, M&A. Cory, why are you bullish about it? Tell me just why you’re optimistic.

Mertz: I’ll talk short-term and just elaborate on what I mentioned earlier about the smaller transactions still being in high demand. There are a couple of reasons for that. People are talking about the cost of debt that theoretically should drive values down, and in a vacuum that is what would happen. We’re in an environment right now where we have a supply and demand mismatch. There are very few quality opportunities that are going on the market right now. When they do go to the market there tends to be significant demand.

On the demand side, at the high end of the market, those multiples have come down. A company that would’ve sold for 20 times a couple years ago may only sell for 12 -15 times now. Those multiples have come down, private equity groups have in some cases delayed their exits because they can’t get the multiple that they need. What they’re doing is they’re arbitraging down for lack of a better term.

They’re buying smaller transactions at say five times to eight times multiple, hoping that the market will rebound. In the meantime, they have to continue to invest and grow. There’s tremendous demand for the smaller companies and not a lot of supply. That’s what’s driving values up going forward. We saw the chart that George put up earlier today. We’re just really at an inflection point with the aging population. One of the things that doesn’t get enough publicity is obviously there’s some government tailwinds, reimbursement tailwinds, not necessarily on the home health side at the moment, but generally speaking.

A lot of the insurance companies, the payers, have venture capital arms that are investing in home-based care. A lot of that doesn’t hit the radar here, but we’re seeing it and I think that’s going to continue to drive innovation and growth in the sector.

Blessing: Very bullish on the M&A environment long term. The home continues to be the place where patients are the safest and that’s where they want to be. There’s just a heightened awareness of the value that home care providers can provide. Long term is still a great space to be in. We’re still highly fragmented overall as an industry, and so there’s still a lot of consolidation opportunities both on the skilled side and on the hospice side as well. From that perspective long term still a lot of M&A activity.

Berman: Same thing. Bullish on M&A is just going to look different, but sellers when they ask us how things are different? The fundamental thesis of being a seller hasn’t changed. Be a good quality provider with good compliance, positive cash flow, run your business like you’re running your business today. There’ll be buyers for it when you’re ready. It hasn’t changed how to run a business and get ready for sale. It’s just the market just looks different, and you can’t use 2021 as the barometer.

If you’re going to use that year as the barometer for all things M&A, you’re just setting yourself up for failure. When we’re asked in diligence what’s the floor for risk? 0% risk isn’t the standard, everyone would love 0% risk in 20, 25 years of diligence we found one provider that had 0% risk. It’s not the floor. 2021 is not the barometer of whether it’s a good or bad M&A year.

Mertz Taggart is a healthcare mergers and acquisitions firm that specializes home- based care and behavioral health. To read our most current home health, hospice, and home care M&A report, visit: https://www.mertztaggart.com/post/q1-2023-home-health-hospice-and-home-care-m-a-update

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