Buyers and sellers operating in the home-based care space have been forced to navigate what has become a fairly complicated M&A environment.
Transaction volume saw a significant drop from 2021 to 2022, down 50% to 60%, according to Cory Mertz, managing partner at M&A advisory firm Mertz Taggart.
Mertz clarified that the marketplace for quality agencies – that are cash flow positive and have solid compliance – is still very strong. However, the lower- to middle-market hasn’t seen a lot of movement.
“There are two reasons for this,” he said during a panel discussion at the Hi2 conference, earlier this month. “No. 1 is scarcity. Everybody sold in 2020, 2021 or the first two quarters of 2022, so there’s just not a lot of inventory out there. The other driver is value-based care.”
Further compounding matters are macro factors.
“The banks have tighter lending standards,” Mertz said. “They want a little bit more control in some of these transactions, and, ultimately, we all answer to the banks for the most part. Getting deals done is a little bit harder, and takes a little bit longer, especially the platform transactions. That’s because there is more structure to them.”
David Marks, a partner at Holland & Knight, noted that it’s not uncommon to see an LOI with a 90- to 120-day ask.
“I’d say, to get the signing, it should take no longer than 45 to 60 days,” he said during the discussion.
Holland & Knight is a Miami-based law firm that provides representation in litigation, business, real estate, governmental and health care law.
In the current M&A environment, private equity (PE) groups that have experience in the space and banking relationships will likely have an upper hand, according to Mertz.
For sellers that want to draw PE attention, it’s crucial to show growth.
“You have to show growth to get the targets you’re looking for,” ARF Financial CEO Steve Glenn said. “That takes some funding, some debt to do that — to hire a few more people, possibly make some small acquisitions, and be in a better position to get the number you’re looking for. Short-term debt can do that.”
Beverly Hills, California-based ARF Financial is a business loan financial company that works with small businesses.
Overall, valuations seem to be holding up, according to Mertz.
“They’re still strong,” he said. “If you’re, let’s say, a $20 million revenue provider in this market. I wouldn’t hesitate to give guidance in the double-digit multiple range at that $20 million number. $10 million may not get double digits, but you’re probably going to get in the higher single digits, generally speaking.”
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