Home-based care leaders looking to become buyers need to educate themselves about the legal transaction lifecycle in order to avoid the common pitfalls.
Broadly, the lifecycle of a M&A transaction can be divided into three phases — strategy and sourcing; due diligence and execution; and integration.
The second phase, due diligence and execution, is typically when legal counsel gets involved, Donna Ruzicka, a shareholder at Polsinelli, noted during a webinar hosted by the law firm on Thursday.
“Diligence is a long process, and it’s good to have that mindset when you go into it,” she said during the presentation. “This isn’t just a check-the-box exercise. It does take time. It distracts from operations and everybody is aware of that, and the buyer is sensitive to that. We need to get through it, so that information can be learned, and we can have a successful transaction at the end.”
Due diligence is part of the transaction lifecycle in an informal way, somewhat early on.
“It’s the seller sharing information that they think is relevant with the buyer,” Ruzicka said. “Maybe there’s some follow up questions, but it’s kind of kept more on an informal level.”
As both parties move further along in the deal, that changes. The process becomes more formal. This means diligence request lists, requests for information, management meetings, diligence calls and data rooms.
There are also different types of diligence that can be conducted, including: financial, legal, insurance, employee benefits, billing and coding claims review and lender diligence.
When an acquisition asset is a particular service line of a larger business enterprise, financial diligence can take longer, Ruzicka noted.
“Additional work is needed to separate the financial information and make sure that the buyer is getting a truly good picture of the service line that they’re acquiring, and that they’re not relying on information that’s related to businesses that aren’t part of the transaction,” she said.
Typically, insurance diligence or employee benefits are outsourced to a third-party consultant.
Billing and coding claims reviews are conducted to make sure that the billing and coding that’s been done in the past is compliant with laws and payer requirements.
“We want to make sure that the financial information that the purchase price is based on is solid, and that the revenue is good revenue, and that there isn’t a high likelihood of recoupment, or that services have been billed incorrectly, and won’t be able to continue to be billed in that manner post-closing,” Ruzicka said.
Legal diligence focuses on things like licensure and payer agreements.
“This diligence is required to make sure that the buyer can legally operate the business post closing … and also to ensure that the buyer is going to be able to get paid for the services,” Ruzicka said.
It’s important for home-based care companies to be aware that there are regulatory issues that can create transaction landmines.
“One example is the 36-month rule for home health agencies — it’s an issue that’s important to look at from the beginning,” Ruzicka said.
The rule applies to Medicare-certified home health business, and it stipulates that if there’s been a change in majority ownership of the agency within the past 36 months, that ownership can’t transfer until the 36-month period has passed. There are some exceptions to this rule, though, according to Ruzicka.
Another factor that’s important to look into from the outset is a company’s tax structure.
On the home care side, sellers that are operating under the franchise model need to make sure that they actually have permission to sell.
“We had a deal once where we worked through the vast majority of the deal, and at the end of the transaction, we learned that the franchisee didn’t have the approval of the franchisor to sell the business to the buyer,” Angelo Spinola, the home health, home care, and hospice chair at Polsinelli, said during the presentation.