Over the next few months, home health M&A is expected to tick back up. Now that the final rule has been published, buyers and sellers have at least some certainty on reimbursement for the near-term future.
Before sellers are approached, there’s a few things they need to know. Going in blind can lead to a deal where they’re shortchanged on what is likely one of the biggest decisions of their lives.
“As a seller, it all comes down to preparation,” Kris Novak, managing director at The Braff Group, said on a webinar hosted by Home Health Care News last week. “There’s a lot of things that can go into that preparation. All sellers want to optimize their outcome values. All buyers would like to pay as small of a purchase price as they can as they enter into these conversations.”
Novak was also formerly the VP of mergers and acquisitions at Amedisys Inc. (Nasdaq: AMED).
In the third quarter, 12 Medicare-certified home health deals were reported, according to The Braff Group data. M&A has remained generally slow throughout 2023, but, again, there’s no longer the payment uncertainty that grips the months between the proposed and final payment rules from the U.S. Centers for Medicare & Medicaid Services (CMS).
There are still challenging macro economic trends, such as high interest rates. But deals that have been in limbo could now get to the finish line in the fourth quarter. Sidelined conversations will resume.
“After probably the most robust market that we’ve seen from a home-based care perspective in [2020 and 2021], we see things can change quickly,” Novak said. “Some of that’s segment related, and some of that is just macro related, and probably the element that you have the least amount of control over in this process. It really boils down to trying get all [the right things] aligned to pick the right time to go out to market and ultimately maximize the value.”
Particularly for home health owners that missed out on the high valuations of 2020 and 2021, getting back to the table with buyers may be enticing.
But, as buyers and sellers reengage, it’s important to understand who has the leverage from the outset – and why.
“The buyer has context. They know the marketplace. They know how businesses have been trading, they know offers they’ve made on a proprietary basis versus offers that came through a banker like ourselves,” Ryan McCarthy, a director in BRG’s healthcare & life sciences transaction advisory, said on the webinar. “The average owner just gets an offer, and they have no context on if it’s high, if it’s low, if it’s in the middle. They have no idea if they’re leaving money on the table, and if they’re underselling themselves. The advantage goes to the buyer there from the start.”
The Braff Group’s experts walked through the deal cycle, breaking it up into roughly five stages: pre-letter of intent (LOI); post-LOI; the due diligence phase; the definitive purchase agreement; and then the closing.
Throughout that process, sellers need to be evaluating from within. Understanding their businesses as much as possible allows them to stand on higher ground when talking to buyers.
“I think in the best deals, both parties end up giving up a little bit on both sides of the aisle to come to what we would consider more market transaction,” Novak said. “And that occurs over multiple iterations of that negotiation, but the buyer is always going to work to anchor in the most buyer friendly scenario, whether that be price, whether that be other terms, whether that be how much time they’re able to achieve within that exclusivity period.”
Despite a slow M&A period, there are always buyers out there looking for quality home health agencies. In fact, those quality agencies are arguably more valuable than ever, as buyers are having a tough time finding agencies that aren’t fixer uppers.
But, even if they are fixer uppers, bringing in multiple interested parties helps ensure that the seller ultimately gets the right value for their business. Having knowledge around how the entire marketplace views an organization is of major benefit to the seller.
“If a process is run, you’ve got multiple offers from multiple buyers, you can see how interested they are across the board,” Mark Kulik, senior managing director at The Braff Group, also said on the webinar.
Like any other business deal, multiple interested parties drives the price up, which is why a seller should not agree to talk to just one buyer throughout the process of selling.
It also sets a better floor from the start of the conversations. An LOI, for example, is not set in stone, but it’s hard to work back after one is put forward.
“Having professional representation at least provides the ability to include the [right] topics in the LOI upfront to provide more of a robust context for making a decision,” Kulik said. “Because, if all you’re focused in on is the purchase price, that’s the tip of the iceberg. The rest of the LOI is going unaddressed below the waterline. And those are some very important and very costly mistakes that can be made by not addressing it upfront with the buyer.”
Building a successful home health business can take years, and sometimes, even decades.
A seller not having the correct approach – or correct information at their disposal – during a transactional process can do away with a good chunk of the equity that has been built up in that business over time.
“It’s a complicated business deal,” Kulik said. “And there are many facets to it. You want to have the best advice you can handy. … It’s probably the first time you’ll ever do it and the last time, but you don’t get a second chance to do the deal over.”
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