Demographics, a global pandemic and potential changes in tax laws are the tailwinds driving strong merger and acquisition (M&A) activity in home care and hospice for the foreseeable future. That was the message earlier this week at the National Association for Home Care & Hospice (NAHC) Financial Management Conference in Chicago.
“There is a ton of interest in our space, and that is great because of the great service we provide in our communities,” Kristopher Novak, Amedisys vice president of acquisitions, told NAHC members during a panel discussion on M&A planning.
While the pandemic temporarily put the brakes on M&A activity in early 2020, companies opened the throttle on deals at the end of last year, continuing the momentum into this year. In the second quarter of 2021, there were 37 acquisitions of home care, home healthcare and hospice firms, according to M&A advisory firm Mertz Taggart. That was the second best quarter for the industry, just behind the 53 deals inked in the fourth quarter of 2020.
Attractive sector for private equity, large firms
An aging demographic and a move away from congregate living during the pandemic are making home-based care attractive. Additionally, a proposed increase in the capital gains tax from 23.8% to 43.4% is also turning up the heat on deals, according to Mertz Taggart.
Two types of buyers are currently dominating the industry, the panel said. Private equity investors have been behind the largest number of deals in recent months. They are usually looking for a platform to get into the industry. Large home care and hospice firms, such as Amedisys, are the second biggest group of buyers. Most are looking to expand their geographic footprint or the services they offer.
“For us, we want to have home health and hospice in every community we serve and have services that we can continue to grow, so we can really get to managing the population,” Novak said.
A large company looking to “fold in” a smaller agency might be looking for synergies and ways an acquisition will enhance business. However, a private equity firm is usually hoping to make money on a future sale. David Berman, managing principal of SimiTree Healthcare Consulting, said those buyers tend to be more focused on future revenue growth.
“If you can demonstrate the ability to grow 15% returns year over year, that is what private equity wants,” Berman said.
Do your homework
Agencies interested in selling are advised to begin getting their ducks in a row three to six months before approaching a potential buyer. That means making sure all financial reporting is up-to-date and all policies and procedures are properly documented.
Berman said buyers carefully evaluate the risk of an acquisition before offering a letter of intent to purchase. He said they want to determine if a compliance problem could get them into legal or regulatory trouble down the road and if there is any downside risk to revenues.
“The higher the risk, the greater change in valuation goes with that,” Berman explained.
Novak said once a deal is struck, communication is key until it is finalized. He said communication should not only flow between the buyer and seller, but between the seller and its employees.
“We want to make sure folks know what is coming, why it’s coming and how we are going to work together going forward,” Novak said.