By: Bruce Vanderlaan
While this has been a pretty volatile year in the M&A world, demand for small- to mid-sized home-based care agencies remains high. You can tell by the sheer volume of calls and emails you have been getting from “advisors” who tell you they have a buyer for you, or they can get you what looks like a very attractive multiple. In this environment, potential sellers need to be keenly aware of the “broker bait-and-switch” that is becoming more common in the home health, home care, and hospice industries.
At the very least, those reaching out to you with promises of “interested buyers” or high multiples (all without knowing anything more than your website) should, at the very least, be cautiously received.
Here is how the broker bait-and-switch usually goes:
● An M&A ‘broker’ approaches a seller with the promise of an interested buyer, multiple interested buyers, or even a specific buyer looking to pay a steep price for that seller’s agency
● To find out who the buyer is, the broker forces the seller to enter into an agreement of some kind
● After the seller enters that agreement, they will likely be forced to pay a fee to that broker down the line when an acquisition takes place with whomever they bring to the table
There are multiple problems with this process. First, it’s highly unlikely the broker actually has a specific buyer who has already made contact. In this equation, the promise of that specific buyer is the “bait.”
Once the seller has entered into the agreement, the broker can turn around and play the same game with potential buyers. That’s the “switch". The broker will notify a group of buyers that it has an interested seller, blasting out an advertisement of sorts of an interested seller.
Sellers — and buyers, for that matter — are likely to find this sort of process expensive, confusing, burdensome, and unprofessional. It leaves owners dissatisfied and fatigued after selling their agency, a chance they may only get once.
Essentially, the broker is intent on making a fee, regardless of who pays it. Many of these brokers are simply “transaction” brokers. Meaning, they represent the transaction, not you, and not the buyer.
A legitimate M&A advisory firm will put significant effort into maximizing value for the seller, and the results can be significant. There is a lot of work that goes into going to market the right way, ensuring that the agency is ready for due diligence and that the transaction has a high likelihood of closing.
Finding Buyers is the Easy Part
To avoid succumbing to this trick, the first thing that sellers need to understand is that the pressure is not nearly as high as the broker makes it seem. After all, there is always strong interest in the M&A marketplace for quality agencies.
There are plenty of strategic buyers and PE firms regularly looking for quality home health, home care, and hospice assets. The allure of an “interested buyer” should generally be ignored when no details are given. In fact, having “one” interested buyer is almost never in a seller’s best interest.
When an owner is looking to sell, they should expect a transparent and competitive process from the outset. An experienced M&A advisory firm or investment banker should lead that process and engage with multiple buyers in order to get the best price and terms for the agency at the end of negotiations.
That also allows the seller — and not the broker, who may just be looking for a fee via the broker bait-and-switch — to choose the best buyer. That choice will involve price, cultural alignment, certainty to close, post-closing obligations, and a host of other factors.
Without backup offers, buyers are hardly likely to raise their offers or make compromises on other seller wishes. They are also more likely to negotiate on the basis of what is ‘reasonable’ versus what is ‘market’, determined by a professional, competitive, process.
How to navigate the process
Sellers should not enter into vague agreements, no matter how eager they are to negotiate with so-called “interested buyers.” In order to ensure the process goes smoothly, they need to ask the right questions to the broker:
● Who is the buyer?
● Did the buyer ask you to contact us, specifically?
● Why is my company strategically interesting to them?
● How did the buyer determine the price or multiple?
● Is the buyer paying your fee?
If the broker cannot or will not answer the above questions, sellers should reevaluate the situation before agreeing to anything. If it seems too good to be true…
The vast majority of the time, a respectable M&A advisor should not have any problem answering those questions from the start. If they do, they likely do not have the sellers’ best interests in mind. Instead, they are likely looking to capitalize on their fees, and not much else.
This is likely going to be one of the most major life decisions an agency owner makes, and it usually only happens once. It makes sense to be cautious and informed. My rule, that it took me a lot of pain to learn, is that if I am being pressured to make a decision, the answer has to be “no.”