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How Rising Interest Rates are Driving Demand for Lower Middle Market Home-Based Care Companies

Updated: Sep 27, 2023


Headline: How Rising Interest Rates are Driving Demand for Lower Middle Market Home-Based Care Companies

The convergence of unique market factors has created an opportunity for owners of home-based care businesses in the lower middle market. The major contributing factors in the market are rising interest rates [ML1], which are causing private equity to delay their exits on platform investments, and a scarcity of quality assets currently on the market. In other words, large private equity-owned businesses cannot fetch the terms and values they want in the 100M+ market due to interest rates, so they are forced to continue investing in their businesses by acquiring assets that fit their strategy.


“The top has come off the higher end of the market, forcing private equity portfolio companies to delay their exits for now. In terms of multiples, these larger companies that would have sold a couple years ago in the mid- to high-teens are not commanding that right now. Transactions that size tend to be more highly leveraged, which will ultimately weigh down valuation,” Mertz Taggart Managing Partner Cory Mertz said. “But private equity has a mandate to spend the piles of cash they are sitting on, so that’s what their portfolio companies are doing right now. Or at least they are trying to.”

The issue for these strategic buyers and opportunity for owners (sellers) lies in the availability or lack thereof of quality assets currently on the market. Although home-based care M&A ticked up in Q2(see report), Q1(see report) recorded near-historic lows for completed transactions, and it appears Q3 will follow suit. “Transaction volume right now is, for the most part, a function of quality opportunities in the marketplace,” Mertz added.


Healthy businesses with EBITDA numbers between $1 million-$10 million have benefited from these conditions. In a market where assets are more readily available, these companies may not garner the same level of interest or demand as they are currently getting. Consistently, in a competitive process, owners are capitalizing on this demand by exceeding valuation expectations.

While values hold firm, the buyers are increasingly disciplined in diligence due to the general sense of uncertainty and historically high values. It is essential that owners are stringent with compliance and manage margins to capitalize on the values being offered.


“We will almost always recommend our clients perform some level of a compliance audit and quality of earnings before going to market,” Mertz said. “It costs money, so it can be a tough pill to swallow for owners, but it will give them insight into how the buyer will ultimately size up the company. It’s better to know that before jumping into a months-long sale process.”

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