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.”

With at least 56 transactions announced so far, 2021 has proven to be a banner year for non-medical home care dealmaking. That’s especially true when it comes to franchisor transactions, with private equity and strategic buyers alike attracted by the often difficult-to-find scale of today’s top networks. “Before 2021, you could count the number of franchisor transactions the previous five years on one hand,” Mertz Taggart Managing Partner Cory Mertz says. “Private equity loves the industry, but have had a hard time finding targets with scale, and more strategic buyers want to own all three legs of the home-based care stool, from home health and hospice, to non-medical supportive care services.” The increased activity around franchisors doesn’t mean other home care businesses have gone overlooked, however. In July, for instance, Denver-based health care services company ModivCare Inc. (NYSE: MODV) acquired CareFinders Total Care LLC for a whopping $340 million. “I wouldn’t be surprised if we saw another large franchise company hit the market in 2021,” Mertz says. “I expect a strong finish for this year." A change of pace Before 2021, home care franchises saw just a handful of noteworthy transactions. The previous uptick in franchise M&A activity took place in 2015 and 2016, when Los Angeles-based PE firm Levine Leichtman Capital Partners completed its acquisition of Caring Brands International and Linsalata Capital Partners bought Home Helpers. Right at Home was also acquired by North Carolina-based Investors Management Corporation, the PE group behind Golden Corral and Fleet Feet Sports, in 2016. In contrast, as of December 1, multiple home care franchisors have sold in 2021. The headliners include Senior Helpers, Home Helpers, Home Instead , Caring Brands International and, finally, Executive Care. “Senior Helpers got the ball rolling in April, after it was purchased by Advocate Aurora Enterprises, the investment arm of the Advocate Aurora health system,” Mertz says. According to at least one report, Advocate’s deal valued Senior Helpers at roughly $180 million, or roughly 14 times the franchisor’s 2020 EBITDA. About a week after Senior Helpers revealed its sale, Chicago-based private equity firm RiverGlade Capital acquired H.H. Franchising Systems Inc., the company that operates Home Helpers. Financial terms were not disclosed. “With its strong performance in the home care market and talented leadership team and staff, we saw an opportunity in Home Helpers Home Care in which our investment could continue to fuel growth,” Danny Rosenberg, managing partner at RiverGlade, said in a press release. “We recognize the great company that has been built at Home Helpers Home Care and look forward to working with [CEO Emma Dickison] and team.” Next came the deal that Mertz calls “the shocker this year”: Honor buying Home Instead. Honor originally launched as a home care technology platform that connected clients and caregivers. Over the past few years, it pivoted to a partnership approach with existing home care agencies. The next step in Honor’s evolution was to acquire greater size and scale, allowing it to maximize its technology. It did just that in August by landing Home Instead, a home care franchise with 1,200 locations across the U.S. and 14 other countries. Financial terms of that deal weren’t disclosed, but the result of the transaction was a combined enterprise with $2.1 billion in home care services revenue, according to the companies. In October, private equity firm Wellspring Capital Management struck a deal to acquire Caring Brands International, the parent company of Interim HealthCare, Bluebird Care and Just Better Care. While financial terms weren’t disclosed, Caring Brands was expected to command a low-double-digit EBITDA multiple. Wellspring also has a minority stake in Help at Home. It previously owned Great Lakes Home Care Services as well, giving it plenty of home care experience. “We have been strong advocates of high-quality home-based care providers that enable seniors, individuals with medically complex care needs, and others with disabilities to live independently in their homes,” Naishadh Lalwani, a partner at Wellspring, said in a press release announcing the news. “Caring Brands International and their franchisees and operators have developed a stellar reputation of empowering individuals to live life on their own terms and we are excited to partner with [CEO Jennifer Sheets] and team to continue to grow that mission.” Finally, in November, The Riverside Company announced its acquisition of Executive Care. Founded in 2012, Executive Care operates a network of 13 franchise locations. “Executive Care has a long track record of success in providing high-quality, non-medical home care support through its network of franchise partners,” said Riverside Senior Partner Joe Lee. “We look forward to working closely with the Executive Care team to build additional value in the business through organic and acquisitive growth.” Riverside adds Executive Care to its existing Best Life Care franchise network, which owns and operates ComForCare and At Your Side Home Care franchisors. Building scale One of the trickiest aspects of home care M&A is the industry’s highly fragmented nature. Simply put, there aren’t too many multi-state or regional home care companies out there. “Franchisor deals do come with scale, though, which is partly why we’re seeing more deals this year,” Mertz says. While franchise dealmaking is up, general interest in home care has also increased because payors, health systems and others see the value of addressing activities of daily living (ADLs) and social determinants of health (SDoH). In the past, it was important to have home health and hospice capabilities, where organizations can send clinicians or caregivers in the home to handle a medical emergency or adverse health event. Now, diversified in-home care providers and others want to care for patients from pre-acute to end of life, which means having some sort of non-medical home care division. Just the beginning While multiple home care franchisors have changed hands, several potential acquisition targets remain. Additionally, even as the public health emergency improves, health care organizations will continue seeking new capabilities focused on ADLs and supportive care. “We’ve really seen the true value of home care since the start of the COVID-19 pandemic,” Mertz says. “The focus on non-medical home care is a long-term trend. This is just the beginning.”

After a record-low start to the first quarter of 2023 that saw only 17 home health, hospice, and home care deals reported, home-based care dealmaking rebounded significantly in the second quarter with 29 transactions reported. It wasn’t just one sub-industries with increased activity, either. Transactions were spread across all three -- with 16 home health, 11 home care, and 13 hospice deals reported. (Sub-industry totals sum to more than the total number of transactions, as many transactions include more than one sub-industry.) “This volume is in line with pre-pandemic norms,” says Mertz Taggart Managing Partner, Cory Mertz. “I’m going to be curious to see what next quarter brings, but we are not ready to suggest it will be this strong. One quarter doesn’t make a trend, but it does signal a rebound in activity, which is positive.” “Demand remains historically high for strong, cashflow-positive home-based care companies,” he added. “That’s driven by scarcity of supply and insatiable private equity demand for add-on acquisitions, caused by a substantial decline in PE exits.” To better understand why valuations remain historically high, click here. In the biggest news of the quarter, though not yet counted toward the transaction tally, UnitedHealth Group’s Optum division beat out Option Care Health (Nasdaq: OPCH) with its bid for Amedisys Inc. (Nasdaq: AMED). The deal values Amedisys at about $3.7 billion (including the assumption of debt), but is still subject to regulatory scrutiny. Optum and Amedisys plan to close the deal later this year. If finalized, Optum would own about 10% of the home health market. Home Health M&A Home health M&A activity hit its highest level since Q4 2021, despite uncertainty around CMS’ proposed rule, which hit the wire in late June. Consensus belief that the proposed 2.2% net reimbursement reduction for 2024 sets the worst-case scenario is workable enough to pave the way for an active second half of 2023. This includes a permanent adjustment of 5.653% to offset the perceived overpayment as a result of the transition to PDGM. There are multiple efforts underway to reduce or eliminate this permanent adjustment, including a lawsuit filed by NAHC challenging the validity of the of the change, and The Preserving Access to Home Health Act of 2023, which was introduced to the senate by Debbie Stabenow (D-MI) and Susan Collins (R-ME) in June. The industry still faces headwinds in the form of the ‘temporary adjustment’ due to the aforementioned overpayment from 2020-2022. This is an issue CMS decided to address later, allowing it to move forward with a somewhat moderate adjustment for 2024 as it gears up for a significant battle from industry advocates and Congress regarding the temporary adjustment. “You can’t ignore the $3.5 billion elephant in the room,” Mertz said. “But, to some extent, this is the nature of healthcare services. Stroke of the pen risk always exists for government payers. The general risk around reimbursement will always keep multiples somewhat grounded, despite overall home-based care industry growth, and its ever-growing role in the value-based ecosystem.” Humana’s (NYSE: HUM) CenterWell Home Health landed a big deal in April when it acquired Trilogy Home Health. Based in West Palm Beach, Florida, Trilogy has 11 locations across the state, providing home health care, personal care and care coordination services. With the deal, CenterWell Home Health added to both its national and statewide presence. “While we have strategies in place to continue to take share in fee-for-service Medicare, we do acknowledge it is a shrinking market with the increasing penetration of Medicare Advantage,” said Humana CFO Susan Diamond earlier this year, in reference to home health care. “Accordingly, our projected admission growth for 2023 reflects a slight decline in fee-for-service Medicare admissions year over year, more than offset by strong growth in Medicare Advantage.” Still, it appears that Humana and CenterWell are happy to take on more market share in home health care agnostically, whether assets like Trilogy are more fee-for-service based or not. Addus Homecare Corporation (Nasdaq: ADUS), another publicly traded company, also completed a significant home health deal in the second quarter, acquiring Tennessee Quality Care for $106 million. While Addus valued Tennessee Quality Care’s home care and hospice services, and its approximately 1,800 patients, the biggest benefit was the opportunity to expand its home health footprint. To further enable value-based care, Addus has been layering on home health care in its strongest home care markets. But that’s not the only aspect of this deal that makes it a valuable one. “This fits Addus growth strategy perfectly, which is to build out the continuum, ideally by adding home health and hospice to their existing home care footprint,” says Mertz. “But it’s also about scarcity. Tennessee is a certificate-of-need state, and there are not many quality companies of this size on the market.” Additionally, LHC Group acquired Delaware-based Summit Home Care, AccentCare forged a JV agreement with Memorial Hermann, and Mertz Taggart client Capital Health Home Care sold its West Virginia operations to Amedisys. There were two pediatric private duty nursing transactions reported in the quarter: Tenex Capital Management sold Team Select Home Care to Court Square Capital, and Trivest Capital’s Family First Homecare acquired Texas-based One Accord Home Health. Home Care M&A Of the quarter’s 11 home care deals completed, some of which were part of transactions that included home health and hospice as well, perhaps the most significant is the Pennant Group’s (Nasdaq: PNTG) acquisition of Bluebird in its home state of Idaho, gaining Bluebird’s three agencies, each with its own service area: Bluebird Home Health, Bluebird Hospice, and Bluebird Home Care. “Bluebird’s operations fit uniquely within the strong continuum of care we have successfully built in Idaho over the last 12 years,” Pennant President and COO John Gochnour said in a statement. “This transition brings with it a strong group of operational and clinical leaders and outstanding clinicians who have made a meaningful impact in Southwest Idaho’s health care continuum over the last few years.” Illinois-based For Papa’s Sake’s, a private duty home care agency based in Chicago, sold to Avid Health at Home. Mertz Taggart provided exclusive M&A advisory services to this transaction, representing the seller. Other home care-focused transactions include, Hope Nursing Home Care’s acquisition of Home Care Services of Rhode Island, and Pillar Health Group’s purchase of Philadelphia-based Serving Spirit Home Care. Hospice M&A Agape Care Group has been a prolific hospice acquirer over the past few years, a trend they continued in the second quarter. Agape completed deals for two hospices in the Southeast, Georgia Hospice Care and Hope Hospice. “I am thrilled to be joining Agape Care during this time of growth and expansion,” Alex Ferguson, Agape’s SVP of M&A, said when he joined the company last year. “There is tremendous opportunity in the hospice and palliative care landscape to add great organizations to the Agape Care portfolio, merging resources to enhance providers and reach more patients.” Other strictly hospice deals in the quarter included Hosparus Health’s deal for Baptist Health Hospice and Arkansas Hospice’s deal for Life Touch Hospice.

A total of 13 venture capital-backed transactions, representing nearly $400 million in new investment in the industry, highlighted behavioral healthcare’s transaction activity in the second quarter of 2023. “The prevailing theme for the deals, most of which involved mental healthcare organizations, was a familiar refrain”, said Mertz Taggart managing partner Kevin Taggart: “Enable access for more patients who need services while saving the healthcare system and payers money. If you can show a path to do that at scale, you’ll likely generate investor interest.” Overall, 34 transactions were announced in the second quarter, in line with 33 in the first 3 months of the year, and payer investment in service providers played a significant role in behavioral health investment activity. In one example, Optum Ventures, the venture capital arm of UnitedHealthcare subsidiary Optum, was a lead investor in a $75 million series D funding round announced by autism care provider Cortica in April. The investment helped Cortica to close deals to acquire two providers (detailed below). Meanwhile, Cigna was among the lead investors in a $52 million series C funding round announced by multistate behavioral healthcare provider Octave. “We’re seeing more payer investment in service providers across healthcare,” Taggart said. “If a provider fits well into the value-based continuum, the payers want to have some influence.” In the coming months, Mertz Taggart will be monitoring interest rates, however. “The marketplace for quality companies is still strong, but the extent of the rate hikes and expected duration will likely be the biggest drivers of M&A over the next 12 months”, Taggart said. Addiction Treatment In the second quarter, seven deals were announced within the addiction treatment subsector, four of which were private equity-backed strategic investments. In one such deal, Pinnacle Treatment Centers acquired four outpatient addiction treatment programs—three in New Jersey and one in Pennsylvania—from Recovery Centers of America. The sale by RCA was part of a strategy to divest from its freestanding medication-assisted treatment center business, CEO Brian O’Neill told Behavioral Health Business in April. Meanwhile, Mertz Taggart served as the exclusive sell-side side advisory firm for Turning Point of Tampa, which received a strategic investment from private investment firm The Apen Group in June. Other transactions involving addiction treatment organizations that were announced in the second quarter include the following: Living at Reflections, a Novato, California-based substance use disorder (SUD) treatment provider, received an investment from Traverse Pointe Partners to create a partnership with Traverse Pointe’s The Hope House. The Rise Fund, the multi-sector global impact investing strategy of TPG, announced an investment in Banyan Treatment Centers in June. Community Medical Services acquired Brightside Clinics in a private equity-backed deal. Aware Recovery Care raised $35 million in a series B funding round as the organization looked to expand its in-home addiction recovery and support services into new markets and strengthen its position in existing markets. Investors in the series B round were not disclosed. Pathway Healthcare received an investment from venture capital firm Garden City Equity. Mental Health The mental health subsector saw 23 deals announced in the second quarter, down from 29 reported in Q1. ARC Health, a Thurston Group portfolio company based in Beachwood, Ohio, was particularly active, closing on transactions to acquire the following organizations: Denver Wellness Associates, which operates two clinics in Colorado Lyn-Lake Psychotherapy & Wellness, which operates multiple locations across Minneapolis and St. Paul, Minnesota Los Angeles-based Silver Lake Psychology Positive Change Counseling Services, a mental health practice in San Diego and Ventura counties in California Other private equity-backed strategic deals involving mental healthcare providers in the second quarter included the following: Deep Eddy Psychotherapy Management acquired Dallas Counseling and Treatment Center. Mertz Taggart provided exclusive sell-side advisory services in this transaction. Stella, a treatment provider for post-traumatic stress injury, anxiety, stress, depression, traumatic brain injury, and the neurological effects of long COVID, acquired the assets of psychedelic therapy provider Field Trip. Stella, a Sterling Partners portfolio company, also announced a new growth equity round of $7 million in May. Provident Behavioral Health in St. Louis acquired fellow Missouri-based not-for-profit mental healthcare provider Care and Counseling. Nystrom & Associates acquired Vantage Point Clinic & Assessment Center in Wisconsin. Nomi Health, a national healthcare programs and payments company, acquired Phoenix-based I Am Wellness. Harmony Health Group expanded with the addition of three Serenity at Summit facilities, acquiring the programs from outgoing operator Delphi. Health Connect America completed acquisitions of First Home Care and North Star Counseling of Central Florida. After a slowdown largely attributed to the collapse of Silicon Valley Bank in the first quarter, venture capital firms showed renewed interest in mental healthcare organizations. The following deals were announced in Q2: General Catalyst Partners led a $3.2 million funding round for Somethings, a New York City-based virtual mental health support platform for LGBTQ+ youth. Digital mental health startup Anise Health completed a $1.2 million pre-seed funding round led by Kicker Ventures. Author Health, a platform that provides treatment for Medicare Advantage recipients with serious mental illness and substance use disorders, received $115 million in financing led by General Atlantic. Uwill, a Boston, Massachusetts-based mental health and wellness solution for colleges and students, completed a $30 million series A funding round led by Education Growth Partners. Scottsdale, Arizona-based EvolvedMD raised $10 million. Investors were not disclosed. AptiHealth, a virtual mental health startup, raised $10.8 million, bringing its total funds raised to about $76 million, according to Behavioral Health Business. AptiHealth investors include Takeda Digital Ventures, Pivotal Life Sciences, Vista Credit Partners, Olive Tree Ventures, Claritas Capital, and What If Ventures. Mantra Health, a provider of digital mental health programs for university students, raised $5 million in an investment round led by VMG Partners. Digital behavioral health benefits company Spring Health raised $71 million in a funding round announced in April, bringing its valuation to $2.5 billion. Investors contributing to the new round were not named. Autism Services and Intellectual/Developmental Disabilities Transactions involving providers of autism and intellectual/developmental disabilities (I/DD) services remained modest, with four deals announced after four were reported in Q1. Armed with its new financial backing, Cortica closed on two organizations, acquiring Springtide Child Development in New England and Melmed Center, a developmental pediatrics and clinical research group based in Arizona. Among others involving autism services and I/DD subsector, Including Kids, a provider of applied behavior analysis therapy for children with autism spectrum disorder, was acquired by fellow Texas-based ABA provider Empower Behavioral Health.

Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A. Addus Homecare (Nasdaq: ADUS) Highlights Addus continues to show strong fundamentals as observed in the trend graphs below for revenue, gross profit, and operating income. Despite this, their stock price took a 28% tumble due to risks from CMS’s Proposed Medicaid Access Rule. The stock has since recovered 8% of the original price. Proposed Medicaid Access Rule update: Addus and multiple other stakeholders, including various trade associates and states, submitted over 2,000 comments to CMS expressing serious concerns with the proposed rule requiring 80% of reimbursement to be spent on compensation for direct care workers. There is no set date for when the final rule will be issued. Revenue ($260M) and EBITDA ($28.3M) increased 9.7% and 12.7%, respectively, over Q2 2022. New candidate management and tracking system is now fully implemented and has shortened the time between application and hire by approximately 10 days. Hospice same store revenue was flat over Q2 2022, when removing the effects of sequestration. Home health same store revenue decreased 10.9% over the same quarter 2022 as a result of a reduction in admissions from payors that do not currently reimburse adequate rates to cover costs. Key Financial Figures M&A Activity Despite the reimbursement headwinds, Addus remains optimistic with their acquisition's strategy: “We believe these reimbursement pressures are lot likely to moderate over the next few years, and as such, we will continue to look for acquisition opportunities that are strategic to our overall growth” – Dirk Allison, Chairman and CEO. Closed the acquisition of Tennessee Quality Care, a provider pf home health, hospice, and private duty nursing services for approximately 1,800 patients through 17 locations covering a service area of over 50 counties in TN. The net leverage position of less than 1x adjusted EBITDA gives Addus the financial flexibility to capitalize on anticipated additional transactions that will come to the market over the next two quarters. Guidance Expects a slight gross profit margin improvement into Q3 and Q4 as a result of the Tennessee Quality Care as it is a medical care business. Aveanna Healthcare (Nasdaq: AVAH) Highlights As demand for home and community-based care has never been higher, the labor environment continues to be the primary challenge that Aveanna is aggressively addressing in 2023. Despite the challenges, the company made positive updates to 2023’s guidance as they remain optimistic with their progress: “We are encouraged by our 2023 rate increases and subsequent recruiting results and believe our business can rebound quickly, as we achieve our rate goals previously discussed” – Jeff Shaner, CEO Revenue was up 6.5% and adjusted EBITDA was down 3.2%, respectively, when compared to Q2 2022. The decreased adjusted EBITDA was due to costs associated with the current labor environment. Year-to-date 2023, Aveanna has secured rate increases in 17 states. This represents approximately 50% of their PDS footprint and includes double-digit rate increases in six key states. The majority of the rate increases are effective in Q3 and Q4 of 2023. Aveanna increased preferred payer volumes to 16% from 13% in Q1 2023 – 2023 goal of 20%. As highlighted by Jeff Shaner, CEO, Aveana’s value proposition is straightforward: “Preferred payers reimburse us a fair rate, and we pay market competitive wage rates, while also earning value-based payments for achieving positive clinical outcome sand improved staff hours.” Key Financial Figures M&A Activity Aveanna has made no acquisitions during 2023 and this will likely remain the case through the end of the year given their net debt to TTM EBITDA July 2023 leverage ratio of 16.0x. Guidance Based on the strength in performance in the first half of 2023 and the rate increases effective for the second half of the year, Aveanna raised its 2023 revenue guidance to $1.85-$1.86B and adjusted EBITDA to $132-$135M. Expected to further update guidance if the positive trends observed in the second quarter continue along with additional rate increases. 25-26% of full year guided adjusted EBITDA to be recognized in the third quarter and then further ramp into Q4 2023 as Aveanna realizes benefits from the cost savings initiatives. The Pennant Group, Inc. (Nasdaq: PNTG) Highlights Pennant’s steady top-line growth continues as the company remains locked in on the five key focus areas highlighted in Q1 2023: leadership development, top- and bottom-line growth, clinical excellence, and employee experience. Revenue and adjusted EBITDA of increased 13.7% and 32.3%, respectively, over Q2 2022 The senior living segment has had a huge turnaround – revenue increased 20.3% over Q2 2022 and 5.3% over Q1 2023, and adjusted EBITDA increased 277.4% over Q2 2022 and 58.5% over Q1 2023. Home health and hospice segment grew revenue 11.3% over Q2 2022 and 4.4% over Q1 2023 and increased adjusted EBITDA 9.2% over Q1 2023. Hospice growth over Q2 2022 – 18.3% revenue, 9.6% admissions, and 9.1% in ADC. Home health growth over Q2 2022 – 5.4% revenue and 3.6% admissions. Pennant credits its solid quarter to success in their leadership development area of focus: “Our local leaders and dedicated resource partners continue to push on ever facet of the business, which is showing in the financial results” – John Gochnour, President and COO. Key Financial Figures M&A Activity Acquisitions play an essential part within Pennant’s growth strategy: “With the growth of our leadership bench and a robust pipeline of attractive acquisitions, we are poised to unlock the potential of our future leaders through our disciplined growth strategy” – Brent Guerisoli, CEO. In May, acquired Benefit Home Health Care and Benefit By Your Side, a home health and home care agency in Colorado Springs, Colorado. In June, acquired Bluebird Health, a home health, hospice, and home care provider in Boise, Idaho. At quarter end, Pennant had $60.5M in their revolving line of credit and $2.8M in cash on hand. Has a 1.57x net debt to adjusted EBITDA leverage ratio. With plenty of dry powder available through cash generated from operations and a revolver, Pennant will continue to stay active within the mergers and acquisitions scene. Guidance Targeting adjusted EBITDA margins of 18% and 15% for the home health and hospice segment and the senior living segment, respectively. On track with 2023 guidance. Enhabit Home Health & Hospice (Nasdaq: EHAB) Highlights Due to underperformance and perhaps by a pressing letter from the hedge fund AREX Capital Management (which owns 4.7% of the common shares outstanding), Enhabit has officially begun a review of strategic alternatives. Ultimately, the review could lead to a sale, merger, other strategic transaction, or no action. Enhabit’s strategic initiatives have not been fast enough in 2023 to meet initial guidance. A faster-thananticipated shift from Medicare fee-for-service to Medicare Advantage has hindered Enhabit’s progress. Barb Jacobsmeyer, CEO highlighted: “Last summer, CMS data pointed to 50% of Medicare eligibles enrolling in a Medicare Advantage plan by 2030. We reached the 50% mark in January 2023. Revenue of $262.3M and adjusted EBITDA of $23.9M were down 2.1% and 40.7% from Q2 2022. Non-episodic visits grew to 31% of total home health visits. This represents an approximate 8% increase year-over-year and a 2% sequential increase over Q1 2023. Every 50 basis points decrease in Medicare fee-for-service volume negatively impacts adjusted EBITDA by approximately $2 million annually or 8.4% of its Q2 2023 adjusted EBITDA. Enhabit’s payer innovation team, established last summer and responsible for negotiating better Medicare Advantage contracts, has established a total of 37 new contracts, including 10 new regional agreements in Q2 2023 A record-breaking, quarterly net new full-time nursing hires of 203 will enable Enhabit to eliminate substantially all contract labor by the end of Q3 2023, which will reduce costs. Key Financial Figures M&A Activity As of end of Q2 2023, Enhabit had approximately $90M in liquidity, including $34M of cash on hand. Net leverage of 4.75x EBITDA – under the 5.25x required by their renegotiated leverage covenant for 2023. Guidance Guidance is most sensitive to episodic admissions, the transition of non-episodic admissions to new national and regional payer contracts, and clinical productivity in hospice. Generated approximately $39M in free cash flow during the first half of 2023 and expect to generate between $49 - $69M of adjusted free cash flow for 2023. 2023 Home health cost per visit now expected to increase 1-3% over 2022 rather than the 4-5% provided within initial projections. Amedisys (Nasdaq: AMED) Highlights Due to the pending merger between Amedisys and UnitedHealth Group Incorporated, Amedisys did not have a quarterly earnings call to discuss Q2 2023 performance and did not provide guidance on 2023 financial performance. As a result of the pending merger, which will give Amedisys’ shareholders $101 in cash in exchange for each share of common stock, the stock price has been hovering around low the $90s. This price behavior is typical in this scenario as there is still risk tied to the completion of the merger, such as antitrust scrutiny or potential due diligence issues. Revenue decreased 0.9% to $553M when compared to Q2 2022, although this is due to the divestiture of its personal care segment to HouseWorks. Revenue increased 2.2% over Q1 2023 when muting the effect of the divestiture of personal care. Home health growth compared to Q2 2022: revenue 2% and admissions 2.4% Hospice compared to Q2 2022: revenue 3.1%, admissions -7.2%, ADC -2.4%, and revenue per day 3.0%. High acuity care compared to Q2 2022: revenue 48.15%, admissions 54.78%, full risk revenue per episode -17.51%, and limited risk revenue per episode 14.71%. Adjusted EBITDA was flat at $74.6M when compared to $74.4M in Q2 2022. Key Financial Figures M&A Activity Pending merger between Amedisys and UnitedHealth Group Incorporated. Guidance No guidance provided due to the pending merger. 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Mertz Taggart follows the publicly traded home-based care companies and reports on their earnings calls each quarter. As a group, public company performance and share price serve as a proxy for industry performance and investor sentiment, respectively. Historically seen as the “ultimate consolidators”, the publicly traded home-based care trading multiples have a downstream effect on lower middle market home-based care M&A. Amedisys (Nasdaq: AMED) Highlights Amedisys is merging with Option Care Health (Nasdaq: OPCH) in an all-stock deal. The transaction values AMED at $3.6B and AMED stockholders will receive 3.0213 shares of OPCH for each share of AMED. That’s equal to $97.38 per AMED share based on OPCH’s 5/2 closing price. Optum has recently made an unsolicited proposal to acquire all of the outstanding shares of Amedisys’ common stock in an all-cash transaction for $100 per share. EBITDA declined when comparing Q1 2023 to Q1 2022 due to the return of sequestration (-$9M) and the shift in Home Health volumes from episodic to per-visit payors: Q1 2022: Medicare FFS = 66.8% of total Home Health revenue Q1 2023: Medicare FFS = 62.7% of total Home Health revenue Amedisys will leverage their proven high-quality ratings to work with per-visit payors to increase reimbursement rates. Contessa’s slower-than-projected growth is expected to drag down EBITDA by $30M for FY 2023 (same amount as in FY 2022). Key Financial Figures M&A Activity Amedisys completed the divestiture of their Personal Care business effective 3/31/2023 (sold to HouseWorks for $50M) Acquired Capital Health Care Network in West Virginia. Mertz Taggart provided exclusive M&A advisory services in this transaction, representing the seller. The company has a total liquidity of 588.3M, composed by 519.2 available revolver and 69.1 cash on hand. Guidance (FY 2023) Addus HomeCare (Nasdaq: ADUS) Highlights While agreeing with the goal of broadening coverage, Addus HomeCare questioned CMS’s proposed rule requiring that a minimum of 80% of Medicaid payments for personal care and similar services be spent on compensation to direct care workers. Strong cash flow and conservative balance sheet management put Addus in a net leverage position of less than 1x adjusted EBITDA. New candidate management tracking system will allow Addus to better engage with potential employees, shortening the time between application and hire, and will be fully implemented by mid-2023. American Rescue Plan Act (ARPA) funds received has enabled Addus to offer sign-on and retention bonuses. To date, the company has received ~$25M, of which $11.7M remains to be spent over the next 12 months. Illinois (largest state of operations for Addus) reimbursement rate increased by $1.26/hr. bringing the rate to $26.92 – effective on April 1, 2023. Key Financial Figures M&A Activity As a result of the uncertainty caused by CMS’s proposed rule, Addus will halt acquisitions for personal care services. However, Addus believes that the personal care services market will be ripe for consolidation once there is clarity surrounding the proposed rule. Addus will continue to pursue acquisitions of home health agencies despite the pending issue related to the payment rates and potential clawback. The company closed Q1 2023 with $73.5M in cash and $670.8M available under their revolver. Guidance Dirk Allison, Chairman and CEO: “In addition to organic growth, we will continue to assess acquisition opportunities in 2023 that align with our overall growth strategy. Importantly, we are well-capitalized to continue delivering value to our shareholders. We are pleased with the operating trends in our business and remain optimistic about our prospects for continued growth in the year ahead.” Enhabit Home Health & Hospice (Nasdaq: EHAB) Highlights Enhabit Home Health & Hospice executed an agreement with a national payor(undisclosed) that became effective May 1 and two agreements with conveners who have national reach. Revenue decreased year over year by $10M primarily due to the continued shift to non-episodic payers in home health and the resumption of sequestration. Besides the decrease in revenue, EBITDA decreased due to an increase in G&A expenses of ~$4M from increased employee group medical claims and incremental costs associated with being a stand-alone company. Non-episodic visits grew to 29% of total home health visits. This is an approximate 7% increase year-over-year and an approximate 3% increase over Q4 2022. Cost-per-visit increased 2.3% year-over-year. Enhabit is now at full-time nurse capacity, which will allow the company to reduce the use of contract labor and improve clinical productivity going forward. Closed out Q1 2023 with a net leverage ratio of 4.2x, 0.55 below the threshold dictated by their credit agreement. Key Financial Figures M&A Activity Closed out Q1 2023 with $107.6M in available liquidity, of which $37.6M is cash on hand. M&A pace slowed down during Q1 2023 as expected after their three acquisitions in Q4 of 2022. Guidance Enhabit expects improvements in its bottom line throughout 2023 due to the expansion of Medicare Advantage contracts, improved rates, and reduced staffing capacity constraints. Maintained adjusted EBITDA guidance for 2023 of $125 - $140M. Aveanna Healthcare (Nasdaq: AVAH) Highlights Aveanna Healthcare PDS segment falls within CMS’s proposed rule requiring to pass 80% of reimbursement to direct care workers. As a result, the company stands firm with industry peers and highlights the importance of giving CMS feedback during the open comment period. Expressed belief that demand for home and community-based care services has never been higher. The labor environment continues to be the company’s primary challenge. Received a double-digit reimbursement rate increase in OK (applied retroactively to 1/1/2023). This allowed Aveanna to double the number of caregivers hired per week in the state. Optimism towards a potential double-digit reimbursement rate increase for private duty nursing services in TX that could begin on 9/1/2023. Secured two additional preferred pay agreements in key markets, bringing the total to nine. Preferred payer volumes increased to approximately 13% of total private duty services. MCO Medicaid partners are saving an average of $5 for every $1 spent on PDS services. This is due to fewer hospitalizations and fewer hospitalized days. Key Financial Figures M&A Activity Aveanna incurred $70K in acquisition-related costs during Q1 2023, which is 23% decrease when compared to Q1 2022. Guidance Jeff Shaner, CEO: “We believe it is important to continue to set expectations that acknowledge our environment we are operating in and the time it will take to transform our company and return to sustainable growth. We believe our outlook provides a prudent view considering the challenges we face with the current inflationary labor environment, and hopefully, it proves to be conservative as we execute throughout the year.” Confirmed previous revenue and adjusted EBITDA guidance for 2023 of $1.84B and $130M, respectively. 2023’s gross profit margin is expected to stay in line with Q1 2023. Expect to finish 2023 with private duty services preferred payer volumes in the high teens (Q1 2023: 13%) The Pennant Group, Inc. (Nasdaq: PNTG) Highlights The Pennant Group, Inc achieved an all-time high in-home health and hospice average daily census. Q1 2023 senior living occupancy was 79.1%, representing a fifth consecutive quarter of occupancy improvement. Will remain focused on their five key organizational priorities: leadership development (top priority), margin, turnover, growth, and clinical excellence. Employee turnover was reduced by double-digits year-over-year in both segments (hospice and home health and senior living services). Home health admissions grew 7.1% over the prior year’s quarter, and hospice admissions grew 9.1% over Q4 2022. Home care business is exposed to the uncertainty around CMS’s proposed rule requiring that 80% of reimbursement be passed to direct care workers. However, it represents a modest portion of home health revenue ($2M for Q1 2023). Key Financial Figures M&A Activity The company expects to continue to employ the strategy of acquiring and turning around underperforming operations. The standard for acquired underperforming operations is that they contribute meaningfully to earnings no later than the ninth quarter post-acquisition. Acquired Robins Landing of Brookfield and Robins Landing of New Berlin, both under the senior living business. Acquired a home health license in Prescott, Arizona, and a smaller home health agency in Colorado Springs. John Gochnour, President and COO: “Our home health and hospice pipeline is ripe with opportunities we expect to execute on over the next few quarters.” Guidance Pennant expects to see continued growth in the hospice and home health segments throughout 2023.

Despite rising interest rates, bank failures, and a slowdown in M&A activity, valuations for healthcare services companies with adjusted EBITDA between $500,000 – $10,000,000 remain historically high. There are two main reasons for this: 1. Scarcity of Quality Companies on the Market. There is a shortage of quality healthcare services companies for sale in the lower-middle market, primarily due to the mass exodus of owners of privately-held businesses that occurred in late 2020 and throughout 2021. Healthcare Services Private Equity Total Deal Activity by Year Source: PitchBook Source Document (Q1 2023 Healthcare Services Report) ● Geography: US & Canada ● *As of March 31, 2023. There were two drivers of this bubble of activity: 1) COVID burnout. Operating a healthcare services company during peak, COVID was hard -- for owners, clinicians, caregivers, and office staff. Many owners, flooded with inquiries to sell, saw the opportunity to get out at peak valuations as too compelling to pass up; and 2) the threat, under the Biden administration, that the capital gains tax rate would increase from 20% to about 40%. During that period, if an owner was considering a sale in the next few years, the potential tax rate change made selling more attractive while rates were low. The current administration has continued advocating for the proposal as a means to fund its spending priorities, but is unlikely to get current congressional support. 2. Declining Private Equity (PE) Exits Creating Demand for Add-On Acquisitions. Private equity firms have faced challenges exiting their investments over the past few quarters. This is due to several factors, including rising interest rates and tightened lending standards. Healthcare Services Private Equity Exits by Year Source: PitchBook Source Document (Q1 2023 Healthcare Services Report) ● Geography: US & Canada ● *As of March 31, 2023. PE exits are often highly leveraged. In other words, the acquiring PE fund will put significant debt on the transaction to achieve the returns their investors require. Since debt is more expensive, values for these platform transactions, in the $100 million+ enterprise value range, have decreased over the past five quarters. As these firms find it more difficult to exit their investments, they increasingly seek to acquire well-managed, cash flow-positive, ‘add-on’ acquisitions. This allows them to increase both the EBITDA and their exit multiple, thereby significantly adding value to their portfolio companies. It also allows them to lower the 'effective' multiple they will have paid for all of the acquisitions combined. They can accomplish the 2nd objective while still paying premium prices by historical standards. This has driven the demand curve up for lower-middle market ($500K to $10M in Adjusted EBITDA) healthcare services companies, which has kept values high. However, not all private equity buyers are created equal in this respect. Those buyers that won’t require a lot of leverage to transact will often have both the ability and the motivation to pay a premium in a competitive M&A advisor-led process.

By Eduardo Tavel No matter where you are in your home-based care journey of ownership or operations, it’s never too early to think: “What’s next?” We get asked frequently, “Who are the buyers for home-based care companies?” In this article, we’ll categorize the investors or buyers who might be involved in your business’s next chapter. Depending on your ultimate exit strategy, you may run into some of them. Buyer Types Broadly, there are two types of home-based care buyers - strategic and financial. This article intends to: Explain the difference between the two buyer types Further break down each buyer type by category Because these buyers have fundamentally different goals, how they approach your business in an M&A transaction can differ significantly. Let’s begin with the notion that strategic buyers tend to dominate the M&A landscape in terms of deal volume: Strategic Buyers These buyers usually operate in the same or connected industry (see ‘payviders’ below) as the seller. They can realize synergies through acquisitions. Synergies represent a financial benefit to them, so they can afford a higher price than a buyer who can not capture them. These synergies can come in the form of duplicate cost savings, referral relationships, and, more recently, ‘value-based’ synergies. In the home-based care industry, we categorize strategic buyers as: Public companies Private Equity (PE) portfolio companies Non-PE-backed Public Companies These companies are consistently under Wall Street’s microscope and public scrutiny. They have different reporting requirements, and the price at the Price/EBITDA multiple at which their shares are trading could influence their acquisition decisions. Examples of publicly-traded home-based care companies include Amedisys, Addus, Enhabit, Aveanna, and The Pennant Group. This group has expanded recently to include “payviders” who are playing a significant role in the value-based care movement, including Cigna (Signify), United’s Optum Ventures (LHCG), and Humana’s Centerwell and Gentiva (which it co-owns with private equity group Clayton Dubilier Rice). Private Equity Portfolio Companies These companies are formed through platform investments – a private equity fund’s first acquisition and entry into an industry. Their growth strategies usually involve ‘add-on’ or ‘tuck-in’ acquisitions around their platform investment. Their cost of debt, which is a product of the interest rate environment and their leverage, can influence their acquisition appetite. Examples of private-equity-backed home-based care portfolio companies include: Elara Caring Help at Home AccentCare Care Advantage Compassus Non-PE-backed Every strategic buyer who is not public or PE-backed falls into this category. Their size and level of sophistication will influence their appetite for acquisitions. This includes both for- and not-for-profit health systems (for example, Trinity Health) or other larger industry not-for-profits – most prominently in the hospice industry. Financial Buyers On the other hand, a financial buyer is interested in investing in a company with a targeted internal rate of return (IRR) and exit date (subject to change, depending on market conditions) at the closing of its initial ‘platform’ acquisition. Since financial buyers are not operators, and to minimize risk, they will usually incentivize the company’s current operator(s) or an industry operating partner with equity in the platform. Private Equity Groups Private equity groups invest in private companies or buy out public companies and take them private. They raise money from limited partners, such as pension funds or wealthy individuals, and create a fund that typically lasts 7-10 years. From that fund, they buy stakes in businesses they hope to improve and sell at a profit, which they share with their limited partner investors. Most private equity groups employ a ‘roll-up’ strategy in the home-based care industry. Once the platform is acquired, that company will acquire multiple smaller home-based companies, usually in different markets. The goal is to create a larger, more efficient entity that can benefit from economies of scale, operational synergies, and increased market share. The key concept to this strategy is called 'multiple expansion', where the combined company will sell for a substantially higher multiple of its earnings than the individual companies they acquired. They will usually use debt financing for acquisitions to maximize returns. Examples of active private equity sponsors in home-based care include: KKR & Co. Inc. TPG Capital Webster Equity Partners Vistria Lorient Capital Family Offices Investment offices that manage capital for one or a small number of high net-worth families. Due to this, they have more flexibility regarding their holding periods and investment strategies. Like private equity groups, they must find a platform investment to break into the industry. Examples of active home-based care family offices include Dorilton Capital, via their investment in Traditions Health, and Kaltroco, who owns New Day Healthcare. Independent Sponsors Also referred to as fundless sponsors, independent sponsors are individuals or a group of individuals who identify and acquire companies, typically with the help of investors. They are often former investment bankers or private equity professionals who have the skills and experience to identify and execute on acquisition opportunities. They often target specific industries based on their expertise and historical success. Unlike private equity, Independent sponsors typically do not raise funds until they’ve identified a target. They work through various equity channels, such as private equity, family offices, hedge funds, and pension funds. Search Funds In the most common form of this investment model, an MBA graduate from a top business school obtains financial backing from the school’s prominent business network, hoping to acquire a profitable business that they can operate and scale. The backers could be successful school alumni, professors, debt partners that have established relationships with the schools, and more. Although this model started in 1984, it has recently gained popularity.

Mertz Taggart announced today that it was recognized as an M&A Source Top Firm of the Year for its outstanding performance in 2022. The company is one of four advisory firms in the United States to earn the award, which is based on total enterprise value transacted. M&A Source is the leading professional association of lower middle market M&A advisors nationwide. The association focuses on education, professional development, and networking opportunities for M&A intermediaries. “We appreciate our friends and colleagues at M&A Source and are honored for this award,” commented Cory Mertz, Managing Partner. “It’s a testament to our team of highly skilled and dedicated professionals and their passion for maximizing value for our clients.” We would also like to thank our clients, who have entrusted us with one of their most valuable assets: their businesses. We are grateful for the opportunity to serve them and help them achieve their goals. We value the relationships we have built with them over the years and look forward to continuing our industry partnerships. Mertz Taggart is an industry-leading healthcare services mergers and acquisitions firm based in Fort Myers, Florida. Our industry focus includes home-based care (home health, hospice, home care) and behavioral health (mental health services, addiction and eating disorder treatment, autism services). We represent owners of companies with between $500K to $20 million in EBITDA. Since 2006, our team has helped over 130 healthcare services business owners achieve their exit planning goals.

Despite Rising Interest Rates and Economic Uncertainty Over the past several weeks, we have had numerous conversations with private equity groups, large, publicly traded home-based care companies, and healthcare lenders. Conversations have been as broad as the debt and equities markets in general (considering recent banking turmoil) and as narrow as specific transaction opportunities we have recently taken to market. These discussions and 16 years of healthcare services M&A history have allowed us to formulate our current thoughts on the M&A marketplace for home-based care. And it’s not all bad. In fact, a lot of it is very positive. Interest Rate Impact With rising interest rates, compounded by stresses imposed on the U.S. and international banking systems, debt financing is getting more challenging and certainly more expensive if you can get it, especially for larger transactions. This has created a shift in the M&A world. On the one hand, financial theory will tell you that interest rates are fundamental to company valuation. As interest rates and uncertainty increase, the cost of capital increases, and investors demand higher returns. As a result, valuations will drop, all else being equal. However, we have a significant supply/demand imbalance of quality home-based care agencies on the market. At the high end of the market – transaction volume in the ~$100M to $1B+ has come down as capital has become more expensive. At this end, transactions tend to be much more highly leveraged. So, we’re seeing fewer large “platform” transactions. Because of this, and the public home care companies' lower overall valuation, many private equity-backed portfolio companies have delayed their exits, opting to double down on smaller ‘add-on’ or ‘tuck-in’ transactions. Generally speaking, private equity still has significant dry powder to invest as they continue to close new funds. At the lower end of the market, demand and, therefore, valuations are as strong as ever. “A lot of agency owners see the lower transaction volumes and hear the news of the financial markets and assume that demand has diminished. We have not seen this at the lower end of the market, say companies in the $3 million to $50 million range, which is where the majority of transactions occur,” said Mertz Taggart Managing Partner, Cory Mertz. “There are no hard lines here in terms of valuation, but generally speaking, the top has come off the high end of the market from the 2021 highs. We will not see a lot of transactions with valuations in the mid- to high-teens right now. But the lower end of the market is holding up fine. I can make the case that values for companies in this size range are higher today than before interest rates started to rise.” Supply and Demand So what is allowing values to stay afloat despite the current interest rate environment? It’s all about supply and demand. The supply of quality agencies going to market is low due to two factors: Owners accelerated their exits in 2020 and 2021 to avoid the not-yet-seen capital gains tax rate increases. One of the current administration’s priorities was double the capital gains tax rate from the current 20%. This created the rush to sell, which only subsided in late 2021 after it was clear this legislation didn’t have legs. This, along with low interest rates and plenty of cash available on the private equity balance sheets, drove record transaction volumes in those two years but left a shortage of quality providers wanting to sell in 2022 and 2023. The perception is that valuations across all sizes must have come down due to rising interest rates. On the demand side, many PE-backed acquirers have postponed their exits. Those portfolio company transactions tend to be more highly leveraged, where the cost of capital will significantly impact valuations. Public company valuations have also come down, impacting the price they can pay for large PE portfolio-type companies seeking a transaction. Generally speaking, private equity has the mandate to grow. So many PE-backed portfolio companies have doubled down on ‘tuck-in’ or ‘add-on’ acquisitions, which they can fund using the increasing piles of cash, both on the company and fund balance sheets “To be fair, buyers have gotten more disciplined in many ways,” said Mertz. “In some cases, they have honed in on what opportunities they want to pursue. In some cases, they’ve narrowed their criteria in terms of service lines/payers and geographies. Others are less likely to stretch on synergies they’ll factor into their valuation models or to look the other way on a small quality of earnings miss. As a result, we may end up getting fewer offers for an opportunity we take to market, but the offers we are getting are as strong as we’ve seen.” Interested in a confidential, complimentary valuation? Please contact us at info@mertztaggart.com. Trackbacks/Pingbacks The Resurgence of Private Duty Home Care M&A - [...] 2018 was a booming year for health care M&A activity. That’s especially true when it comes to private duty home care transactions... Treatment Center Value Insights: It’s All About the Multiple (…Or Is It?) - [...] I would go as far as saying it’s irresponsible to give guidance simply in the form of...

COVID-19 Short-term Impact on Healthcare* M&A Buyer Mindset *Home Health, Home Care and Hospice and Behavioral Health In response to questions from the media, buyers, and sellers, Mertz Taggart undertook a qualitative survey of industry buyers. There has been a wealth of conjecture and prognostication about the short- and long-term effects of the COVID-19 outbreak on healthcare in general and mergers and acquisitions in particular. Rather than guessing, we decided to talk to the people in the trenches, so to speak. The commentary assembled in this overview represents not only first-hand experience with COVID-19’s impact on our industry but also some excellent insights into what is to come. As always, Mertz Taggart will do its best to keep a finger on the pulse of the market. Our plan is to share as much good information as possible with the community as we process it. In our small way, Mertz Taggart is trying to contribute to the available information to keep our friends and business partners informed as much as possible. Overview Perceived impacts of COVID-19 on healthcare M&A buyers indicate the following: Strategic buyers (both public companies, and mature PE-backed portfolio companies) buoyed by strong balance sheets, dedicated development teams, and industry savvy, will continue to do strategic transactions, albeit at a slower pace; Private equity interest in new opportunities is mixed, depending on the COVID-19 impact on other portfolio companies and their banking relationships. Methodology On March 19-20, 2020, Mertz Taggart conducted a brief qualitative survey of 24 industry leaders representing home care and behavioral health strategic buyers and private equity groups. Timeline for current deals The majority of respondents believe they will experience a slowdown in current closings. Reasons include market uncertainty, tightening credit, and a diversion to other corporate interests. “Although the M&A team is all systems go, the executive team and operations team have other pressing issues to deal with right now.” (Home health, home care, and hospice company) “The banks are still lending. They are going to get more stringent and are adjusting their coverage ratios. It will be difficult for banks to lend into a declining business.” (Private equity group) Several respondents believe the pace of their current closings will stay the same with one private equity respondent citing “the momentum we have built over the past several months” as a reason for optimism. A couple of respondents think their current closings will accelerate. “Opportunistic strategy” (Homecare company) “Going to try to accelerate closing on existing opportunities…” (Behavioral health company) The impact of COVID-19 on the pace of current closings led one respondent to be unsure of how the timeline would be affected. “Uncertainty in the current state of the virus is causing a lot of panic with sellers/buyers from the legislative and operational strain and it is still so early on. Unknown impacts on the economy could cause drastic changes in the sector and spark sellers' decisions to de-list because they are afraid of lower valuations. However, smaller agencies without less financial cushion may seek to sell to solidify some profit before folding.” (Home care company) Likelihood to look at new opportunities The majority of respondents believe their likelihood to look at new opportunities will stay the same. “We are in it for the long game and will continue to look at opportunities.” (Homecare company) “We’re PE, we look at everything.” (Private equity group) “This answer could change as things develop in the months to come but for now we plan to look at opportunities the same as usual.” (Hospice company) Several respondents describe they are more likely to look at new opportunities because of the favorable deals that arise from the marketplace. “Greater disruption creates greater opportunities at better potential risk/reward prices (if underwritten correctly.)” (Private equity group) Also, several respondents state they are less likely to look at new opportunities. “We’ll look at mental health opportunities, but everything else is on hold right now.” (Private equity group) “Although our business is doing well, our financial partner has other portfolio companies that are struggling and need attention.” (Behavioral health company) Other factors being monitored Respondents list travel limitations, social distancing, seller engagement due to the strain of COVID 19, reimbursement risk, supply chain problems, and clinical staff shortages as factors they are currently monitoring during this changing economic environment. Check back to hear what home care, behavioral health, and private equity groups are saying as we weather the uncertain times ahead. For up-to-date news, information and insights join our email list and follow Mertz Taggart on LinkedIn Facebook Twitter Trackbacks/Pingbacks Behavioral Health M&A Report: Q1 2020 - Mertz Taggart - […] to a recent survey by Mertz Taggart, strategic buyers forecast a slower pace of healthcare M&A transactions only for…

Post-Acute Care Transaction Activity Remained Robust During the First Quarter of 2020 Despite the continued transition to the Patient-Driven Groupings Model (PDGM), as well as the emergence of the COVID-19 national health emergency and other strong health sector headwinds, post-acute care transaction activity remained robust during the first quarter of 2020. Overall, the home health, hospice, and home care industries saw a combined 27 transactions during Q1, a slight uptick from the 25 total transactions reported in the same period a year ago, according to the latest M&A update from advisory firm Mertz Taggart. “There are some very real challenges on the horizon right now, but there’s still ample interest in quality home health, hospice, and home care assets,” Mertz Taggart Managing Partner Cory Mertz says. “And on the lending side, we’ve been hearing that banks are still open for business, though they might be behaving a bit more cautiously.” Of the deals that took place during the first quarter of 2020, the hospice segment saw the most activity, followed by home health. Home Health Transactions Rebound With 13 transactions, home health deals were up in Q1 compared to the previous quarter, which saw six deals. Both totals were sharp declines from the three-year high of 18 transactions recorded in Q1 and Q3 2018. However, this data is somewhat misleading, as all but seven of the 13 transactions included hospice. The decline in standalone home health deal volume is clearly linked to PDGM, as some buyers have chosen to observe the transition on the sidelines before jumping back into the M&A game. That’s primed to change throughout the rest of 2020, as PDGM has, for the most part, turned out to be a more manageable transition for many home health providers than expected. “I think all the preparation throughout 2019 really paid off,” Mertz says. “Many agencies and ownership groups have a good grasp on the model, so it’s probably not going to be the big speed bump for quality agencies that everyone anticipated.” Among the home, health transactions to take place in the quarter was Louisville, Kentucky-based BrightSpring Health Services’ deal for the home health and home infusion businesses of Advanced Home Care. For BrightSpring, the deal helps the company double down on its multifaceted care delivery strategy, which ranges from skilled home health and hospice to non-medical home care and pharmacy services. “Advanced Home Care has a 30-year heritage,” BrightSpring CEO Jon Rousseau said in an interview with Home Health Care News . “It offers tremendous partnership, innovation, and care management solutions to their ACO and hospital partners, so we’re really excited to build on that.” Additionally, at the very start of 2020, Lafayette, Louisiana-based LHC Group Inc. (Nasdaq: LHCG) announced several joint venture purchase and expansion agreements with partners in Texas, Arkansas, and Louisiana. In total, the January moves accounted for annualized revenue of approximately $23.8 million, according to the company. Meanwhile, on the private equity front, Seattle-based Fedelta Home Care received an investment from Montlake Capital . Hospice Stays Hot As has been the tale for the better part of two years, interest in the hospice space was substantial in the first quarter of 2020. At least 15 hospice transactions took place in Q1, one more than the previous quarter and six more than the first quarter of 2019. “The first quarter of 2020 saw more hospice M&A activity than any other quarter we’ve ever tracked,” Mertz says. Similar to home health agencies, hospice providers have been forced to navigate significant change over the past couple of months because of COVID-19. Those changes include pausing volunteer activities, redesigning bereavement care due to social distancing, and figuring out new electronic face-to-face flexibilities. Salt Lake City-based Bristol Hospice — a portfolio company of investment firm Webster Equity Partners — alone announced at least three hospice-related deals. At the end of March, Briston acquired the Utah and California locations of Sojourn Hospice & Palliative Care, a Healthy Living Network company, for an undisclosed amount. About a month prior, Bristol announced a new partnership with Front Range Hospice and Palliative Care and its patient care services team in the Frederick, Colorado, area. Bristol additionally made a move in Texas — partnering with New Dawn Hospice — in January. Apart from Bristol’s transactions, PE firm Pharos Capital Group LLC recently announced that its post-acute care provider platform — Charter Health Care Group — acquired two hospice service providers: St. Luke’s Home Hospice LLC and Arizona Select Hospice LLC. Both providers were part of the VeraCare Hospice system. Home Care M&A Activity Rebounds The first quarter of 2020 saw a slowdown in-home care deals, with only seven transactions reported. “Home care remains attractive to buyers. I would not mistake a drop in-home care volume for a decline in investor interest,” commented Cory Mertz, “The low volume is more reflective of a lack of quality providers in the marketplace.” Q1 home care deals included MGA Homecare’s partnership with Chicago-based Flexpoint Ford LLC, announced in March. MGA Homecare is a provider of home health care, home therapy, and home- and community-based services to pediatric patients throughout Arizona, Colorado, and Texas. Arosa+LivHome — backed by Bain Capital Double Impact — also made another move in the first quarter of 2020 by acquiring Life Care Innovations in Illinois. And in another Q1 home care transaction, Care Advantage, a provider of home-based care services in the Mid-Atlantic, acquired Amaisa Home Care. Care Advantage is a BelHealth Investment Partners portfolio company. Looking Ahead The coming quarter will likely shift in terms of M&A activity given the COVID-19 pandemic and the sweeping impact it has had on the health care system and global economy. Stay tuned for future updates, or click the link to learn more about our recent survey of healthcare M&A buyers and what they are anticipating in the near team for transaction activity. Trackbacks/Pingbacks PDGM — Not COVID-19 — Mostly to Blame for Drop-in Home Health M&A Activity » RegentCares - […] So far in Q2, home-based care — including Medicare-certified home health, hospice, and non-medical home care — has seen… PDGM — Not COVID-19 — Mostly to Blame for Drop-in Home Health M&A Activity - Medicare & Health Insurance News - […] So far in Q2, home-based care — including Medicare-certified home health, hospice, and non-medical home care — has seen… PDGM — Not COVID-19 — Mostly to Blame for Drop-in Home Health M&A Activity – My Blog - […] So far in Q2, home-based care — including Medicare-certified home health, hospice, and non-medical home care — has seen… Home Health, Home Care & Hospice M&A Report: Q2 2020 – Mertz Taggart - […] In all, the home health, hospice, and home care industries saw just 19 deals during Q2, down from a… Why 2021 is Poised for a Comeback for Home Health M&A – Mertz Taggart - […] that expected M&A activity was curtailed significantly by the COVID-19 emergency beginning in Q1. Many of the small and… Home Health, Home Care and Hospice M&A Report: Q4 2020 – Mertz Taggart - […] expected due to the Patient-Driven Groupings Model (PDGM), home health dealmaking started off strong in 2020, with at least… Home Health, Home Care and Hospice M&A Report: Q3 2020 – Mertz Taggart - […] third quarter. Mertz Taggart tracked just two deals, down compared to Q2’s five transactions and Q1’s seven […]