On April 27th, shortly after we published this original post, CMS dropped a bombshell proposed rule, which stated, among several objectives, that "At least 80% of all Medicaid payments for specific HCBS — homemaker services, home health aide services, and personal care services — must be spent on compensation for direct care workers to help address the direct care workforce crisis." The intent, experts believe, was to send a message to the states that they need to address the workforce issues and access to care. The markets panicked. With nearly 60% of its revenue comprised of home and community-based services, Addus HomeCare's share price dropped almost 30% on the news. The company has since regained some of its initial losses, a sign that institutional investors believe things aren't quite as bad as they initially seemed. Most private equity-backed strategic acquirers have indicated it is business as usual. "We've spoken with several strategic acquirers since the news broke to gauge their general sentiment," Mertz Taggart Managing Partner Cory Mertz commented. "Most buyers with HCBS as central to their investment thesis continue to show strong interest. Valuations for add-ons in the $3M to $50M range remain robust. Several PE groups seeking platform opportunities at the higher end of the market continue to look for opportunities, although some have hit the pause button until more is known." Do these strategic buyers know something we don't? Or worse, are they so married to their theses that they're convinced they'll 'figure it out'? The consensus among those 'in the know' regarding policy is that the final rule, currently slated to take effect four years after it is finalized, will not be nearly as onerous as it reads now…if it gets finalized at all. CMS welcomes comments through July 3, 2023. "Industry advocates, including several of the big strategic acquirers, are actively feeding back to CMS and educating policymakers, so they're not ignoring the issue," added Mertz, "But they're not overreacting either. They still see the long-term value in HCBS for all stakeholders, including patients and payors. Companies with strong cash flow and a culture of compliance continue to draw strong interest in the marketplace.”

The final three months of 2023 were a relatively quiet period within the behavioral healthcare sector. Just 31 deals were completed—the fewest since the second quarter of 2020 and the onset of the COVID-19 pandemic. Though 2023 was down, all indications point to increased activity in 2024. "We've had the opportunity to speak with industry and financial buyers over the past few weeks," said Mertz Taggart Managing Partner Kevin Taggart. "The consensus today is that we'll have increased activity across the sector. Improved capital markets and quality deal flow will drive the activity, especially in the 2nd half of 2024." However, seed and venture funding accounted for more than a third of those transactions, with 12 such deals representing a total investment of $257.9 million. These investments could be a preview of behavioral healthcare organizations to watch, added Taggart. “Some of these venture back firms will end up being major players in the industry, but I also think that many of them won't make it for a variety of reasons”, he said. Combined, venture capital and private equity firms completed 24 of the 31 transactions in the quarter. One deal alone accounted for nearly half of the VC money that was invested in behavioral healthcare in Q4. In October, Headway, a healthcare tech startup that connects patients and in- network therapists, raised $125 million in Series C funding, according to a Reuters report. The round was led by Spark Capital Partners, with participation from existing investors Thrive Capital, Accel, and Andreessen Horowitz, as well as the insurance company Health Care Service Corporation. While Mertz Taggart analysts don’t expect an immediate jump in dealmaking in 2024, we expect activity could see an increase if widely expected interest rate cuts by the Federal Reserve come to fruition in Q2. “We expect more companies to go to market in 2024, reverting to pre-pandemic levels,” Taggart said. “However, buyers will be more disciplined about the companies they choose to invest in or purchase. Much of that discipline is being imposed by higher interest rates and banks themselves.” To make their organizations more attractive to buyers and investors, Taggart said prospective sellers would be well served to take stock of the state of their operations. Performing some level of clinical, compliance, and quality-of-earnings audits prior to going to market can help mitigate deal risk, he said. Addiction Treatment M&A Although the final three months of 2023 marked the most active quarter of the year for the addiction treatment subsector, with 11 transactions announced, the year-to-date total of 28 deals involving addiction treatment providers solidified 2023 as the least active year in M&A for addiction treatment organizations since the onset of the pandemic. For comparison, 32 deals involving addiction treatment providers were announced in the fourth quarter alone in 2021. Addiction treatment transactions include the following: Abacus Investments acquired Louisiana-based Longbranch Retreat & Recovery Center in a platform deal. Borden Cottage, a luxury residential drug, alcohol, and co-occurring behavioral health treatment program in Camden, Maine, transitioned to independent ownership in October. New Jersey-based outpatient treatment providers BlueCrest Recovery Center, QuickSilver Counseling Center, and Assess With Guidance merged to form BlueCrest Health Group. Defining Wellness Centers, a Jackson, Mississippi-based SUD treatment organization, was acquired by Fulcrum Equity Partners. Also in Mississippi, Vertava Health, a provider of addiction treatment and mental health services in Southaven, was acquired by Bradford Health Services. The Handley Foundation acquired Origins Behavioral HealthCare and its locations across Texas and Florida. Among the transactions completed in the quarter, three providers announced they had secured significant investments: PursueCare, a Connecticut-based virtual substance use disorder (SUD) treatment organization, raised $20 million in a Series B funding round led by T.Rx Capital and Yamaha Motor Ventures, along with participation from Seyen Capital and OCA Ventures. Sunnyside, a digital health company that addresses alcohol addiction, secured $11.5 million in Series A funding, with Motley Fool Ventures leading the round and Will Ventures also participating. You Are Accountable, a New York-based SUD treatment platform, secured $2 million from an undisclosed investor. Mental Health M&A A total of 19 transactions involving mental healthcare providers were announced in Q4, marking the fifth straight quarter in which mental health-related deals declined after a record 39 transactions were announced in the third quarter of 2022. Private equity remains active, accounting for 16 deals, including the following: ARC Health, the Beachwood, Ohio-based mental healthcare practice operator backed by the Thurston Group, acquired three organizations: Exult Healthcare Solutions, Advanced Psychiatric Group, and Mindsoother Therapy Center. Mertz Taggart represented Mindsoother in the transaction. Comprehensive Rehab Consultants received a strategic growth investment from the private equity group of York Capital Management. Integrative Life Network and Integrative Health Centers announced a merger, forming a unified mental and behavioral healthcare company known as Peregrine Health. Partnered Health acquired New View Psychology in a private equity-backed deal. UpLift, a Tampa, Florida-based virtual behavioral healthcare provider, announced in November that it acquired Minded, a psychiatric telehealth organization that focuses on treatment of women. Private equity-backed Kidz Therapy Services acquired Complete Rehabilitation Consultants. Beckley Waves, a venture studio that invests in psychedelics to advance mental health, made a strategic acquisition of Nue Life, a ketamine-assisted therapy provider. The Grunt Style Foundation acquired Irreverent Warriors, uniting a pair of national not-for-profits that specialize in addressing mental health and suicide prevention in the military veteran community. In addition to the $125 million investment in Headway that was led by Spark Capital Partners, the following organizations announced funding rounds in the fourth quarter: Behavioral health urgent care provider Connections Health Solutions announced its intention to expand with a $28 million Series B funding round led by Town Hall Ventures. Digital peer support marketplace startup Forum received $5.3 million in seed funding from NextView Ventures, along with participation from MBX Capital, Cue Ball Capital, Sahil Bloom of SRB Ventures, Romeen Sheth, Shaan Puri, and City Light Capital. BeMe Health, a Miami, Florida-based virtual pediatric care organization, received a $1.5 million investment from Blue Cross and Blue Shield of Kansas. Ciba Health raised just under $7.5 million in a funding round led by DigiTx Partners. Telehealth-based youth therapy startup Joon Care secured $6 million in investments from Pioneer Square Labs Ventures, Route 66 Ventures, and the company’s CEO, Emily Pesce. Clayful, an on-demand coaching company, netted $7 million in seed funding led by Reach Capital, and education technology investment firm. Nema Health, a virtual provider of post-traumatic stress disorder (PTSD) treatment services, secured $4.1 million in seed funding in a round led by Optum Ventures and .406 Ventures, along with participation from Graymatter Capital and other angel investors. Autism and Intellectual/Developmental Disabilities M&A Activity involving providers of autism therapy and intellectual/developmental disabilities treatment services remained light in the fourth quarter, with just 3 deals announced. The year-to-date total for the subsector was 17 transactions, the lowest of any year since the onset of the pandemic. Cortica extended its Series D funding round by $40 million, led by CVS Health Ventures, along with participation from LRVHealth, Ascension Investment Management, and the University of Wisconsin Foundation. Meanwhile, BlueSprig Pediatrics, an autism therapy provider backed by the private equity firm KKR, acquired Trumpet Behavioral Health in Lakewood, Colorado, and New Story, a provider of special education, therapeutic, and mental health services, acquired The Learning Spectrum in a private equity-backed strategic deal. If you are interested, you can also download the Q4 2023 Behavioral Health M&A Report via the following link:

The fourth quarter of 2023 closed with an uptick in home-based care transactions, and while the 25 total wasn’t a staggering number, it does represent a significant increase from the just 16 that took place in the third quarter. It is also more in line with pre-pandemic norms of 25-30 transactions/quarter. For the full year, there were 95 home-based care transactions. That represents a 14% downturn from 2022, and a much more significant dropoff from the frenzy that was 2021. “We are seeing signs of a thaw in dealmaking,” says Cory Mertz, managing partner at Mertz Taggart. “But the first and second quarter of 2024 will be better indicators.” There are various reasons behind the slowdown in 2023, but chief among them was the Federal Reserve’s war on inflation, causing interest rates to rise and debt markets to tighten. This spurred nearly every financial sponsor to re-evaluate their acquisition strategies. In most cases, this included taking a much more disciplined approach to investing and, in some cases, kept would-be buyers on the sidelines completely as they focused on shoring up their internal operations. But there was an increase in deals across home health, home care and hospice in the fourth quarter. And many of those deals were driven by private equity: 18 of the 25 transactions either involved a PE buyer or a PE-backed portfolio company. “Eventually, PE-driven activity will normalize across industries,” Mertz says. “Considering how in-demand quality home-based care agencies remain, the home-based care industry at large is primed to be a beneficiary of that normalization.” A huge jump in activity is not guaranteed in 2024, of course. Much will depend on not only what the Fed does next in terms of interest rates, but also consensus opinion of what the Fed will do in future meetings. “We expect more companies to go to market in 2024 — reverting back to pre-COVID levels — but it will continue to be a bit more of a challenge to get deals across the finish line as buyers will continue to chant the ‘discipline’ mantra,” Mertz says. “That is, of course, imposed on them by higher interest rates and bank covenants themselves. Prospective sellers would be well-served to perform some level of clinical and compliance audit along with some level of a quality of earnings (QoE) prior to going to market to help mitigate deal risk.” Home Health M&A Home health care dealmaking ended on an up-note, with 13 transactions completed, up from just four transactions in Q3. The biggest deal completed was Gentiva’s acquisition of ProMedica’s home health and hospice assets. Worth $710 million, this is Gentiva’s first major deal following its formation out of the divested assets of Kindred at Home. Humana Inc. (NYSE: HUM) formed CenterWell Home Health out of Kindred, and did away with the home care and hospice service lines in the process. What Gentiva decides to do with the home health piece remains to be seen, though they’ve given us no indication they are interested in looking at future home health opportunities. In late December, Brookdale Senior Living (NYSE: BKD) sold the remaining 20% stake it had in its home health JV with HCA Healthcare (NYSE: HCA). In early 2021, during the tumultuous COVID-19 period, Brookdale offloaded 80% of its home health segment to HCA Healthcare for $400 million, implying an enterprise value of $500 million at the time. Later in 2021, some of those assets were then sold to LHC Group, for $197 million. It sold its remaining 20% stake for $27 million, which has an implied enterprise value of about $135 million. The proceeds were used to refinance Brookdale’s debt obligations. “Based on the transaction timeline for the original Brookdale assets, and taking into account the earlier LHC transaction, it’s probably safe to assume the JV didn’t create a lot of enterprise value for the agency,” Mertz says. Among the other notable home health deals in the fourth quarter: ● Blue Wolf Capital-backed Elara Carings’ acquisition of American Family Home Health Services, further increasing its Illinois presence. ● New Day Healthcare remained acquisitive, closing on Pathfinder Home Health, with four locations in south Texas. The deal was New Day’s eighth transaction since its inception in 2020. ● Two PE-funded private-duty nursing transactions: InTandem Capital’s Pediatric Home Respiratory Services’ acquisition of All About Pediatrics in Jacksonville, FL, and Care Options for Kids’ acquisition of Preferred Home Health Care, with 12 locations throughout New Jersey, Pennsylvania and Delaware. Home Care M&A Non-medical home care transactions were a major bright spot for dealmaking in the fourth quarter, with 13 transactions reported. The 80/20 rule — which has still not been finalized, and would force providers to direct 80% of all Medicaid dollars toward caregiver compensation — does not seem to be deterring investment in home- and community-based services. Of the 13 home care transactions that took place in the fourth quarter, nine involved HCBS sellers. Sodexo also completed its sale of Comfort Keepers — one of the nation’s largest home care franchises — to The Halifax Group. The transaction was part of Sodexo’s divestiture of its Worldwide Home Care Operations, with subsidiaries in Europe and South America. Searchlight Capital Partners-backed Care Advantage acquired Nova Home Health Care, based in Northern Virginia. The deal builds density in the northern Virginia Marketplace. “Northern Virginia is one of the more populated areas across the state,” Care Advantage CEO Tim Hanold told Home Health Care News. “We’ve done numerous acquisitions there over a period of time. We continue to build out our density, and also the diversity of both payer source and the communities that we serve within that area.” The deal was Care Advantage’s 18th since 2018. New England-based Best of Care acquired Barton’s Angels in November. Best in Western Massachusetts, Barton’s provides both state-funded and private pay services to clients in Western Massachusetts. Finally, Tygon Peak Capital pulled off a rare feat with its five-way merger of agencies in South Texas.  The deal included A Plus Family Care, Axiom Home Health, Bee First Primary Home Care, Elder Homecare and Starr Home Care. Hospice M&A Hospice saw an uptick to nine (9) total transactions in Q4. This followed a record low two transactions in Q3. The Pennant Group (Nasdaq: PNTG) led the way with hospice transactions in the fourth quarter. An aggressive acquirer, Pennant completed two deals in Q4. Acquiring Arizona-based Southwestern Palliative Care Associates and Guardian Hospice, with locations in Texas and Oklahoma. Other notable hospice deals in the quarter include: ● Trive Capital-backed Choice Health at Home’s acquisition of Lumicare Hospice in Colorado ● Graham Healthcare Group-owned Residential Healthcare Group’s acquisition of Safe Haven Hospice in Illinois ● The aforementioned Gentiva/Promedica deal, which included substantial hospice assets. Healthcare services M&A is hard to predict due to both economic and regulatory uncertainty, and 2024 presents its fair share of challenges on both fronts. Healthcare-savvy investors who are used to navigating these obstacles are chomping at the bit for quality opportunities. Finding and closing those deals will be the bottleneck for activity in 2024. If you are interested, you can also download the Q4 2023 Home-Based Care M&A Report via the following link:

By: Michael Lloyd The home-based care M&A marketplace is ever-evolving and looks different than it did 24 months ago. Many owners have trepidation around today’s values and how the current financial climate affects the enterprise value of their business. Fortunately, the demand for quality home-based care agencies remains exceptionally high. This has kept values higher than historical norms, despite the general perception. However, buyers have become more disciplined. They need businesses to “check all the boxes” to pay a premium in today’s market. Below are some areas agency owners should consider to best position themselves and their business for a successful sale in 2024. Financials While keeping organized financial records is usually directly correlated with successful agencies, owners should know how buyers will look at their financials during a sale process. Buyers all have their own valuation models but have much in common. One of the main adjustments will be a conversion from cash basis to accrual. In order to remove revenue cycle lumpiness and match revenue with its corresponding expense, buyers will want to account for revenue and payroll expenses based on the date of service (vs the date of payment). This exercise will smooth out the monthly numbers to reflect payments and costs more accurately. “If I could give owners one piece of advice on the financial side, be sure to have accrual-based numbers, broken out by month, before going into any kind of negotiation with a buyer,” Mertz Taggart Managing Partner Cory Mertz said. “Signing a letter of intent with a buyer based on cash financials is a no-win situation for a seller. If the accrual numbers come back and they are worse than the cash-basis numbers, the buyer may want to renegotiate, which is not what you want to hear halfway through diligence. On the other hand, if the accrual numbers come in better than the cash numbers, you won’t hear anything from the buyer, but more likely will leave money on the table, which can be considerable.” The ultimate goal is to present an Adjusted EBITDA that will serve as a proxy for normalized cash flow to interested acquirers of the agency and minimize any surprises during due diligence. Accomplishing this is both an art and a science. A competent M&A firm will ensure this is handled correctly. Transition Risk Beyond regulatory and reimbursement risks that affect every healthcare company in some way, the biggest driver of the multiple is transition risk. To command a premium value for your agency, transition risk must be low in the eyes of your ideal buyer. This is the risk that the business (and its cash flow) will deteriorate after closing, usually due to the transaction itself, and it’s often a function of the owner’s role before the transaction, especially around leadership and business development. When exit planning, an owner should work towards removing themselves from these functions. This is easier said than done, but will help alleviate transition risk for the buyer and make them comfortable with current staff’s ability to continue operations without significant disruption, and grow the company after a short transition period. This is often referred to as “bench strength” and is correlated with premium valuations. “The first question strategic and financial buyers will ask, after they’ve read and understood the financial statements, is ‘Who’s on the bench?’ Who can run the business in the owner’s absence,” Mertz stated. “As an owner who is considering an exit, hiring or promoting quality leaders is an investment in the business that results in premium valuations when it’s time to exit.” Valuation A current valuation will help any business owner understand the value of the business today and the delta between the current value and their goal for an eventual exit. The valuation exercise from a trusted third-party M&A Advisor allows owners to set realistic expectations for their business's purchase price or enterprise value. In today’s M&A environment, premiums will lie in the details, so putting in the work beforehand will give the seller leverage and confidence entering into what can be an emotional process. Compliance Across the industry, compliance issues slowed deal volume in 2023. As buyers have become more disciplined, compliance around home-based care agencies is a significant factor in the success of a transaction. The service line will dictate the focus from a compliance standpoint. Hospice, of late, has been under a microscope from ADRs, compliance reviews from CMS, and enhanced oversight in certain states. Quality hospice opportunities are still in high demand, but compliance and legacy liabilities will remain factors for buyers. Identifying and addressing potential issues with the right experts and often having outside guidance and legal opinions will comfort buyers. For home health and hospice providers alike, buyers will look at both conditions of participation and conditions of payment. This is very different from a survey. We encourage owners to hire a 3rd party consultant to perform a billing audit on a small sample of the agency’s current and historical census. This can be accomplished with a relatively small investment, saving would-be sellers' heartache during diligence. It also signals to the buyer community that the agency is prepared for diligence, which adds value. For non-medical home care agencies, the compliance priorities are different and generally focused on caregivers employed by the agency. Every state has its own requirements for caregiver employment, but generally speaking, wage and hour compliance, ACA (Affordable Care Act) requirements, and other caregiver benefits must align with local, state and federal mandates. “If you look at home-based care valuations over the past 20 years, they remain historically high. How do they stack up to 2021 and 2022 valuations? For premium agencies, values have held up very well. However, not all agencies are considered premium in the eyes of today’s buyers,” Mertz added. “Preparation is key. And as self-serving as it sounds, having an experienced advisor who is well-versed in the rigors of diligence, can help mitigate potential surprises, and is respected by the buyer universe can make the difference between a successful transaction and a failed process.” Contact us to arrange a confidential discussion.

The third quarter of 2023 was another slow quarter for home-based care M&A, with only 18 reported deals. “Two factors drove the low deal volume,” Mertz Taggart Managing Partner Cory Mertz commented, “We saw a spike in deal count in Q2, but some of those transactions could just as easily have closed in Q1 or Q3, which would have smoothed out the lumpiness in deal volume. On the home health side, CMS’ proposed rule certainly delayed some deals. The final rule, published November 1, wasn’t a negative surprise, and will give Q4 a lift. Barring anything unforeseen, we will likely end 2023 with just short of 100 transactions. Still down ~10-15% from pre-pandemic norms of 110-120 deals a year.” On the supply side of the M&A world, the industry is still reverting to the mean in terms of agencies going to market. Agency owners rushed to the exits during the 2021 boom due to concerns around the capital gains tax rate and burnout, meaning sellers that would have exited in 2022 or 2023 were gone sooner, leaving fewer agencies going to market this year. This dynamic is not unique to home-based care. Additionally, many owners believe they have missed their window to sell for a premium, and have instead opted to hold and grow. That is likely the best decision for many owners. For others, there may be a little bit of a misunderstanding of the current M&A climate. “While the valuation curve has shifted a bit, a clean, lower middle market agency with strong cash flow will still command premium multiples, in line with 2021 numbers,” according to Mertz Taggart Managing Partner Cory Mertz, “For the agencies that have some work to do to command a premium in today’s environment, this is an opportunity to take stock. How would a critical buyer view the company in terms of valuation and its drivers? The answers to these questions should feed into a seller’s ultimate exit strategy.” Some transactions were in ‘wait and see mode’ regarding the final rule, which was released November 1. That will be a catalyst to more activity in the fourth quarter of this year or the first quarter of 2024. The other proposed rule that has changed the dynamics is the home- and community-based services (HCBS) proposal from CMS that would mandate that 80% of reimbursement be put toward caregiver salaries. “Industry buyers we’ve had conversations with vary in how they are factoring the proposed rule into their models going forward,” Mertz said,” Everyone in the industry is curious to see how this develops, but at the moment there is quite a bit of variation in how buyers are modelling HCBS businesses.” Home Health M&A While the hospice sector had just two transactions in the third quarter, skilled home health only had four — also a new record low. As always, quality small- to mid-sized home health agencies remain in high demand. “The proposed rule put a temporary delay on some deals,” says Mertz. “Given the final rule, I expect we’ll see those transactions those transactions close in Q4, providing some lift.” Among the home health deals in the third quarter: New Day Healthcare’s acquisition of Advantage Care Home Health Amber Personal Care’s acquisition of Healing Hearts Home Health Intermountain Health’s acquisition of Advent Home Health Home Care Home care deals led the way in the third quarter. There were 12, seven of which were of the HCBS variety. The aforementioned proposed Medicaid rule — with the mandated 80% of reimbursement going to caregivers — doesn’t seem to be significantly slowing buyer interest. There are likely a few reasons for that. To start, the rule is still just proposed, and it’s difficult to predict what a final version will look like. Most industry leaders, while concerned about the proposal, expect to see a final version that won’t be as draconian. Finally, rates for HCBS are far better than they were prior to the pandemic. Even private-pay home care providers are beginning to diversify into Medicaid, especially as billing rates rise. “Despite the proposed 80/20 rule, there is still strong demand, and transactions are happening across the map,” says Mertz. Among the notable home care deals in the quarter: Martis Capital-backed Community Based Care acquired Mertz Taggart client, Your Home Court Advantage, which illustrated the strong demand for Veteran Affairs (VA) as a HCBS payer source. New Day Healthcare acquired three Texas providers as it continued to build out its presence in the state. Vistria-backed Help at Home, the largest in-home personal care provider in the country, continued to execute on its growth strategy, with two transactions, Berkshire Home Care and My Care at Home. Help at Home Chief Development Officer Rich Tinsley told Mertz Taggart, “We’re continuing to identify small, medium and large-scale home care partners that can add to our differentiated value proposition for our caregivers, clients, partners and payers. Adding scale and density deepens our ability to connect home care to the health care ecosystem and provide innovative programs and services that can positively impact cost and quality.” Hospice Hospice saw a record low two transactions. That has to do less with demand and more with a lack of quality agencies going to market, Mertz says. “There just are not a lot of squeaky-clean, profitable hospices going to market,” he says. “Those that do will still attract strong attention. Buyers have gotten much more disciplined, and the increased regulatory scrutiny is causing more deals to fail diligence. For a hospice agency to transact today, it really needs to be buttoned up, especially on the clinical and compliance fronts.” Stricter buyer discipline In the end, buyers, especially on the hospice side, are becoming more disciplined around the following: Narrow acquisition criteria. Buyers are tightening their acquisition criteria, with harder rules around geography, payer mix/service line and profitability, to name a few. Stricter due diligence. Buyers are exhibiting stricter diligence, which is eliminating more deals. A clinical issue or earnings shortfall that would have previously been swept under the rug or worked around will now cause the deal to not close. We are now seeing this more on the hospice side than anything, given the increased regulatory scrutiny in general. Tighter economics. Banks have tightened their lending standards, which then causes buyers to tighten their standards. Meanwhile, many newer PE-backed platforms are feeling the weight of their debt service and are not as able to pay a premium. Buyers that are more established platforms with plenty of cash and little or no debt are still able to pay a premium for the right opportunity. However, they are also aware that there will be less competition for deals. In the hospice world specifically, hospices with poor cash flow that would have previously commanded premium valuations based on ADC and admission trends, no longer command those premiums. “Buyers are having a harder time justifying paying for a hospice based on average daily census, and what they think they will do with the agency in the twelve-month period post-close,” Mertz says. “Their PE investors and the debt providers won’t let them. So, those transactions have slowed significantly.”

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.

If you are an agency owner who is thinking about selling your business someday, you might want to take some cues from the experts in the field of buying and selling companies: Private Equity (PE) firms. PE firms are professional investors who acquire, transform/grow, and exit businesses with the goal of maximizing returns for the limited partner (LP) investors, and the firm itself. They have significant experience and know-how when it comes to maximizing the value of their portfolio companies and executing successful exits. They are the “Pros” at creating and maximizing value. Here are three things that home-based agency owners can learn from PE firms on how to achieve a successful exit: 1. Plan your exit early One of the key principles of PE exit excellence is to keep a clear and consistent view of why your business is a great asset, how it will improve, and why it will be attractive to potential buyers. PE firms plan their exit strategy before they even close on purchasing a platform company, or as soon as possible after acquiring it. They identify the most likely buyers, the key value drivers, and the optimal timing for the exit. They also align their business strategy and performance improvement initiatives with their exit objectives. As one PE executive reminded us at a recent conference, “We make our money when we sell, not when we buy." In fact, PE will often “overpay” for the initial platform acquisition, just to get a foothold in the industry. As an agency owner, you should also have a clear vision of your exit goals and how to achieve them. You should know who your target buyers are, what they are looking for, and how you can differentiate your business from the competition. You should also have a realistic valuation of your business and a plan to increase it over time. An exit plan doesn’t need to be elaborate to be effective. Having an early idea of your “magic number”, your target buyer/investor category (usually a strategic buyer or private equity firm), and an ideal exit date is a great start. Keep in mind your exit plan is a living document. It will evolve, along with you and your business. We suggest taking a few minutes each quarter to review, modify, and expand on it as appropriate. 2. Be big on KPIs PE firms are obsessed with measuring and improving the performance of their portfolio companies. They use Key Performance Indicators (KPIs) to track progress, identify issues, and drive actions. They also use KPIs to communicate the value proposition and growth potential of their businesses to potential buyers. As an agency owner, you should also use KPIs to monitor and improve your business performance. You should focus on the metrics that align with your values, such as quality of care, revenue growth, gross and net profit margins, client satisfaction, employee retention, and market share. You should also use KPIs to showcase your agency’s achievements and demonstrate your future potential. 3. Run a banker-led competitive auction process when you sell This sounds self-serving, and it is, but it’s also true. PE firms typically hire investment bankers to run a competitive auction process when they sell their portfolio companies. This involves creating and sharing the appropriate marketing materials with the most qualified buyers at the right times, soliciting bids, negotiating terms, and closing the deal. A competitive auction process helps PE firms achieve the highest possible price for their businesses, as well as favorable deal terms and conditions. It also creates a sense of urgency and scarcity among buyers, which can motivate them to act quickly and decisively. As an agency owner, you should also consider hiring a professional advisor to run a competitive auction process when you sell your business. A professional advisor can help you prepare your business for sale, market it effectively, attract multiple offers, negotiate the best deal, and navigate the due diligence and closing process. Selling your home-based care agency can be one of the most important decisions of your life. It can also be one of the most rewarding if you do it right. By following the best practices of PE firms, the “Pros,” you can increase your chances of achieving a successful exit that meets or even exceeds your expectations.

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.