Ever Hear of ZBB? It Can Make You $$$ If you intend to exit by selling your company, either to an outside buyer (a competitor, private equity group, etc.) or an inside buyer (one or more employees), the price you receive at the sale will likely be closely tied to the company’s earnings. The higher the earnings, the higher the likely sale price. As we know, there are two potential ways to grow earnings — increase revenue and decrease expenses. Both methods can maximize earnings prior to selling your business. In our experience, many companies underestimate the amount of expense reduction that is possible prior to sell the company, without harming morale, the team, or key operations. Remember, if you sell your company for a multiple of six times earnings (commonly calculated as your adjusted EBITDA), then every $1 of expenses you reduce potentially adds $6 to your selling price. Expense reduction prior to sale is a significant opportunity that many owners miss. How ZBB Can Help Transform Cost Management That’s where ZBB comes in to help. ZBB stands for zero-based budgeting, and it’s a little-used and often-misunderstood financial management tool. Zero-based budgeting simply means creating an annual budget for the company by starting at dollar zero, then adding expenses into the plan from there. For each new expense, company management has to justify the item and amount, thus forcing a rigorous and thorough line-by-line examination of expenses that challenges old assumptions and habits each step of the way. (“Why do we spend money on that? Gee, I am not sure. I guess because we always have…”) An excellent online article from McKinsey, one of the world’s largest consulting companies, describes how ZBB transforms cost management: “A world-class ZBB process is based on developing deep visibility into cost drivers and using that visibility to set aggressive yet credible budget targets. The annual budgeting process does in fact start from zero and is very detailed, structured, and interactive in order to facilitate meaningful financial debate among managers and executives. Throughout the year, multiple owners are tasked with managing performance and continuing the healthy debate on cost management. Through new system and process controls, and aligned incentive programs, all employees make cost management a part of their daily routine.” Create a Culture of Accountability and Transparency Learning and adopting ZBB does not require nor lead to cutting expenses to the bone, as the McKinsey article points out. ZBB compels a more thorough, transparent, and objective look at expenses than many companies would otherwise implement. When going through a ZBB exercise, it can be helpful to ask aloud “would anybody miss that?” as you and your team consider adding items back into the budget, working up from zero. If you don’t hear a loud outcry within the company that a certain expense would be sorely missed, that’s a clue that the expense in question might be better converted into savings. Properly implemented, ZBB is more surgical than draconian, and it can help create a culture of ownership thinking, accountability, and transparency. Why ZBB Is a Worthwhile Effort Many business owners, CFOs, and leadership teams are unfamiliar with ZBB and its methods. Some try ZBB but get bogged down in the details. Others fail to realize that ZBB is more than just a financial exercise; implementing ZBB can require rethinking employee communications, internal reporting, and even executive compensation. The effort can be worth it. Following ZBB practices and principles, it is not usual for companies to realize high single-digit or low double-digit reductions in SG&A expenses. Sustained until company sale, that reduction can generate dramatic returns from the increased selling price. To learn more about ZBB, task the company CFO with studying the issue and reporting his or her findings to the team. There is excellent information online, including the article cited above as well as this article by Forbes. Additionally, contact us at Mertz Taggart to discuss your exit plans and how we can help you and your team maximize your company’s sale price at the exit. Schedule my free 45-minute consultation Contributing Author, Cory Mertz, M&AMI – Managing Partner

The Simple Little Org Chart Can Produce Big Value at Your Exit Few business tools are as overlooked and underappreciated as the organizational (“org”) chart. Likely, you have diagramed one for your company. We tend to pull them out at specific moments such as when we need to meet with a third party like a vendor, customer, lender, or new hire. If out of date, which they often are, we quickly update them. Then, after the meeting, the chart gets put away, forgotten until the need arises to pull it out again. Most business owners stop there, having no further use for this unexciting little instrument. But hidden within the org chart is the potential to drive significant value in your company between now and exit. Here’s how. The Future Org Chart Exercise Convene your leadership team for an exercise called “The Future Org Chart.” Pick a future period of time such as three to five years out, and lead the team through the process of diagramming what the company org chart must look like on that date in order to support the expected growth between now and then. Choose a date that matches up with the growth plans and timetable defined in your company’s long-term strategic growth plan. (If your company lacks a written growth plan, watch this webinar to learn why this is an expensive mistake.) Start with a completely blank sheet, and then discuss and fill in the organizational structure needed to realize and support this growth. Assign job titles (those are the boxes) and define reporting roles and relationships (those are the connecting lines), but do not assign current employees to the future org chart — not yet. You and your team will be tempted to start filling peoples’ names in the boxes, but it is important that you do not do this until you have a completed org chart that the entire team agrees with and supports. At this point, you now have a clear and written vision for the team that is required to grow and lead your company over the next three to five years. Meeting With Your Leaders There’s more to be gained. With the Future Org Chart template built, it is time to put names in the boxes. We recommend you meet individually and confidentially with your leaders to get their input because some of these conversations involve people’s careers: Some of your employees may have ambitions about climbing the organizational ladder and progressing into one of the higher positions forecasted in the Future Org Chart. Some employees may aspire to occupy a position currently occupied by another person. The Future Org Chart may call for adding new management layers into the company, and some employees may worry about being eclipsed or losing status if the level they currently occupy is subsidiary to a new level above it. Issues or opportunities uncovered by these one-on-one conversations have the potential to be good for both the team and the company. Leaders aspiring to do more and earn promotions can be trained and coached on what is necessary to achieve their goals, and any fears about growth can be addressed. By necessitating these conversations, the Future Org Chart helps you develop and grow your current team. Assigning Names After receiving input from your team members, now it’s time to finally put current employees’ names in the appropriate boxes within the Future Org Chart. Once done, you may see the following: Some newly created positions have empty boxes. This indicates that to create the team of the future, your company will need to identify and hire a person qualified to fill that need. Some existing positions that are currently occupied become empty between now and the Future Org Chart’s effective date. This reveals some succession planning that must take place, typically because the employee currently occupying that position is retiring sometime within the next few years. Some names are listed in multiple boxes. This indicates that you have some people doing too many things. You may need to find ways to add new talent into the picture to reduce the organizational dependency on any one person who is over-allocated. The most important person to be wary of here is yourself — as the business’s owner, you cannot remain directly involved in too many functions. If the company is overly dependent on you it will be difficult if not impossible to achieve a successful exit. Some names do not belong in any box. This might happen for a couple of reasons. Perhaps the employee is not in alignment with the rest of the organization, and this exercise is shining a light on that challenging reality. Alternatively, perhaps the direction and pace of the company’s growth will eventually eliminate the need for a person’s role and skills. In either situation, it is best to recognize these inconsistencies and develop a response rather than miss or overlook the issue. With this exercise complete, you now have a written picture of what the company’s team needs to look like in the future, as well as specific insights on what work needs to be done to make that future happen. The Future Org Chart exercise provides you with a road map for the company’s coaching, training, hiring, succession, and team development needs in order to realize the desired growth over the next several years. From there, you and your team can develop the plans and incremental steps required to migrate from the current organization to this organization of the future. Maximizing Company Value Having a solid plan for growth and the right team to achieve that plan would be reason enough to complete a Future Org chart, yet there is one final benefit for you to reap from this exercise. Building a competent team for the future that can deliver on this growth drives value in your company, which in turn supports achieving your exit goals: getting maximum value for the company, building a sustainable organization, and leaving on your own terms. All of this is from the simple, little, often-overlooked org chart. Review our checklist, 25 Business Value Drivers, to identify steps that may enhance your business value. -Mertz Taggart

Inside the Kindred Deal…and Why It Makes Sense As many of you have likely heard by now, on December 18, Humana announced an agreement to partner with private equity firms TPG Capital and Welsh, Carson, Anderson & Stowe (WCAS) to acquire Kindred Healthcare for $4.1 billion in a landmark transaction for the home health and hospice industry. Under the terms of the deal, TPG and WCAS will acquire 100% of Kindred’s long-term care facilities while partnering with Humana to acquire the company’s home care and hospice division, formerly owned by Gentiva. Humana will continue to operate Humana at Home (formerly SeniorBridge) separately, at least for now. Where it gets more interesting is in the deal structure for the home care and hospice assets (Kindred at Home). Initially, Humana will invest $800 million for 40% of what is now Kindred at Home, while TPG and WCAS will own 60%. However, TPG and WCAS will have the option to sell (or “put”) their 60% stake to Humana after three years, at a multiple of between 10.5x and 11.5x (depending on its achievement of certain value-based outcomes tied to clinical metrics). It’s assumed the private equity firms will exercise their option at that time, rounding out their exit. Why it Makes Sense for Humana Despite Wall Street’s tepid reaction to the deal (as of the date of this publication, Humana’s stock is down 3% since the transaction was announced), this transaction makes perfect sense for Humana. While their 40% share of Kindred At Home’s $2.5 billion in revenue barely moves the needle compared to their existing $54 billion, the deal will bring significant value in other ways. “The combination of Humana At Home’s pursuit of improving care for seniors living with chronic conditions, in concert with Kindred At Home’s care delivery, will allow these important capabilities to create more effective care in a compassionate way for our members,” said William Fleming, Humana’s President – Healthcare Services. “We look forward to transforming post-acute care through a value-based approach that will deliver improved clinical outcomes, ultimately lowering medical costs. We believe this work will lead to reduced hospitalizations, reduced emergency room visits, and allow physicians and clinicians to extend their care all the way to the patient’s home.” This is all about value. And it will bring significant value to Humana from a cost-saving perspective, as it will allow them to more closely manage their most frail (costly) client/patient population. The structure of the deal – buying 40% now and the rest later – also allows Humana to “dip their toe in the water” of Medicare home health, hospice, and community-based services while allowing sufficient time to both learn this side of the home care business and take their time to thoughtfully integrate it with their other care providers. All while partnering with a growth-oriented private equity partner. Why it Makes Sense for Kindred There are three main reasons this is compelling to Kindred: 1) It pays their shareholders a premium to Kindred’s recent share price; 2) It gives them a clean balance sheet and plenty of “dry powder” (cash from their equity partners) to do future deals, and; 3) It allows them to grow their core facilities-based business. To expand on the first point, Kindred’s stock has underperformed since its acquisition of Gentiva. Perhaps they assumed better synergies with their facilities business that didn’t materialize as expected. Kindred stock was trading at approximately $23 per share just after the Gentiva acquisition closed in February 2015 and proceeded to nosedive to about $8.60 per share in the 12 month period after the deal was completed. It has never recovered. Since the announcement of the Humana deal, and as of the date of this article, Kindred’s shares have bounced back to $9.80 per share which, oddly, is more than the $9.00/share acquisition price – it will be interesting to see if something else is developing there. Why it Makes Sense for TPG/WCAS Private equity typically makes its money in a number of ways, the primary being “multiple expansion”. They buy a platform and then subsequent add-ons for a weighted-average multiple of earnings (or EBITDA). They put them all together, grow the business, and typically sell in 3-7 years, for a much higher multiple than the weighted-average multiple they paid for their acquisitions. They use leverage to amplify their returns. In this case, it appears the entry and exit multiples are roughly the same from the equity groups’ perspective. So they must be counting on significant growth, both organically — by leveraging Humana’s population health model, and WCAS’ Innovage private duty platform (acquired in 2016) — and through future acquisitions. What this Means for the Industry It will be interesting to see how this plays out. Humana is certainly leading the pack in terms of developing a well-coordinated, value-based, managed care model that others may follow – eventually. In the meantime, I expect we’ll see another major player looking for acquisitions – namely Humana or its new subsidiary. Kindred has been on the M&A sidelines for over a year, has not announced a deal since August 2016, so adding a well-funded, growth-oriented buyer will certainly help strengthen the marketplace for quality home health and hospice providers. Contributing author Cory Mertz, M&AMI – Managing Partner

After dropping slightly in the first quarter of 2021, M&A activity for home health, hospice and home care rebounded significantly in Q2. Overall, there were 37 transactions completed in the second quarter. That marked the largest number of deals in a quarter on record outside of Q4 of 2020, which saw a record-breaking 53 total. “M&A activity ticked back up in a major way in the last quarter, as was expected,” Mertz Taggart Managing Partner Cory Mertz says. “Unfortunately, a lot of agency owners are burned out and thus looking to sell. The pandemic has undoubtedly taken its toll.” It’s not just about burnt out agency owners, however. There are other reasons why 2021 has the chance to be one of the most significant dealmaking years ever. Mertz sees two main causes. First is the spotlight that shone on these providers during the pandemic, which increased the value of many at-home care agencies nationwide. Second are recent tax legislation considerations. The Biden-Harris administration has introduced a new tax bill that will have significant implications on transactions. The bill proposes moving the tax rate on long-term capital gains from 23.8% (including the 3.8% Medicare tax) to 43.4%, and if passed, would be expected to go into effect on Jan. 1, 2022. Under the current 23.8% rate structure, a $10 million transaction would result in $7.62 million of after-tax proceeds. To net the same $7.62 million after taxes under the new proposed rate, a deal would require $13.46M million in cash proceeds. “Sellers’ anticipation of an increase in the capital gains tax rate is something that is undoubtedly the biggest driver of the current market,” Mertz says. Home-based care tailwinds derived from the pandemic will also continue to drive up the value of select agencies as the public health emergency wanes. “I expect we’re going to see this kind of velocity and perhaps acceleration as we close out 2021, barring anything unforeseen,” Mertz says. “This is setting up to be another record year for the sector.” As for the actual buyers, private equity (PE) players continue to lead the way, accounting for 24 of the 37 deals overall, including six (6) platform transactions. Note: Total industry transactions does not necessarily equal the sum of the sub-industries, as many transactions include more than one sub-industry. While PE remains a major player, health care providers looking to build out more substantial capabilities across the care continuum could become competitors in a buyers’ market. Home Care M&A Skyrockets The deals made in the home care sector played a big part for the Q2 uptick. The parity between home care, home health and hospice is also an unusual detail of this quarter’s transaction numbers. One reason for that is the home care market — which had the most deals — heating up. “Non-medical home care has become a hotter market,” Mertz says. “The 17 total non-franchise deals in Q2 were the highest number we’ve seen in home care in the last five years.” Arosa — formerly known as Arosa+LivHome, and backed by Bain Capital Double Impact — continued a busy 2021 in Q2, acquiring the Tennessee-based Family Staffing Solutions. In Q1, the Los Angeles-based Arosa entered the New Jersey market following the acquisition of Aveanna Concierge Services. Family Tree In-Home Care acquired HomeCare of the Rockies, aiming to take greater control of the private-pay market west of its Texas base — in states like Colorado. Chicago-based Help at Home, a provider of home- and community-based services, is also rumored to be going public by the end of the year. If true, that reveals the immediate impact of Centerbridge Partners and The Vistria Group, which acquired Help at Home last November. Home Health Agencies Get Aggressive The 15 deals in home health during the second quarter were also underscored by some larger moves in the sector. In May, home care provider Aveanna (Nasdaq: AVAH) went public, and also announced plans to become a player in the Medicare space by acquiring Doctor’s Choice Holdings, LLC for an aggregate cash consideration of $115 million. “We believe that Doctor’s Choice is a perfect fit to our strategy because it deepens our penetration into the traditional home health market and brings us greater density in the state of Florida,” Aveanna Executive Chairman Rod Windley said in a statement. “Our pipeline of acquisition targets currently remains robust for traditional home health as well as private duty services.” Going public is an exit strategy that a handful of other providers could be weighing, leveraging the valuations of the current public operators. The home-based care provider that was the most active in Q2 was The Pennant Group (Nasdaq: PNTG) — parent company of affiliated home health, hospice, home care and senior living companies — which closed three deals, include Pasco Southwest in Colorado. Mertz Taggart provided exclusive transaction advisory services in this transaction, representing the seller. Despite staffing pressures and other challenges tied to the COVID-19 pandemic, the Eagle, Idaho-based Pennant clearly sees the present as the right time to acquire. As more buyers come to market, prices will likely be less favorable, which bodes well for the companies getting into M&A earlier. Hospice Hospice dealmaking was in near lockstep in Q2 with the home health sector, totaling one more transaction, with 16. “Demand is still very high in hospice, but there aren’t all that many options for buyers,” Mertz says. “Although there was still significant activity in Q2, I suspect it will level off and create more demand for home health and home care sellers in the near-term.” Pennant was also active here, acquiring the Sacramento, California-based First Call Hospice in mid-June. For companies like Pennant that provide care across the spectrum, having multiple capabilities such as home health and hospice in the markets they serve appears to be a key motivator. LHC Group Inc. (Nasdaq: LHCG) was the most notable active player in hospice, acquiring Heart of Hospice, an end-of-life care provider with locations in five states, and Heart ‘n Home Hospice before that. Overall, while 16 deals in the second quarter represented an increase from Q1, that number represents the lowest we’ve seen since Q2 2020, which also saw 16 deals. Looking ahead If 2021 is going to be a record-breaking year in M&A as predicted, it would point to a very busy second half of 2021. After all, the year initially got off to a slow start with just 22 total deals in the first quarter. Between the first two quarters, 59 total deals have come to a head. There were 82 total deals in 2017, 131 in 2018, 112 in 2019 and 143 in 2020.

Across the board, home health, hospice and home care M&A activity was down slightly in the first part of 2021 compared to last year’s busy end. The break in the action isn’t expected to last long, however, thanks to a relatively clear operating landscape across industries and multiple macro-level tailwinds in favor of home-based care. Overall, the home health, hospice and home care segments saw at least 23 combined transactions during Q1 of this year, a substantial decrease compared to the 52 total transactions reported during the last quarter of 2020, according to the latest M&A update from advisory firm Mertz Taggart. “Dealmaking activity was down in the first quarter, but much of that can be attributed to potential buyers finalizing the several deals executed in the second half — especially in the last quarter — of 2020,” Mertz Taggart Managing Partner Cory Mertz says. “We’re headed toward a record high for M&A activity, with robust interest from strategics and private equity buyers alike, across all in-home care areas.” Of the deals that took place during the first quarter of 2021, the home health space saw the most activity, followed by hospice and home care, respectively. Private equity led the way, accounting for 18 of the 23 total transactions. Three of those PE-driven deals were platform transactions, with 15 being add-on transactions. “Hospice has been the big target over the past several quarters, but we may be seeing a shift back toward home health care,” Mertz noted. Note: The sum of sub-industries (broken down below) does not always equal total sector deal volume, as some transactions include more than one sub-industry. No headwinds for home health dealmaking Transactions for Medicare-certified home health assets was steady from early 2018 through mid-2019. But after that period, buyers and sellers went on a dealmaking rollercoaster, with cautious buyers waiting to see how the Patient-Driven Groupings Model (PDGM) played out. Many industry leaders expected PDGM to trigger a wave of transactions in 2020, with smaller agencies unable to adapt to the new payment overhaul. The COVID-19 pandemic threw a wrench in those plans. “The CARES Act delivered tens of billions of dollars to U.S. health care providers,” Mertz says. “On top of that, the U.S. Centers for Medicare & Medicaid Services (CMS) expanded its advanced and accelerated loan program. That helped some home health operators stay in business a little longer as opposed to exploring a sale.” There were at least 12 home health-related transactions in Q1 2021, down slightly compared to the previous quarter, which saw 17 deals. Again, the dip is likely tied to sellers reloading as opposed to a decreased interest in doing deals. Among the deals reportedly taking place in Q1 was BrightSpring Health Services’ acquisition of Abode Hospice and Home Health. According to some reports, BrightSpring’s play for Abode came with a $775 million purchase price, with a multiple rumored to be in the mid-teens. In February, Pharos Capital-backed Charter Health Care Group continued its aggressive growth in early 2021 by acquiring two home health and hospice assets in Omaha, Nebraska. Charter has since announced acquisitions of The Providence Hospice IInc. and The Providence Home Health Services Inc.. In March, LHC Group Inc. (Nasdaq: LHCG) and Orlando Health also expanded their Florida partnership with a move into the St. Petersburg area by realigning Bayfront Home Health Services into their existing joint venture. Hospice M&A down, but not for long Since Q1 2019, there have been at least 11 hospice transactions in each and every quarter. That streak may have ended in the first quarter of 2021 — it’s important to note some deals closed at the very end of March and others may still be unreported. So far, there have been at least 10 reported hospice transactions in Q1 2021. That figure is a dramatic drop compared to both the 26 deals that occurred in Q4 2020 and the 18 transactions that took place during the same quarter a year prior. “Hospice is still at the higher end of the valuation spectrum,” Mertz says. “Demand remains incredibly high for end-of-life care assets, but the supply just isn’t currently there. That’s one of the reasons we anticipate rising levels of interest for home health businesses, particularly with the public companies, since they generally have ample cash on hand that they want to deploy.” In addition to the previously mentioned deals, Charter also purchased Serene Care Hospice in the Omaha market for an undisclosed amount. In February, AngMar Medical Holdings expanded its Angels Care Hospice brand with the acquisition of three unnamed hospice providers with locations in Texas and Nebraska. Looking ahead, Bristol Hospice, backed by Webster Equity, is reportedly moving into the second phase of the acquisition process, with private equity firms standing as the only remaining bidders. Of course, HCA Healthcare (NYSE: HCA) and Brookdale Senior living Inc. (NYSE: BKD) are also still in the process of finalizing a transaction where HCA will take over 80% of Brookdale’s hospice and home health business. More big deals in home care expected There were just nine home care-related transactions in the first quarter of this year, down from the near-term high of 15 that took place in Q4 2020. In January, the Chicago-based Help at Home executed a deal for The Adaptive Group, a home health, hospice and home care services provider that operates across the state of Indiana. Help at Home is the 13-state in-home care provider backed by The Vistria Group and Centerbridge Partners. “The winning combination of Adaptive and Help at Home not only means that we will be able to set the bar for high-quality care and service excellence in the state of Indiana, but also throughout the Midwest and across the broader United States,” Adaptive co-founder Mike Root said in a press release. “By partnering with Help at Home, we are better positioned to execute on our mission — to positively impact as many lives as possible through the delivery of exceptional, patient-centric home care services.” Q1 wasn’t a blockbuster quarter for home care dealmaking, but that’s already changed in Q2. On April 1, Advocate Aurora Enterprises — the investment arm of Advocate Aurora Health, one of the largest not-for-profit health systems in the country — announced it acquired Senior Helpers. With more than 320 franchised and corporate-owned locations in 44 states, in addition to Canada and Australia, Senior Helpers is one of the largest home care organizations in the market. Days later, on April 8, the company that owns Home Helpers Home Care announced it had been acquired by Chicago-based private equity firm RiverGlade Capital. The Cincinnati-based Home Helpers is likewise one of the largest home care franchise organizations in the U.S. “A lot of the big home care franchise companies were acquired between 2015 and 2018 by PE buyers,” Mertz says, “Those PE firms are now nearing their typical exit timeframe, so we should see plenty of additional home care deals to come later this year.” On the horizon The first quarter may have been down somewhat for home health, hospice and home care M&A activity, but the action is all but guaranteed to pick up throughout the rest of 2021. Trackbacks/Pingbacks After slow start, M and A activity set to take off for home health: advisory report – Home Care Daily News – Elderly Senior Corner - […] took a break from a buying binge. But that respite might be short-lived, according to advisory firm Mertz Taggart,… Addus HomeCare looks to expand home healthcare as pandemic wanes – Home Care Daily News – Elderly Senior Corner - […] In the first quarter of 2021, home healthcare led mergers and acquisitions activity, followed by hospice and home healthcare,… Long-Term Clients, Referral Sources Give Home Care Sellers an M&A Edge – My Blog - […] assets in all of 2020, with the most transactions happening in the fourth quarter of last year, according to…

Significant tailwinds across the behavioral health sector propelled an active first quarter of 2021 with regards to merger and acquisition activity, keeping up momentum observed in the latter stages of 2020. A total of 29 behavioral health industry transactions were announced in Q1. Outside of a dip in the second quarter of 2020 during which only 19 transactions were announced—a slowdown fueled by the onset of the COVID-19 pandemic—the sector has settled into a pattern of roughly 30 deals per quarter dating back to the beginning of 2020. The volume of deals for Q1 2021 is “telling, but not unexpected,” said Mertz Taggart Managing Partner Kevin Taggart. “And it’s pretty evenly split between addiction treatment, autism treatment and mental health,” Taggart said. “Mental health transaction volume has picked up significantly over the past two quarters, buoyed by the pandemic.” Private equity continues to play a large role in the space, accounting for 22 of the 29 deals announced in Q1, including three platform transactions and 19 add-on transactions. With many private equity-backed strategic companies operating in the space continuing to grow, there is a possibility that one could announce a public offering, either traditionally or through a special purpose acquisition company (SPAC) in the coming months, Taggart said. Many treatment center owners, worn out by the pandemic could be ready to exit the space and sell, but the number of deals across behavioral healthcare to be announced over the rest of 2021 could hinge on the Biden-Harris administration’s stated intention to raise the capital gains tax, Taggart said. The administration’s recently announced infrastructure plan, however, does not directly address capital gains, instead focusing on corporate tax reform. In the meantime, private equity has a mandate to invest and grow. Firms will be watching closely as industries get back on their feet in a post-pandemic world. A key factor to watch will be which structural changes enacted to keep businesses afloat in 2020—both in the behavioral healthcare space and other industries—will stick permanently. Addiction Treatment Based on recent data, demand for addiction treatment services is expected to be high in the coming months. CDC reported that there were more than 88,000 deaths attributed to drug overdose in the 12 months ending in August 2020, the highest total for a 12-month period on record. The 11 transactions announced in the addiction treatment space were down slightly from Q4 2020 (14 transactions), but on par with the prior two quarters. After a busy quarter to close out 2020, BayMark Health Services stayed busy in the new year, announcing the acquisition of Partners in Drug Abuse Rehabilitation Counseling, a medication-assisted treatment provider in Washington, D.C. The deal for PiDARC was announced between two acquisitions of office-based opioid treatment (OBOT) programs by AppleGate Recovery, a BayMark subsidiary. In February, AppleGate acquired Redemption Recovery, a portfolio of five OBOT clinics in Tennessee, and in late March, the brand announced a deal for Montgomery Addiction Clinic, an OBOT located east of Nashville. Platform deals were announced by private equity firms Health Enterprise Partners, which provided an investment in Aware Recovery Care in January, and Northlane Capital Partners, which announced an investment in global behavioral healthcare provider Empower Community Care in March. Summit BHC acquired The Pavilion, a 66-bed inpatient psychiatric facility, and The Farley Center, a 70-bed substance use disorder treatment provider. Both programs are located in Williamsburg, Virginia. Summit BHC’s portfolio now includes 24 facilities. The owner and CEO of Footprints to Recovery and Vogue Recovery, Michael Milch, added South Coast Behavioral Health to a portfolio that now includes seven facilities for the Costa Mesa, California-based group. Discovery Behavioral Health added to its network of facilities by acquiring Prosperity Wellness Center, a 40-bed residential program in Tacoma, Washington. Prosperity became the 10th brand in the Discovery family, which is backed by the firm Webster Equity Partners. Ohio-based BrightView Health announced a deal for Renew Recovery Centers, an SUD treatment provider with four Kentucky locations. Autism Services & Intellectual/Developmental Disabilities Nine deals in the autism services and intellectual/developmental disabilities space were announced in the quarter, matching the number of deals reported in Q4 2020. Lighthouse Autism Center continued to build its presence as the largest provider of applied behavior analysis therapy in Indiana, acquiring Access Behavior Analysis and A Step Ahead. Lighthouse also opened a new facility in Valparaiso, Indiana, as well as a center in Niles, Michigan. Acorn Health, which operates in seven states, strengthened its position in Florida with a deal for the assets of Sandcastle Centers. Stepping Stones Group acquired EBS Healthcare in Pennsylvania, although while the two organizations are led by one combined executive team, they will continue to function as separate companies. LEARN Behavioral has invested in Behavior Analysis Center for Autism (BACA), although the latter continues to operate as a separate brand. Proud Moments ABA expanded its footprint in the Southwest with a deal for Bridges: Educational Services for Children with Autism, based in Albuquerque, New Mexico. ACES continued scaling its clinical model with the acquisition of the Center for Language and Autism Support Services in Tulsa, Oklahoma. Private investment firm Comvest Partners completed a sale of D&S Community Services to The Mentor Network. After relocating its headquarters to North Carolina from Wisconsin last year, Broadstep Behavioral Health, part of the Bain Double Capital Impact Fund portfolio, added to its 90-plus facilities with a deal for Excalibur Youth Services in South Carolina. Mental Health Although deals in the mental health sector dropped by 33% from Q4 2020, from 15 to 10, activity in this sector was still significantly higher than the second and third quarters of 2020. Moreover, demand for mental health services, much like the addiction treatment sector, is expected to be high in the coming months, as social isolation and anxiety resulting from the COVID-19 pandemic have exacerbated mental health conditions for many individuals. Among the deals commenced in Q1, Marshfield Clinic Health System acquired Oswald Counseling Associates in Plover, Wisconsin, renaming the behavioral health practice Marshfield Clinic Health System-Plover Counseling Center. Philadelphia-based outpatient practice CM Counsel was acquired by the investment and business development firm Centra Capital in a platform deal. Following the investment by Centra, CM Counsel formed a strategic partnership with Savia Community Counseling Services, an in-home care provider in New Jersey. Two eating disorder programs, the Emily Program and the Veritas Collaborative, finalized a merger that allows the two brands to maintain their identities in their respective markets of Minnesota and North Carolina. Meanwhile, Nashville-based eating disorder program operator Odyssey Behavioral Healthcare acquired Shoreline Center for Eating Disorder Treatment, which operates multiple locations in Southern California. Talkspace, a digital and virtual behavioral healthcare company, and Hudson Executive Investment Corp., an SPAC sponsored by Hudson Executive Capital, announced a merger, as well as plans to become listed on the NASDAQ as the first exclusively virtual behavioral health company to be publicly traded. Mental health and wellness platform Modern Health reached a deal for mental health startup Kip, allowing the former to enhance its personalized care plans. Adventist Health Vallejo, a 61-bed psychiatric hospital in Vallejo, California, was acquired by Acadia Healthcare.

I am ready to sell my business. I have a buyer lined up—a peer in our industry whom I’ve known and trusted for years. At this point, bringing in a mergers & acquisitions advisory firm would accomplish little besides cutting into profits from my sale price, right? History, and research studies, suggest this is not the case. In 2016, Fairfield University assistant professor of finance Michael B. McDonald published a study1 in which 85 business owners who sold their businesses for a price between $10 and $250 million with the help of an advisory firm between 2011 and 2016 were surveyed. Of those sellers, 84% reported a final sale price that was equal to or higher than initial sale price estimates received from their advisors. Mertz Taggart has reported similar results working with its clients. Prospective sellers approach our firm under the belief that they are already well on their way to a deal, when really, many are en route to a sale that leaves millions on the table. For example, in 2020 we were approached by a business owner who was prepared to sell. The seller presented us with the offer they had received from a prospective, strategic buyer: a sale price of $5 million in cash at close, plus a $1 million earnout contingent payment that wasn’t attainable in our view. The seller asked: Was this a fair offer? In our estimation, it was not, and so we went to work on negotiating a better deal. The result? The same buyer eventually agreed to a sale price of $7.5 million cash at close, plus a $500,000 earnout contingent payment that was more attainable. Our leverage? The threat of going to market, creating a competitive auction process. In a similar deal completed last year, a buyer initially offered $12 million, but ultimately agreed to a price of nearly $20 million. Such deals don’t materialize out of thin air, of course. When considering the sale of your business, enlisting the services of an M&A advisory firm offers several benefits: Perception and leverage. It is widely understood within the buying community that the presence of a professional intermediary, i.e., an M&A advisory firm that represents the seller, will ensure that the seller will accept nothing less than the best terms for their business. Mertz Taggart works hand in hand with clients to identify their objectives in a sale and presents a thorough list of qualified potential buyers and/or investors. Having multiple qualified buyers creates a competitive, seller-friendly market. In many cases, the mere presence of an M&A advisory firm can have the same effect, as competition becomes the expectation for buyers when they know the seller is being represented by an advisory firm. What’s more, buyers who know they face competition for a potential acquisition target are less likely to drag out negotiations and due diligence and run the risk of losing a potential deal. Increased competition and multiple offers create additional leverage for a seller. Put your best foot forward. When working with our clients, we organize and prepare the seller’s financial data and create a Confidential Information Memorandum (CIM) that tells the client’s story, details its financial data, and demonstrates its unique value proposition. The CIM is shared only with buyers who have been vetted, and who have signed a Confidentiality Agreement. Potential suitors may include strategic buyers who are looking to integrate new companies into their existing operations or expand their footprint, or financial buyers, such as private equity firms looking for a return on invested capital. Navigating the process. Selling a business is a complex process that must clear several hurdles along the way. Information must be exchanged between buyer and seller, buyers often want to conduct (confidential) site visits, and other exercises in due diligence must be completed. Failing to successfully complete these steps can often make promising deals fall apart. When sellers choose to go it alone, they can end up spending significant time on tasks other than those that generate revenue and drive up the value of their organization. Hiring an advisory firm allows business owners to maintain their focus on running their organization and trust that the complicated process that must be traversed to close a deal are handled by those who specialize in doing so. It’s why respondents in the McDonald study ranked managing the sales process as the most valuable service offered by advisory firms. * * * Ultimately, enlisting the services of an M&A advisory firm puts the seller firmly in control of the sale. A good advisor maximizes a seller’s chances of getting the best return on their investment by accentuating a selling organization’s best traits, identifying qualified buyers, driving competition, and professionally managing the sales process to completion. Sellers can focus their energies on running their business while knowing they are putting their organization in the best possible position for a deal. Reference: 1 McDonald, Michael B. IV. Fairfield University, 2016. The Value of Middle Market Investment Bankers.

M&A transactions up 70% in Q4. Mertz Taggart completes four in-home care transactions. After months of M&A uncertainty triggered by the COVID-19 pandemic, 2020 ended on a welcomed high note. Overall, there were at least 51 home health, home care, and hospice transactions in the fourth quarter of 2020, the latest data from Mertz Taggart shows. That’s 22 more than in Q3 2020 — and the most deals in any individual quarter over the last three years. “Deal volume started to recover or trend upward across the home health, home care, and hospice markets toward the middle of 2020,” Mertz Taggart Managing Partner Cory Mertz says. “We’re not surprised that Q4 was a big quarter. We called it months ago. Combine that with the threat of a near-term capital gains tax hike, and we expect an active 2021.” There are plenty of industry-specific reasons for the spike in M&A action at the end of 2020, Mertz noted. But buyers and sellers had plenty of macro-level factors to weigh, too, including the shift to a Biden Administration and expected higher capital gains taxes at some point in the near future. Following nine or ten months of a public health emergency, some sellers also probably just hit a wall in the fourth quarter, prompting an exit. Note: The sum of sub-industries (broken down above) does not always equal total sector deal volume, as some transactions include more than one sub-industry. Home Health M&A Activity Rebounds As expected due to the Patient-Driven Groupings Model (PDGM), home health dealmaking started off strong in 2020, with at least 14 transactions in Q1. There was a sharp dropoff in Q2 before M&A activity started to climb again starting around July. The most recent quarter saw at least 17 deals for home health assets, according to Mertz Taggart data. “There has been a lot of pent-up demand for home health businesses,” Mertz says. “And that demand is only growing strongly now, as the U.S. health care system looks to avoid skilled nursing facilities and facility-based care.” To some extent, the confirmed deals in Q4 were overshadowed by two possible industry-shaping deals to come. Birmingham, Alabama-based Encompass Health Corp. (NYSE: EHC) is a large operator of in-patient rehabilitation facilities (IRFs) that also runs the fourth-biggest home health provider in the nation. On Dec. 9, the company announced it is exploring “strategic alternatives” for its highly successful home health and hospice businesses. Encompass Health said it is exploring a range of options, including full or partial separation through a sale or other transaction. “Since joining together with Encompass Home Health and Hospice in 2015, we have generated substantial growth in both our business segments, and we continue to deliver high-quality, cost-effective, integrated care to a growing number of our patients,” President and CEO Mark Tarr said in a statement upon the announcement. Less than a week later, rumors surfaced that Brentwood, Tennessee-based Brookdale Senior Living Inc. (NYSE: BKD), the country’s largest operator of senior living communities, is also considering a sale of its home health and hospice segments. “If those two items are any barometer, we’re in for a very, very interesting 2021,” Mertz says. Hospice Somehow Gets Hotter Unsurprisingly, hospice again drove home health, home care and hospice dealmaking in Q4. Mertz Taggart data shows there were at least 25 hospice-related transactions for the quarter, six more than the whopping 19 reported in Q3 2020. There have been at least 15 hospice-related transactions every quarter since the end of 2019. “It seems like every quarter we’re saying demand for hospice is at an all-time high — and then we see even more demand materialize,” Mertz says. In December, private equity-backed post-acute care provider Traditions Health purchased Oklahoma-based Centennial Hospice. The Care Team acquired InTeliCare Home Health & Hospice in Michigan the same month. In one of the most significant post-acute care deals of 2020, AccentCare completed its planned merger with Seasons Hospice & Palliative Care in Q4. Combined, the AccentCare-Seasons enterprise becomes a top-five player in both the home health and hospice spaces. “During the last several years, we’ve witnessed a growing need for post-acute care services that are patient-centered and easy to navigate,” Steve Rodgers, CEO of AccentCare, said upon the merger’s closing. “With our expanded organization, we will be able to meet the demands of our patients and partners, and offer a full range of innovative solutions that streamline the process of accessing care.” Home Care Sees Blockbuster Quarter Even more than home health care, home care transactions hit a lull throughout much of 2020. In fact, prior to Q4, no quarter in 2020 saw more than eight home care-related transactions, according to Mertz Taggart data. That all changed from October through December, however. There were at least 15 home care-related transactions during the last quarter of 2020. “We’ll continue to see deals for home care,” Mertz says. “Payers really saw firsthand the value of home care during the public health emergency. It was a vital resource in managing chronic conditions, especially with individuals avoiding in-person trips to the doctor.” Examples of Q4’s home care deals include 24 Hour Home Care’s purchase of Grace Care Management. In December, Care Finders Total Care further builds its Philadelphia blueprint by announcing its acquisition of ORI HomeCare. Mertz Taggart provided sell-sides services for the ORI HomeCare transaction. Mertz Taggart Completes Four Transactions Including the aforementioned Ori transaction, Mertz Taggart completed four in-home care transactions in Q4. The others include: A large private duty home care agency based in Florida sold to a PE-backed strategic buyer; A large private duty home care agency based in North Carolina sold to a PE-backed strategic buyer; A mid-sized Medicare home health agency in Texas sold to a family-office-backed strategic buyer. For more information on these transactions, please contact admin@mertztaggart.com. 2021 Projections Home health, home care, and hospice transaction activity was up across the board in Q4. That should set up an action-packed 2021. “We have a confluence of factors that should drive higher-than-average transaction activity in 2021. The threat of a significant hike in capital gains tax rate and owner burnout as a result of the pandemic are two common themes we are hearing from owners,” Mertz said. Trackbacks/Pingbacks Healthcare M&A Transaction Recap for the Year 2020 - National Business Press - […] Taggart tracked 133 transactions in 2020 in the home health, home care, and hospice sectors, nearly 25% higher than… Top Home Care Trends for 2021 – My Blog - […] continue to see deals for home care,” Mertz Taggart Managing Partner Cory Mertz wrote in a Q4 M&A report.… Top Home Care Trends for 2021 - Healthcare & Pharma and Nutrition - […] continue to see deals for home care,” Mertz Taggart Managing Partner Cory Mertz wrote in a Q4 M&A report.… Top Home Care Trends for 2021 * Blog for Startups - […] proceed to see offers for house care,” Mertz Taggart Managing Accomplice Cory Mertz wrote in a Q4 M&A report.… CareFinders Total Care Reportedly Pursuing Growth Capital – My Blog - […] The fourth quarter of 2020 saw at least 15 home care-related transactions. Prior to Q4 2020, eight deals were… CareFinders Total Care Reportedly Pursuing Growth Capital – Kapi News - […] The fourth quarter of 2020 noticed a minimum of 15 house care-related transactions. Previous to This fall 2020, eight…

Readying your agency when an acquisition is underway. The COVID-19 public health emergency has had a profound impact on the health care sector, particularly in post-acute care. As home-based care providers experienced a range of disruptions, including census dips, and as banks paused on financing new deals to assess the impact of the pandemic, M&A activity cooled off. During the second quarter of 2020, for instance, there were only 18 transactions across home health, hospice, and home care, according to Mertz Taggart statistics. That’s a substantial drop compared to the 26 transactions that took place during the same period a year prior. But don’t let the somewhat depressed M&A numbers fool you. There is still money to be made during the pandemic — as long as buyers and sellers stick to the M&A playbook. And the demand for quality agencies is on the rise. “We might not be seeing as many deals materialize, but that interest in quality assets is still out there,” Mertz Taggart Managing Partner Cory Mertz says. “The entire U.S. health care system, and everybody associated with it, are looking for ways to shift care into the home and away from facilities. Interest in home-based care has probably never been higher.” For home health, hospice and home care agencies exploring a sale in the current preparation is paramount to a successful transaction. Here are three tips for streamlining the process. 1. Approach the sale before you’ve decided to take the “plunge” Agencies should begin readying themselves for a sale long before they officially take the “plunge” and initiate the sales process. An important part of that is identifying key employees and management members — the influencers and decision-makers who make your operating model tick. In many cases, buyers aren’t just interested in acquiring scale and market share; they’re interested in acquiring new voices, ideas, and systems. The identification of key employees and management members should be made prior to starting the process. After pinpointing cornerstone leaders, sellers should make sure those individuals are willing to stay on board during a transition. How and when that should occur can vary, however. That might even extend to the agency owner. Take, for example, PE-backed Caring People’s acquisitions of Acappella In Home Care, Aging Care LLC and AMR Care Group. “With these three acquisitions, what was attractive to us was that they had very like-minded owners, who all stayed on with the organization in different roles,” Caring People CEO Steven East told Home Health Care News on Aug. 20. “We felt that we could continue working with them and growing what they built.” The big question agency leaders need to think about: When should I tell my employees a sale is coming? “Sellers need to make sure their team is ready to lead during a transition, but they don’t want to tip their hand too early,” Mertz says. “To wait or not to wait? It’s an extremely delicate question that we will typically pose early with our clients early in the engagement process.” 2. Communication is king — but be strategic After you reveal plans to your key team members that you’re considering a transaction, you will eventually need to communicate with all levels of employees. This should be done as late in the process as possible, certainly after the purchase agreement and confidentiality agreements are signed. Until then, only key players involved in due diligence should be informed. Additionally, make sure there aren’t any outstanding issues when it comes to HR, accounting, or other departments. “Owners often feel compelled to tell their employees early on, out of loyalty, which is both understandable and admirable,” Mertz says. “But letting them know too early can actually create more uncertainty in-house, and hard-to-control speculation, both internally and in the markets they service.” Once the purchase agreement is signed, it’s time to communicate the sale with the rest of your employees. This should be a well-coordinated communication plan. Change comes with many unknowns, which often leads to anxiety for employees. Let them know exactly what the sale means to them. This opens up the opportunity for them to be introduced to the buyer, put a face to the name, and the buyer can then communicate their plans for the company. This introduction will also open the floor to the employees to ask the difficult questions that are on their minds. “Let your team know their day-to-day will not change,” Mertz says. “Employees dread change, but less fear usually means smoother integration and lower odds of information being leaked outside your organization.” Once workers know their day-to-day roles won’t drastically change, assure them that you have a strong transition plan in place. As you share that transition plan, have other agency leaders back you up, demonstrating that the entire leadership team is pulling from the same end of the rope. Prior to commencing any communications with employees, it’s vital to make sure paperwork is organized and free of inaccuracies or inconsistencies, particularly regarding accounting and financial documents. In the age of COVID-19, that preparation is even more important than usual, with Provider Relief Funds, advanced payments from the U.S. Centers for Medicare & Medicaid Services (CMS) and Paycheck Protection Program (PPP) loans. 3. Utilizing change management Effective preparation and communication both fall under the “change management” umbrella. Broadly, change management is the collective term describing philosophies associated with leading individuals and organizations during times of change. Before, during and after any transactions, it’s always good for both buying and selling parties to keep best change management practices in mind. Here’s what Encompass Health Home Health & Hospice CEO April Anthony had to say on the topic: “I think successful change management starts with a strong culture. If you create the kind of environment where people say, ‘You know what? We’re on the same team. I know my leadership cares about me. I believe in the mission we’re pursuing’ — that aligns any organization with being prepared to deal with big, transformative change in processes.” So remember: Whatever the external market factors, there are key areas to prepare any time a sale will be taking place. When it comes to readying an agency for sale, advance preparation, thorough and appropriately timed communication, and a planned change management strategy will help set the stage for a smooth change in ownership. To learn more about the sales process when selling your home health, home care, or hospice agency, visit Our Process Page.

ST. LOUIS–(BUSINESS WIRE)–Pathways Health and Community Support, LLC (Pathways), one of the largest providers of behavioral and mental health services in the United States, announced today it has completed its acquisition of three Community Intervention Services (CIS) companies: Access Family Services (AFS), Family Behavioral Resources (FBR) and Autism Education and Research Institute (AERI), which will operate as one entity (FBR-AERI). The three CIS companies are large, clinically focused providers of community-based behavioral health and substance use services in the eastern United States. The acquisition makes it possible for Pathways to expand and strengthen its presence in Pennsylvania and North Carolina and add new service lines in South Carolina. Terms of the agreement were not disclosed. AFS and FBR-AERI’s service offerings align with Pathways’ mission to improve the lives of people by inspiring personal growth, health and wellness. AFS offers community-based, school-based and outpatient behavioral health and autism services in North Carolina and South Carolina. Managed as one company, FBR-AERI operates from 30 locations throughout Pennsylvania and is also a leading provider of outpatient and community-based behavioral health services. Integrating these programs and services into Pathways’ current service offerings will enable Pathways to offer a broader range of programs in more communities. Read the full press release here. Trackbacks/Pingbacks Behavioral Health M&A Report: Q4 2020 – Mertz Taggart - […] Health and Community Support, LLC completed the acquisition of Access Family Services, Family Behavioral Resources, and Autism Education and...

EAGLE, Idaho, Sept. 16, 2020 (GLOBE NEWSWIRE) — The Pennant Group, Inc. (NASDAQ: PNTG), the parent company of the Pennant group of affiliated home health, hospice and senior living companies, today announced that it has acquired the assets of CMS Home Health Care, which has locations in Brownwood and Coleman, Texas. The acquisition was effective September 16, 2020. Danny Walker, Pennant’s Chief Executive Officer, commented, “With sister operations in Abilene, Austin, and Dallas, this off-market acquisition is an excellent strategic fit for our burgeoning Texas portfolio of home health and hospice operations. Our local leaders, supported by dedicated field and service center resources, continue to source and cultivate new opportunities for growth while navigating dynamic operating environments in their local communities.” “The team at CMS Home Health has a reputation for compassionate care and excellent clinical outcomes,” said Brent Guerisoli, President of Cornerstone Healthcare, Pennant’s home health and hospice portfolio company. “We are excited to welcome the staff and patients of this well-respected home health agency into the Pennant family. We look forward to working with these talented caregivers and the local healthcare community to bring life-changing service to the patients we are privileged to serve.” Mr. Walker reaffirmed that Pennant will continue to pursue opportunities for growth in the home health, hospice and senior living industries, targeting strategic and underperforming operations of all sizes. Read the full press release here. Trackbacks/Pingbacks Home Health, Home Care and Hospice Mergers & Acquisitions Quarterly Report: Q3 2020 – Mertz Taggart - […] the known deals: The Pennant Group Inc. (Nasdaq: PNTG) announced in September that it had acquired CMS Home Health… The Pennant Group Acquires Arizona Hospice Agencies - [...] The Pennant Group, Inc. (NASDAQ: PNTG), today announced that it has acquired two affiliated hospice agencies in Arizona...

MIAMI–(BUSINESS WIRE)–Acorn Health, a national provider of Applied Behavior Analysis (“ABA”) therapy for children diagnosed with Autism Spectrum Disorder (“ASD”), is pleased to announce the acquisition of the ABA therapy assets affiliated with Concord Foundations Network (“Concord”), an industry leader in providing high quality, center-based and in-home ABA therapy services to children and adolescents. The acquisition of Concord will enable Acorn Health to expand services into Maryland, Pennsylvania, and Tennessee, as well as significantly enhance its current capabilities in Michigan and Virginia. The combined company will serve more than 1,200 families across seven states and a network of 35 clinics. Read the full press release here. Trackbacks/Pingbacks Behavioral Health M&A Quarterly Report Q3 2020 – Mertz Taggart - […] Acorn Health, a national provider of autism services for children, has acquired the ABA therapy assets affiliated with Concord…