Your Primer to Healthcare Mergers and Acquisitions

6 Reasons Private Equity Groups Want To Buy Your Homecare Company

Apr 25, 2017

by Bradley M. Smith

By Bradley Smith, ATP, CM&AA

Volume 4 Issue 9, April 25, 2017

In 2016, Private Equity Groups (PEGs) made big investments in home health and hospice providers. And they weren't the only ones. 2016 also saw hundreds of smaller add-on acquisitions in the this space.

The increased investment in this area might seem unusual, considering that homecare is a challenging business that must adapt to a rapidly-and changing regulatory environment. However, the prospect of change and uncertainty increases risk. One of the best ways to manage risk is to increase the scale of operations, hence the market is consolidating.

At VERTESS, we expect this consolidation and maturation of the homecare industry to continue throughout 2017, limited only by the ability of provided PEGs to find high-quality companies to purchase. In other words, it's a seller's market, but only if those sellers have the specific characteristics that fund managers want to see. These include:

1. A strong management team

PEGs often place as much value on your team’s potential for even greater success (the future) as financial performance to date (the past). A key element of this is the management team that's in place and (just as important) the team's knowledge of their own strengths and weaknesses (see #6 below).

2. A clear path to success

PEGs may be less knowledgeable about your market dynamics than a buyer from within the healthcare or homecare industry. However, your ability to project an understandable picture of the future (and a viable business plan to address that future) increases your credibility and ultimately your perceived value.

3. A diversified service/payer mix

Because the homecare industry is rapidly changing, PEGs prefer companies that are diversified away from a single payer or and away from services that might seem overly specialized, such as interventions for children with an autism diagnosis.

The more diverse the mix of services you provide, the more likely you'll be to attract PEG interest.

4. A plan for "organic" growth

PEGs like to see a clear strategy that will allow your homecare business to acquire new customers and patients. Even though you may not choose to aggressively implement this strategy, (for good reasons like limited cash flow) having a clear plan of what you COULD implement will enhance your perceived value to a PEG.

5. Pre-Identified acquisition targets

PEGs expect you to have a strategic plan for acquisitions that would help your firm grow rapidly rather than organically. Ideally, you should have candidates in mind for horizontal acquisitions (firms with services/products like yours) and vertical acquisitions (firms that offer services that go naturally along with homecare.)

Again, you may not choose to act on these possibilities, but PEGs will value your firm more highly if you've already thought these issues through. If a growth by acquisition strategy doesn’t come naturally to you, VERTESS can help you create such a plan.

6. Ability to articulate your strengths AND and weaknesses

Every business has competitive advantages and disadvantages. Being honest about them helps a PEG assess the opportunity.

That being said, the owners and operators of a firm are sometimes "too close" to the business to understand their own strengths and weaknesses. At VERTESS, we've many times had clients who overlooked substantial strengths and/or worried too much about "weaknesses" that ultimately weren't that important.

You may want to get an outside, objective evaluation of your firm's situation and status before presenting it to a PEG.

Ultimately, the potential value of your homecare firm to PEGs is dependent partly upon the state of your business and partly upon how you present your business.

At VERTESS, we frequently help healthcare companies improve the basics of their business as well as counsel them on how to best position their strengths.

NOTE: If you're interested in discussing a PEG acquisition, I recommend that you attend the upcoming annual meeting of the National Hospice and Palliative Care Organization (NHPCO) in Washington, DC, May 1st-3rd which will focus on the impact of Private Equity on the homecare industry. (VERTESS representatives will be located at booth #226.)

Bradley M. Smith

Bradley M. Smith ATP, CM&AA

Managing Director/Partner

For over 20 years, Brad has held a number of significant executive positions including founding Lone Star Scooters, which offered medical equipment and franchise opportunities across the country, Lone Star Bio Medical, a diversified DME, pharmacy, health IT, and home health care company, and BMS Consulting, where he has provided strategic analysis and M+A intermediary services to executives in the healthcare industry. In addition, he is a regular columnist for HomeCare magazine and HME News, where he focuses on healthcare marketplace trends and innovative business strategies for the principals of healthcare companies. At VERTESS, Brad is a Managing Director and Partner with considerable expertise in HME/DME, home health care, hospice, pharmacy, medical devices, health IT, and related healthcare verticals in the US and internationally.

We can help you with more information on this and related topics. Contact us today!

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