This article is sponsored by health care mergers and acquisitions advisory firm Stoneridge Partners. In this Voices interview, Home Health Care News sits down with Executive Vice President and Partner Joe Lynch of Stoneridge Partners, and learns why Lynch left the world of health care operations to get into mergers and acquisitions, the top pitfall for buyers in today’s market and why would-be sellers would be wise to jump in now.

Editor’s note: This interview was conducted Friday, March 13, prior to the country’s various shelter-in-place orders due to COVID-19. It is too early to truly assess what effects this will have on M&A. Please feel free to contact Stoneridge Partners for insights on this developing matter.   

HHCN: Your background is in health care operations. Tell us about that and your experience prior to coming to Stoneridge.

Lynch: I started out in 1990 with a large hospital corporation, OrNda Healthcorp, in one of their home health agencies. I was eventually able to move up to the corporate level because they wanted to dramatically grow their home care division.

I traveled a lot in that role, starting and managing hospital-based agencies, and also got experience buying agencies. Then in the late 1990s, OrNda merged with Tenet, and by that point I was tired of being on the road all the time. I realized I was pretty proficient at starting agencies, so I decided to start my own.

Initially, my agency provided traditional private-pay home care. Once we got some momentum, I purchased another private-pay company, and a couple of years after that, I started a Medicare division which grew quickly. We eventually acquired a second Medicare operation in Houston, Texas.

After founding your agency, Reachout Home Care, in 1997, and operating it for almost two decades, what made you shift away from operations and into the advisory side?

Well, I owned my company for 17 years. Couple that with my seven years at OrNda and Tenet, and I’d been in operations for 24 years. I was ready for a change of pace. It happened for me pretty suddenly. I just woke up one day and realized I’d hit the wall and I wanted something new.

I worked with Stoneridge on the sale of my company and afterward, the founder, Don Cummins, called and asked me to join his team. It seemed like a logical transition to me, because I always enjoyed transactional work and I love the home health and home care industries. Now I get to be part of the industry without having to worry about surveyors showing up at my door.

What is the greatest M&A lesson you learned as a home-based care operator, and what principles did you follow to build and expand your company with regards to acquisitions?

Selling my company was complex and took a long time, and I think the biggest lesson I learned from that was to be patient. I wanted to walk away from the deal on several occasions, but Don could see the big picture and encouraged me to stay the course, and that was good advice. And that’s been my experience since I’ve been working with Stoneridge – a seller is often better off sticking with a deal that may be taking longer than expected than shredding all the work that’s been done and searching for a new buyer.

Regarding M&A growth principles, my first goal was always to grow organically, and if that wasn’t possible – usually because of geographic constraints – then I’d pursue growth through acquisition. I simply tried to evaluate the benefit each potential acquisition could provide in terms of gaining market share. I knew that my exit strategy would be to sell the company one day, so I also tried to determine how eventual buyers would see the acquisition I was evaluating: Would it help the company’s overall value or hurt it?

We saw a downturn in home-health M&A activity in 2019 Q4, and now we’re seeing a rush of consolidation. What type of activity do you expect to see for the remainder of 2020?

I expect we’ll continue to see an increase in bargain shoppers – those looking to buy quality companies at 50 cents on the dollar. The Patient-Driven Groupings Model will certainly cause a lot of operators some pain, and the buyers know this. The trick for the buyers will be to find those operators who are fed up and are willing to give them a good price. But I’ve dealt with many owners who are handling the change very easily, and those sellers won’t be so willing to deeply discount their company’s sale price.

From a big picture standpoint, how are things shaking out compared to your expectations with regards to PDGM?

I thought I’d see a pretty large decline in the number of buyers for home health. But I’m actually still seeing a very healthy demand for quality companies, as well as those bargain hunters I mentioned. Some buyers have pivoted away from traditional Medicare and have gone to private pay, Medicaid and hospice — but not as many as I expected.

For today’s buyers, what is the top pitfall they need to be aware of as they enter the market?

It sounds simple, but they need to truly understand the new payment model. I’ve encountered some buyers who don’t seem to really understand PDGM, and that’s made the evaluation process extremely painful. If they don’t understand how they’re going to be paid post-closing then they’re going to have a hard time evaluating acquisition targets. And should they make it to closing, they’re clearly going to have a hard time running their new company. We’ve entered a new time and they need to be completely up to speed with what’s happened and how they’re going to handle it themselves.

What about sellers? What is your top piece of advice to those looking to sell their businesses in the coming year?

In the near term, I’d say they’d better have a plan of attack for PDGM as it relates to their patient mix, and be carrying that plan out. They need to be ready to speak about it in-depth with potential buyers. As the year progresses, if the plan was a good one, the results will speak for themselves.

Also, sellers who have strong companies but don’t plan to be in the business much longer may want to consider selling now while evaluations are still favorable, before things get any more complicated for them. Our industry is not getting any easier, so if you’re not planning to be doing this in three to five years, now might be a good time to really look at selling.

Whether an agency is a buyer or a seller, what is the top trait of well-prepared agencies for adjusting to the market in a post-PDGM world?

I’ll say operators who embrace change will be the most successful post-PDGM. I remember when the industry switched to PPS (the Prospective Payment System) in 1997, the operators who dove in headfirst were the ones who emerged as the industry leaders a year or two later.

We all know the demographics – post-acute care isn’t going anywhere. This is just a change, and understandably, people tend to dislike change. But based on my experience, I believe the operators who tackle PDGM head-on will be one step ahead of their competition.

All right, last question: Describe the influence that PDGM will have in 2020 in one word.

Transformation.

Editor’s note: This interview has been edited for length and clarity.

Stoneridge Partners is a national health care mergers and acquisitions advisory firm specializing in the brokerage of home care, home health, hospice and behavioral health agencies. Established in 2001, Stoneridge and its team of experienced health care advisors provide complete, confidential representation throughout the course of a transaction to both potential buyers and sellers. For more information about their services, contact their corporate office at 800-218-3944 or via email at partners@stoneridgepartners.com.

The Voices Series is a sponsored content program featuring leading executives discussing trends, topics and more shaping their industry in a question-and-answer format. For more information on Voices, please contact sales@agingmedia.com

The post Voices: Joe Lynch, Partner and Executive Vice President, Stoneridge Partners appeared first on Home Health Care News.