The health services arena recorded more than 1,200 deals in 2019 for the second year in a row, according to the latest figures from international accounting firm PricewaterhouseCoopers.
As has become the norm, long-term care was the largest sub-sector by volume throughout 2019 — with particularly strong M&A action in the home health and home care space. Dealmaking has become a way of life when it comes to in-home care businesses, but there are pros and cons to every move.
“Integration is remarkably and incredibly complex,” Arosa+LivHome CEO Ari Medoff told Home Health Care News. “The number of details that you have to get right, the amount of data migration between systems, things as simple as harmonizing holidays and bill rates or benefits, … these things all take time and focus.”
For the most part, companies in the position to acquire others are riding momentum that is spurred by recent success. That’s a good thing for their CEOs — and especially satisfying for founders who have watched their entrepreneurial ventures succeed to the point where they are in a position to grow.
But, as Medoff noted, there is an abundance of critical decisions to make before expanding, no matter how many times a company has done so.
Common questions, for example, include: What kind of services and products should the target acquisition offer? How long will the dealmaking process take? Will the selling company be able to teach the acquiring company something new about the in-home care industry?
Most importantly, acquiring companies and their CEOs need to know the risks.
In addition to Medoff, HHCN spoke with two in-home care CEOs currently in the middle of ambitious expansion efforts. Those top executives included Andrea Cohen, CEO and founder of Boston-based HouseWorks, along with Tim Hanold, CEO of Virginia-based Care Advantage Inc.
For another perspective, HHCN also connected with M&A Cory Mertz, managing partner at advisory firm Mertz Taggart.
Acquiring, integration pose outset challenges
Since Arosa and LivHome merged in 2018 to form Arosa+LivHome, the company has been aggressive on the M&A front. Backed by Bain Capital Double Impact, Arosa+LivHome has acquired eight companies in total, expanding the company’s portfolio to 24 individual offices.
Arosa+LivHome is a whole-person senior care management provider and the largest employer of care management professionals in the U.S., according to Medoff.
Arosa+LivHome has learned from past M&A experience that it needs to be patient.
“On the deal-process side, deals take twice as long as you think that they ever should,” Medoff said. “If you think it should take four months, it will take eight months. If you think it’s going to take six months, it’s going to take 12 months. It’s bringing the different parties to agreement on so many details. It’s executing these transactions while running your business as the buyer — and the seller is running his or her business. It takes a lot of persistence to take something across the finish line.”
In other words, heavy involvement in M&A prospecting and transitioning can take leaders out of the day-to-day business that gave them the opportunity to expand in the first place.
That’s something Andrea Cohen — who nurtured HouseWorks for 20 years to a point of expansion in 2019 — has been cognizant of throughout the process.
Backed by health care investor RAB Ventures LLC, HouseWorks provides both home care and home modification services.
“I think that you have to be really careful that these acquisitions and deals don’t distract you from continuing to run the day-to-day business,” Cohen said. “Our No. 1 goal is always to optimize service delivery because we’re a service business. You just have to make sure that you keep your eye on the ball, and [make sure] as you’re doing these deals that you’re continuing to strengthen your infrastructure.”
Learning from sellers
Care Advantage’s last year was characterized by a handful of acquisitions that contributed to it becoming the largest privately-owned home health company in the Mid-Atlantic, according to CEO Hanold.
Care Advantage currently has 22 locations in Virginia, Maryland, Delaware and Washington, D.C.
“We’ve actually found that our quality of delivery has gone up with the acquisitions,” Hanold said. “If we’re doing them the right way, we’re learning a lot every single day. It’s not like we’ve perfected this thing, by any means. But we’ve learned to be open and learn from every new family that’s joins ours. We’ve learned a ton from their best practices. Because if you put all those together, it’s like over a decade of service delivery in our community. [That’s] a pretty powerful thing.”
After decades of growing HouseWorks from the ground up, Cohen felt the same about learning from new partners.
When the company moved into Pennsylvania, Maine and New Hampshire in 2019, its leaders prioritized listening over making aggressive changes.
“When you try to listen, you find that hidden jewel that they might have, something they’ve been doing that you just never thought of,” Cohen said. “It could be a technology tip; it could be a way that they respond to clients or a way that they train caregivers. That actually really helps strengthen the bonds between companies as well. I want them to feel like they have something to offer to us — and they do.”
Willing to risk it all
In Q4 of 2019, there were nine acquisitions in home care and just five in home health — down from 10 and 14 in Q3, respectively — according to proprietary data from Mertz Taggart.
Regardless of the precautions buyers take, there’s inherent risk in the M&A process, which is something that most are well aware of, according to Mertz. As a firm, Mertz Taggart typically represents sellers that are selling to either strategic or financial buyers.
“If I were an individual agency looking to acquire, I would follow the examples of the consolidators in the industry,” Mertz said.
One of the biggest risks after acquiring is that the purchased company — and its subsequent cash flow — will deteriorate after closing. Cashflow represented may not be reflective of ongoing concern and contingent liabilities, according to Mertz.
“Contingent liabilities for a home care agency mainly come from three agencies: CMS, the Department of Labor (DOL) and the Internal Revenue Service (IRS),” Mertz said. “Buyers can’t escape these liabilities by doing an asset transaction. They are called legacy liabilities. In each case, they can be mitigated through proper due diligence.”
Another way to mitigate risk would be to hire a firm to conduct financial due diligence.
There are obvious rewards to expanding a business, but the risks can often be nonobvious. Sometimes it takes experience to realize both.
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