Private Equity Groups (PEGs) have recently been making huge investments in home health and hospice providers, according to Bradley Smith, managing partner at VERTESS, an international M + A advisory firm that helps healthcare business owners prepare their companies to be acquired or to make acquisitions to create new revenue growth.
“This might seem unusual considering that Homecare is a challenging business that must adapt to a rapidly-changing regulatory environment,” Smith says. “The prospect of change and uncertainty increases risk and one of the best ways to manage risk is to increase the scale of operations.”
The consolidation of the Homecare industry at this point is limited only by the ability of PEGs to find high-quality companies to purchase. According to Smith, here’s what they’re looking for:
- A strong management team
PEGs often place as much value on a 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.
- A clear path to success
PEGs may be less knowledgeable about the Homecare industry than a buyer from within the healthcare industry. However, a firm whose management can project an understandable picture of the future and a viable business plan to address that future will have increased credibility and command a higher price.
- A diversified service/payer mix
Because the Homecare industry is rapidly changing, PEGs prefer companies that are diversified away from a single payer 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 a Homecare firm provides, the more likely it is to attract PEG interest.
- A plan for “organic” growth
PEGs like to see a clear strategy that will allow a Homecare business to acquire new customers and patients. Even though the firm might not choose to aggressively implement this strategy, (often for solid reasons, such as limited cash flow) having a clear plan of what the firm COULD do enhances its perceived value to a PEG.
- Pre-Identified acquisition targets
PEGs expect a homecare firm to have a strategic plan for acquisitions that could help it grow rapidly rather than organically. Ideally, they want firms that already have candidates in mind for both horizontal acquisitions (firms with similar services/products) and vertical acquisitions (firms that offer services that complement Homecare.)
- Ability to articulate strengths AND weaknesses
Every business has competitive advantages and disadvantages. Being honest about them helps a PEG assess the quality of the opportunity. That being said, the owners and operators of homecare firms are sometimes too close to their own business to perceive 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,” says Smith. “Owners of Homecare firms who want to get the best possible price should get an outside, objective evaluation of the firm’s situation and status … before presenting it to a PEG.”