With governments locking down communities to combat the COVID-19 pandemic, health care providers and practitioners scrambled to find ways to deliver care to patients at their homes or residences. CMS relaxed restrictions on providing health care via telehealth, allowing for all Medicare patients to receive care via two-way, audio and video communications, and even via telephone calls notwithstanding that patients may not reside in rural zip codes. Hospitals pivoted to providing services to patients in their homes, again using telehealth modalities or by deploying practitioners to a patient’s home. Skilled nursing facilities also adopted strategies of keeping patients in their homes, deploying needed skilled caregivers to the patient. And while home health services may have hit a lull in the first couple months of the pandemic, services provided by home health agencies soon started to soar. Home health agencies started to become busier than ever, with many providers reporting overall growth due to demand to receive services at home instead of hospitals, skilled nursing facilities or nursing homes.
Home health agencies everywhere have become the favorite targeted acquisitions of “the financial world.” Apparently, there is one seminar that every buyer attended convincing buyers or all kinds (buyers with money, buyers without money, buyers in the private equity space) that:
HHAs are ripe for aggregation because the industry is disaggregated; and
HHA owners lack business sophistication necessary to bring their businesses to the “next level.”
Unfortunately, some of the buyers lack any true industry experience and are looking at acquisition targets solely from a financial perspective. They’re looking principally at business financials and nothing else. And, worse yet, they’re not focused on the centrality of operational expertise. All of which can come crushing down on the head of seller financed acquisitions. In other words, if the buyer is paying the purchase price over time, the seller is effectively financing the transaction because the purchase proceeds are (in theory) coming from seller operational profits. This may make the transaction possible, but operations will ensure company profitability and growth, which is gonna drive seller interest.
So what? A lot! As current HHA owners know, the secret sauce is in not financial analytics. It’s in the operations! And the financial due diligence is just a part of the equation. What about regulatory due diligence? What about knowing where the bodies are buried (legally speaking)? What are the payer relationships? What are the marketing relationships? What is really driving the business? Who is the key reason why the HHA is successful? It is typically one or two people. And missing that or retiring them is a recipe for disaster for buyers and seller financed sellers. As is missing illegal payments made to induce patient referrals, which can shut down even a completed transaction in a heartbeat. None of this is part of the usual [financial] due diligence!
Lawyers might say “Yeah, but there will be plenty or reps and warranties to cover the transaction. And the indemnification sections will be tight.” So what? The buyer doesn’t want a pig in a poke. They want a reliable and growing income stream. Details matter. Especially the details both buyers and sellers are missing!
Further, if a buyer thinks they can buy an HHA on the cheap (1) without proper due diligence, (2) with lawyers waiting to get paid if the transaction closes and funds, and (3) with heavy seller financing, think again. If you’re dealing with a buyer with pockets (or you have pockets) and will spend the right money on proper due diligence, the right (and experienced) marketing and management, have at it! The HHA industry is ripe for aggregation. But doing it in “the new way” isn’t new at all. It’s just defective and a recipe for lots of heartache…and litigation.
Real buyers love due diligence. They love to measure twice (three times is even better!) and cut once. They love either understanding the business they’re buying or buying the operational talent. And they understand and embrace the notion of putting hard money to work. They don’t try to buy something for nothing or find lawyers who don’t have enough work to do who are willing to work for free. Real buyers are not trying to get something for nothing. And they don’t allow a financial flow focus to blind them to the daily “wax on; wax off” aspects of the business. Doing so would disappoint both sellers and buyer investors.
It’s great to see so much activity in the HHA space. But the ones that win and stay will only be the ones that do it the old fashioned away—They’ll Earn It!
Health law is the federal, state, and local law, rules, regulations and other jurisprudence among providers, payers and vendors to the healthcare industry and its patient and delivery of health care services; all with an emphasis on operations, regulatory and transactional legal issues.