A significant majority of buyers are planning to be more acquisitive in the home-based care space compared to 2023.
However, the success in that endeavor hinges on three key factors: quality deal flow, capital markets and regulatory developments.
That’s according to a new survey conducted by M&A advisory firm Mertz Taggart, which interviewed 51 of the most active acquirers interested in home health, hospice, personal care and private-duty nursing.
Quality deal flow stands out as the primary determinant of M&A success in 2024.
In the interim, the number of deals is expected to be lower due to the number of companies entering the market for sale compared to the outlier year of 2021. Many potential sellers are still holding off and hoping for market improvements.
Despite that, there seems to be general optimism around the Federal Reserve easing interest rates in the next few months, which would have a massive impact on M&A in home-based care – and in other industries.
“So much of what we’re expecting to see from an activity standpoint is going to depend on whether or not the Fed adjusts interest rates,” Rebecca Springer, lead health care analyst at PitchBook, recently told Home Health Care News. “Higher interest rates could affect the value of future cash flows and exit valuations.”
In the meantime, many buyers are aggressively looking to acquire “quality cash-flow-positive companies” prior to those companies’ anticipated exits,” according to the report.
Of the 51 acquirers interviewed, 77% of them suggested they plan to be more acquisitive in 2024 compared to 2023.
It’s important to note that buyers’ definition of quality deal flow has changed over the last few years. Instead of buying assets that could use a fix-up, buyers now prioritize acquiring transition-proof, profitable businesses that align with their exit strategies.
“A premium, cash-flow positive agency will often still sell at or near the market peak multiples of
2021, but it needs to check all the boxes from a financial, clinical, compliance and leadership perspective,” Cory Mertz, managing partner at Mertz Taggart, wrote in the report. “The lesson here is to make sure you are prepared. Otherwise you will be going in at least somewhat blind.”
Areas of focus
Despite ongoing reimbursement challenges, home health care remains a significant focus for many buyers, particularly in private equity.
Experienced operators have shown resilience in the industry, the report details, and successful home health operators with strong outcomes and NPS scores are considered integral to buyers’ value-based care strategies. Recent moves by major payers like UnitedHealth Group (NYSE: UNH) and Humana Inc. (NYSE: HUM) validates this trend.
“Private equity is smart,” Mertz said. “They are drawn to industries and companies that ultimately save the health care system money, while achieving better patient outcomes.”
In recent years, the interest in either home health or hospice from buyers has fluctuated. When home health is up, hospice is down, and vice versa.
Reimbursement risk has recently been a concern for home health, which has caused interest to fall. However, the hospice sector is now facing increased scrutiny and audit activity in certain key states like Texas, Arizona, California and Nevada.
As a result, buyers are becoming more selective in their hospice acquisition targets.
More than half of respondents said they are either in value-based arrangements (47%) or are considering them for their overall strategy (25%). A smaller percentage — 19% — said they have no plans to inquire about value-based arrangements.
Even though 2023 was a down year, it’s encouraging to see interest levels rise in home health, personal care and hospice heading into Q2 of 2024, Mertz said.
Compared with 2023, M&A interest has increased by 38% for hospice, 32% for home health and 27% for home care.
“Equally as telling — although they have become more selective on which deal they pursue — very few buyers have narrowed their service line focus,” Mertz said. “In other words, if they were interested in home health in 2023, it’s clear they would remain interested in home health.”
The result? Pent-up buyer demand across all home-based care service lines, according to the report.
Companies featured in this article:
