Hospice M&A Must Adapt to a Virtual World

Deals used to be sealed with handshakes and ink on a dotted line, but COVID-19 has turned these old-school practices into risky propositions. With little opportunity for travel or face-to-face meetings, the COVID-19 pandemic has impacted the ways hospice providers do business when it comes to mergers and acquisitions.

Hospice M&A is striding forward at an accelerating pace in 2020 even as the nation’s workforce goes virtual. Hospices comprised nearly 70% of acquisition targets in the home-based health care sector in the second quarter of 2020, the market intelligence firm Irving Levin Associates reported. But even though transactions are closing, providers and investors have had to navigate some troubled waters.

“I would estimate about 50% of our management meetings (buyer/seller meetings) are now done through Zoom. We’re also doing hybrid management meetings, where some folks may be able to meet in person and those who can’t Zoom in to a laptop,” said Cory Mertz, managing partner of the M&A advisory firm Mertz Taggart. “While in some cases, I think this will enable us to all to be more efficient with our time, in the case of management meetings, it can be hard to put a transaction together without the parties meeting face to face. It’s so important that buyers and sellers get comfortable with one another.”

When face-to-face meetings have occurred during the pandemic, they often take place towards the end of the transaction process. Traditionally, an in-person meeting would occur early in the course of negotiations, according to Mike Moran, principal with Team M&A at American Healthcare Capital. 

Location also plays a role as social distancing and travel restrictions can vary from state to state, with some municipalities such as New York and Chicago applying their own rules such as mandatory self-quarantine when travelling to or from a COVID hotspot.

“A buyer traveling from New York to Florida is always welcome to the Sunshine State, but getting back home and having to self-isolate for a period of time can be impractical,” Mertz told Hospice News. “The buyer is usually contemplating paying a significant amount of money for a ‘people business,’ while sellers need to gain comfort that the buyer they are working with will close the transaction as promised and be good stewards to the company the seller has invested so much in. A lot of this trust is easiest to foster in person.”

One aspect that has been less impacted is the due diligence process in which the buyers’ representatives and advisors evaluate the acquisition target, Moran indicated. This process had with some exceptions gone virtual long before the pandemic.

“When it comes to diligence that in particular is usually a very virtual process. It typically starts with the quality of earnings,” Moran said. “A financial firm is usually hired by the buyer to come in and vet the financials of the company. When we get beyond that the process typically will evolve into clinical and legal diligence.”

Despite these obstacles, the hospice M&A market is unlikely to falter anytime soon according to most observers. Transactions slowed late in the first quarter and early in the second quarter as providers turned their attention to responding to the pandemic. Activity has since ticked back up as demographic tailwinds and rising demand continue to whet the appetites of investors and hospice companies looking to expand their footprint.

Among providers that offer both hospice and home health, companies have leaned more heavily into building their hospice portfolio as they weather disruption in the home health space from the onset of the patient-driven groupings payment model (PDGM) this year.

“Hospice, home health to a certain degree, and behavioral health have been some of the more resilient companies as it relates to the effects of COVID from a revenue standpoint and interest from buyers. For us this year, hospice has certainly become the most coveted segment when it comes to acquisitions,” Moran told Hospice News. “It’s very common for a hospice provider to generate in that 15% to 20%-plus EBITDA profitability range, so that’s a big part of it. They’re just such important, needed services that have seemingly powered on through COVID.”