2025 Could See Uptick in Hospice M&A, Less ‘Deal Fatigue’

Hospice transactions are facing a new world of challenges during a time when M&A activity is projected to ramp up after recent lulls.

More founders who began their organizations when the Medicare Hospice Benefit was established in the 1980s are reaching retirement. A large contingent will be seeking an exit strategy that will sustain their businesses. However, heading to the seller’s table has become an increasingly complex process.

This is according to Maria Warren, vice president of the health care advisory company McBee Associate, which is part of Netsmart. Hospices seeking a potential sale have varying “playbooks” for how a deal is structured, weighing many operational and financial considerations alongside care delivery impacts, Warren said at the National Association for Home Care & Hospice’s (NAHC) Financial Management Conference in Las Vegas.

“We’re seeing a lot of the founder-owned assets out there starting to look at their succession plans [and] who they could be passing the baton to carry it on,” Warren said during the conference. “A lot that we’re looking at that want to go to market have a lot more to do internally within their organization [in] getting all their ducks in a row from looking at your compliance, quality and all the financial diligence pieces. It takes one to five years sometimes for them to get ready to go to market, especially if you’re looking for a certain dollar to transact.”

Some deals stall before they come to fruition during the due diligence processes, Warren said. Some of the potential snags include intensifying regulatory pressures.

Though compliance is an increasingly significant factor in hospice deals, many more “pitfalls” can hinder a transaction’s progress that may be under a seller’s radar, Warren said. How a hospice operates internally has become a much greater area of risk in moving a deal forward. Compliance, revenue cycle management, staffing and leadership structures, organizational culture and operational processes have varying levels of impact.

“When we think about transaction shortcomings, they all sit around these pillars of people, process, technology and organizational culture,” Warren said. “These are core pillars within a successful organization and not created equally.”

Deal “fatigue” is growing more common in the hospice space, with some sellers walking away from a transaction during the due diligence phase and experiencing significant financial loss as a result, she added.

Hospice transaction volume and valuation reached record highs in recent years until a cooling period began in 2023. Multiples in home health and hospice reached 29x in 2020, beating 2019’s record of 26x, reported PwC’s Health Research Institute. Increased private equity investment was a large propeller of heightened M&A activity.

These investors are now looking to bring their assets to market, with the hospice industry facing another boost in coming years, said Andrew Voss, shareholder at the law firm Polsinelli PC, said during the conference.

The outlook of private equity deals in hospice looks vastly different from previous years, according to Voss.

“We’re about to start seeing here is the deal flow back in 2021 [having] a typical private equity exit of five years,” Voss said during the conference. “They are going to be in a position to exit based on some of the multiples. So we’re butting up to that point real quick to see what’s going to happen. One question we get asked a lot is how to save a deal if it needs a lifeline. Number one for sellers is what are the tax consequences. Can we structure this in the most tax efficient way?”

Tax-related concerns often can be where a transaction sees the most complications, particularly when a nonprofit is acquired by a for-profit entity, he added. Financial liability and cost following a sale are just some of the aspects to consider, Voss said. Outlining change of ownership and organizational structure of leadership roles is another key to ensuring a smooth transaction process.

The legal aspects involved in a private equity-related deal have become increasingly important, according to Mark Kulik, senior managing director at M&A firm The Braff Group. Financial liability and revenue generation can be more complicated to navigate and require a closer look.

“There’s a deeper dive on the legal side of the structure of the entity,” Kulik told Hospice News at the conference. “Who’s going to receive the proceeds? Are there proceeds going forth? The rigors of diligence are identical, it goes more toward the legal side of who is merging and are they a nonprofit-to-nonprofit or a for-profit?”

Despite some frothy conditions, the next year holds promise in the hospice market — particularly for operators seeking a sale, Kulik indicated.

The industry is ripe for change amid rising demand, with sellers seeing a potentially favorable environment as investors continue to set their strategic growth sights on hospice, he stated.

“If you’re looking to buy or thinking about growing, now is probably a good time, because the conditions will be more fitful toward sellers coming into 2025 and then 2026,” Kulik said. “Depending on which side of the table you’re on, it might also be time to wait, it might be time to act before too long.”