November 21, 2023 • 28 mins
Crack the code of Mergers and Acquisitions in the healthcare-at-home industry with our guest, Kristopher Novak, Managing Director at The Braff Group. In this dynamic episode, we dive into the current landscape of healthcare M&A, exploring the latest trends and challenges shaping this sector.
Kristopher leads us through the crucial timing aspects of M&A - how to perfectly align your business growth, market dynamics, and personal objectives for optimal results. He shares invaluable insights on strategic and tactical preparation, guiding you through the process with clarity and expertise.
But that's not all! We tackle the critical topic of avoiding pitfalls and building premium value in your healthcare business. Kristopher reveals vital strategies to survive and thrive in the M&A space. He also sheds light on identifying the best types of buyers to meet your specific objectives, a crucial step in the journey.
As we approach the end of our enlightening conversation, we delve into the general timeline of M&A processes, setting realistic expectations for what lies ahead. From the early stages of considering a sale to the final steps of closing a deal, this episode is packed with practical advice and real-world insights.
If you're looking to understand the healthcare M&A landscape or contemplating a sale, this episode offers practical advice and expert insights tailored for healthcare providers and entrepreneurs alike.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Jennifer (00:09):
Hi there, I'm Jennifer Kennedy, the lead for Quality
at CHAP, and welcome to thismonth's CHAPcast.
Today I'm talking withChristopher Novak.
He's the managing director withthe BRAF group and what we're
going to talk about today iseverything healthcare, mergers
and acquisitions.
So welcome to the podcast,chris.
I'm glad to have you and, ifyou would, could you just share
(00:32):
a little bit about yourself withour listeners?
Kristopher Novak (00:35):
Yeah, thank you, jennifer.
I really appreciate the timetoday with CHAP.
So join the BRAF group inAugust of this year as managing
director solely focused on homecare.
We kind of define home care asMedicare, certified home health,
hospice, the Medicaid home andcommunity based services,
private duty nursing and alsopediatric care.
Prior to this I spent 14 yearswith the medecis, running their
(00:59):
M&A department for the lasteight years.
So great to stay with thissegment of healthcare services.
I think it's really importantwhat we do out in the
communities that we serve, youknow giving the aging population
, giving where we are withMedicare, medicare advantage.
You know there's a lot oftailwinds, despite some of the
(01:19):
recent hurdles that we've allbeen working through post
pandemic, and it's great to beon with CHAP.
I've got a long history with alot of folks at CHAP given the
medecis relationship, certainlyDan McPhilamy, but also Daniel
Stevens and Nathan DeGote aswell, and it's just great to be
here.
I should give a shout out toTeresa Harbour as well after all
(01:42):
these years spending timetogether at various conferences.
But you know, the one thing Ireally wanted folks to know
about our relationship with CHAPgoes back to my time with Dan
at a medecis.
And one thing about M&A that'ssort of one of the fun parts is
naming the projects, and we hada lot of great names over the
years, like Centurion andMonarch and Foxtrot.
(02:02):
Dan never got to name anythingand he was always quite jealous
about it.
So maybe Dan will have aproject code name for the
podcast when we wrap up.
Jennifer (02:13):
I like that project code name.
That's awesome.
So you know I'm a nurse, I'm atime nurse.
You know I've worked inhome-based care in most of my 38
years of nursing.
But you know that when we lookat the current landscape of
home-based care and it's notjust home-based care, it's sort
(02:35):
of like all healthcare, thewhole healthcare continuum you
know we know that we have a hugeinflux of baby boomers that are
going to be aging out over thenext decade, two decades, and
that's really going to shoot thedemand for home-based care,
particularly since we're seeinga push of home-based care and
(02:56):
pushing that out of the hospitalinto the community.
And you know there's going tobe a need to meet demand.
And I think that's where theBRAF group comes in to assist
providers in assessing what dowe do now?
Can we handle things?
What's the right strategic moveto make?
And I'm hoping that you cansort of give us a lay of the
(03:20):
land of what at least home-basedcare and that environment looks
like in that respect.
Kristopher Novak (03:26):
Yeah, you hit the nail on the head.
I mean, I think, just givenwhere the aging population is
going, where we're going aroundvalue-based care and the impact
that we know we can make withpatients and their families by
taking care of them at home,we've got incremental
technologies that are allowingus to do more and more at home.
I mean, there's a lot out therearound hospital at home
recently, certainly in our timeat a Metasys, investing and
(03:49):
Contessa but there's others outthere as well that are trying to
solve a lot of problems and atthe same time, we're staring in
the face of the nursing shortageand the labor issues that a lot
of folks have been having.
So I think the next few yearsare going to be very exciting.
There'll be some challenges,but those challenges always
(04:10):
provide great opportunities andI'm just looking forward to
seeing how differententrepreneurs, different
operators, different privateequity groups and other
investors tackle some of thebigger issues that we're going
to have.
We know that care based in thehome is going to help solve a
lot of those problems or justincreasing demand, and it's a
(04:35):
great time to be in the space,around the space, and part of
our approach with the BRAF groupis providing that consultative
approach.
Yes, we are mergers andacquisitions advisors.
Yes, we focus solely on thesell side to help our clients
achieve a great outcome.
But really, in a best casescenario, we're working for 90
days to 180 days, sometimes more, in order to really dig into a
(04:57):
business, with an owner, with anexecutive team, to understand
how they can optimize growth,how they can optimize the care
they're providing and thequality outcomes.
And look, we're certainly notexperts in delivering that care,
but we know the areas that aregoing to be important as buyers
(05:18):
come to the table, work througha transaction, and what they're
looking for, and so we thinkit's important to have that time
to prepare and get ready to go.
Jennifer (05:33):
So from my perspective , chris, given what your group
does, the timing of when someonedecides that they're going to
be in the position to make anacquisition is anybody's guess.
From my perspective ofcompliance, quality, clinical
(05:56):
I'm seeing a few variables thatcan push that timing, like
regulatory burden for one, ourmove in the continuum towards
value-based purchasing.
I've worked with a lot ofmedium to smaller home-based
care groups in my time and Idon't see that many of them are
(06:21):
going to be able to make it.
You know, essentially, or fromthe acquisition side, there
might be organizations poised tosay, okay, well, we're looking
to, you know, expand or grow ourorganization.
You know what is.
(06:42):
What are the timing pieces ofall of this?
When you look at assistingsomebody to say, is it the right
time to look to add to our orgor is it not the right time?
What are sort of the chesspieces of that?
Kristopher Novak (06:58):
Yeah, sure, and there can be a lot of
reasons and motivations forsomeone to say, hey, I think
it's the right time to sell, andwe hear a lot of different
things in that regard.
However, there's really threedecision spheres that you want
to try to overlap in order tomaximize your outcome through
that process.
One is where are you from agrowth perspective?
(07:20):
Two, what are your personalobjectives?
And three, what are the currentmarket dynamics that are out
there today, and so I'll kind ofbreak down each individually.
On the growth side, you know youprefer to sell kind of an
agoldy locks type spectrum,right?
You don't want to sell whengrowth is too hot and you also
(07:43):
don't want to sell when growthis cold, and so you're really
trying to find where you're inthat market growth profile or a
little bit above the marketgrowth profile.
If you're in that hyper growthscenario, you're just going to
get less credit as it relates topurchase price.
No buyer is going to assumethat they're going to continue
to grow in that hyper growthstage through their modeling
(08:06):
period, as they're thinkingabout applying value to your
organization, because they're,of course, looking at the
history of your organization,what you've done, but they're
really looking at the go forward, modeling out sort of the next
five years or so, and they'rerunning all the financial
analysis around discounted cashflows and getting to whatever
metrics that are driving theirinvestment decisions based on
(08:28):
that.
And so if you're growing, youknow 15%, 20% more than likely a
buyer is not going to give youcredit for that and so you'd
really rather wait a littlewhile, achieve that growth, and
we all know you know the law ofdiminishing returns.
It's hard to continue to growat elevated rates when you think
about continued market sharecapture and so continue to
(08:50):
capture that market share.
And it may be 12 or 24 monthsdown the road where then you are
in that sort of warm growthprofile and you've achieved that
growth and you're going to getcredit for that growth as it
relates to your purchase price.
And then certainly look if youprefer not to sell if you're
below that market growth.
However, you know there may beother stipulations that drive
you to sell.
(09:10):
Anyways, I think ultimately,you're probably looking at a
slightly discounted valuationbased on the fact that you know
a buyer is going to assume thatthere's some level of investment
that they have to make in orderto get back to that at least
market growth potential.
Jennifer (09:25):
You know what, as you're talking, I was thinking
how does all this impact access?
So let me give you an example.
You have organizations thatmight be acquiring smaller
medium organizations in ruralcare I'm thinking rural home
based care Right?
(09:45):
So let's say you know a mediumorganization that provides that
rural based care is acquired bya larger organization.
Does the access Remain?
Is it impacted?
What happens there?
I'm in that.
That's that's sort of acritical piece from from my
perspective as a nurse that Ithink about.
Kristopher Novak (10:04):
Sure, no, I think.
Look, I think Byers,particularly in our segment,
right speaking to home care,very specifically here it's an
important outreach into theserural communities.
Sometimes, you know, it's, it'squite a bit to travel to get to
some of the you know, facilitybased, facility based providers,
(10:26):
and so you know I, there arequite a few investors that are
looking into the secondary,tertiary type rural markets.
That's their strategy.
They believe there'sopportunity, you know, from an
optimization perspective, from adifferentiation perspective on
quality or otherwise.
So there's definitely interest,I think, no matter where an
(10:46):
acquires buying in our space, Ithink what folks have to realize
, because everybody's alwaysconcerned, what's gonna happen
to my people, what's gonna haveto my job?
Right, energies is, you know,sort of the term that gets
thrown around a lot, what?
What I think a lot of folksMaybe don't understand is the
court.
Our businesses are based on thegreat work that our clinicians
(11:07):
do out in the field and so itwould be very short sided for a
buyer in our segment to To wantto limit access, to be really
cost controlled within the field.
It's really, you know, ifthere's cost control thoughts
being gone on in the field.
It's really more or less.
How do we optimize the staffand you know how can we grow
market share in order to makethem, you know the most of the
(11:30):
clinicians that we currentlyemploy, which ultimately will
grow the business and be asuccessful you know investment
thesis.
Jennifer (11:38):
Yeah, that's good to hear, you know.
I think I think that might be ageneral concern when clinicians
are looking at acquisitions.
Is, you know, is access goingto decrease and Rural health is
already hard to do.
You know what I mean.
And I'm taking away anorganization that provides that
(12:00):
service, provides that touch Inthe things that folks way out in
and I've driven way out in mytime that they wouldn't lose
that.
I think that's important.
But so thanks for Sort ofexplain that piece of it now.
I have known I've never beenthrough sort of an acquisition
(12:21):
when I was at an organizationmyself, but I've known friends
that say, oh my gosh, this ispainful, right.
So you know, I know that ittakes a.
There's lots of strategy andthere's preparation that goes
into it.
Do you, do you and your grouptry to Level, set the pain level
(12:43):
when you're going through theprocess?
Kristopher Novak (12:46):
we do.
I think it comes understanding.
You know probably what theexpectation should be to work
through the whole process.
I think we always just implorefolks whether you're our clients
, are you're not our clients, isyou know?
Look, there's a strategy thatgoes into this and there is
tactical preparation that Needsto be completed in order to
(13:07):
alleviate some of that pain.
Look, every transaction comesdown to price.
It comes down to the terms ofthe deal and it comes down to
certainty of close, and so wespend our time Our clients on
the front end, really advisingthem on the ways that they can
prepare.
I think you have to know yourstrategy to prepare for anything
Transaction is exactly the same.
(13:29):
So a really good understandingof your strategy is important in
order to set set what thosepreparations need to be
strategically, you know.
I think you have to have anunderstanding of what those
personal objectives are.
Right.
Are you doing this because youwant to retire is a lot
different than I'm doing thisbecause I want to take some risk
off the table, but I want tocontinue to run the business and
(13:50):
I need someone to, you know, tocome in as a financial sponsor
and help me continue to investin the business moving forward.
There may be other familyconsiderations, particularly if
other family members areinvolved in the business, or it
could just be a commitment toyour staff, a commitment to the
community and the legacy thatyou leave behind.
I mean there could be a varietyof Of objectives and once you
(14:14):
really have a good understandingof your personal objectives,
working with an advisor likecraft group, what we can do is
help you build that strategy,help you define what the process
is going to look like and giveyou an understanding and
expectation for what the processis going to be.
We're going to help you tellyour story again.
Some of those just in theobjectives that I listed, which
are just a handful of examples,you know, could really warrant
(14:39):
different stories to be told asyou're preparing the materials
to go market your organization.
And then also, we're going towant to understand and make sure
that we are getting thefeedback and or commitments up
front from buyers as they arepresenting offers to you, so
that you can understand asyou're vetting those offers do
they?
Do they really meet myobjectives?
(15:00):
And that'll help you weedthrough who's the who's the
right partner, who is it?
Is an outright sale?
Is it a private equity group.
Is it another investor so thatyou can make a full decision?
I think you know, when we thinkabout selling your organization,
it's likely one of, if not themost meaningful financial impact
(15:21):
that you'll see in your lifeand you'd prefer to do it once
and not have something stall outand then have to go back to the
drawing board and try againlater.
You know I liken it to, youknow, selling your house selling
you know you more than likelywill work with a real estate
agent to do that.
This is a much more complexbusiness transaction than
(15:44):
selling your house.
I think something to the effectof like 90% of home sales are
actually done through realestate agents, even with, you
know, for sale by owner andeverything else.
Most folks work with theirfinancial advisor as they're
planning out their future andyou know we kind of wear a
number of hats to the processand it is in order to help, you
(16:06):
know, prepare and then alsoexecute on that plan moving
forward.
And part of what we do on thefront end is helping align with
some of the other advisors thatwe highly, highly recommend that
folks bring in, and bring inearly, you know.
I think you know, outside ofthe advisor that can help
develop the plan, push throughthat process, which we'll talk
(16:26):
about in a little bit moredetail on the podcast.
You know, always recommend youknow that you really get some
financial advisors that workthrough transactions on a day in
and day out basis we recommendthat you do a compliance audit
on the front end.
You know survey risk is a lotdifferent than oh yeah.
Repayment risk and that's youknow buyers are delving in more
(16:47):
and more into due diligence.
You need a tax advisor just soyou understand structurally,
with the different dealstructures that are out there,
what it's going to mean for youand what your actual take home
will be.
And then health caretransaction counsel.
I'm not, you know, I'm sure alot of folks have lawyers that
they work with day in and dayout, but this is a very
specialized business transaction.
(17:09):
We are a highly regulatedindustry and so finding counsel
that has experience not only ontransactions but with health
care will help you understandwhat's sort of market terms or
normal terms as you work throughthe negotiation of about a
hundred page long document thatbecomes a definitive agreement
(17:31):
and ultimately is that bindingagreement which leads to the
sale of your organization.
So just a few areas that we dodo that really lay the
foundation, and for us it'smaximizing your ability to tell
the story, to drive to theoutcome and the objectives that
you set forth at the beginning.
But also, you know I can'tstress enough that it provides
(17:54):
you that visibility.
No business is perfect, nobuyers expecting your business
to be perfect.
There's pros and cons havingsuccessfully due diligence to
over 50 deals out of Metasys.
That means we probably you knowwe're very serious and probably
triple that amount oftransactions.
I did not succeed for onereason or another, and that
(18:18):
preparation allows you tounderstand the pros and cons.
It allows you to defend Some ofthe areas of weakness that you
have and it also allows you toelevate and highlight where
you're very strong.
It gets you organized so thatyou can move through this
process as quickly as you canand so that it's less of a
distraction, because the buyeris expecting you to operate your
(18:39):
business through this timeperiod and they're going to want
to get intermittent updatesaround your performance, and so
there's a there's a lot ofreasons why we urge people very
strongly to spend the time onthe front end, to get prepared,
to be thoughtful, and really itelevates your opportunity to get
a really great outcome at theend of the day.
Jennifer (19:01):
So, Chris, I know there's a lot of variables that
would affect the timeline ofwhen the process.
You know how quickly theprocess would occur, but what
would you say would be like anaverage of an organization going
through that process?
Kristopher Novak (19:15):
Yeah, right, on average is about six months.
And that's a little bit ofpreparation.
That's marketing your businessto find out who's interested and
what those offers look like.
It's betting those offers,picking a buyer at that point,
probably providing themexclusivity.
And then you get into, you know, the very detailed due
diligence process which you'realso going to be kind of in
parallel negotiating thepurchase agreement at that time,
(19:38):
ultimately signing and thenworking through whatever
conditions to close, likeregulatory approvals, delivering
consents on payer contracts,leases, and ultimately a close
and fund.
So ultimately that's about sixmonths.
It may be a little bit shorterand it certainly can stretch out
(19:58):
if, if other things pop up inthe midst of that process and
again, in this highly regulatedbusiness we know that that can
occur and sometimes you have towork through things within that
diligence period that you didn'tknow on the front end and you
couldn't have planned for, andso you know it could take.
It could take longer than sixmonths, but on average for the
(20:20):
BRAF group it's right at 181days, when we look at our data
over the last several years,from ultimately making the
decision, signing the engagementwith us and then getting to a
close.
Jennifer (20:29):
So you could say things that pop up, would you
qualify those as the pitfallsduring the process from you know
no detail, if you will lookingat dog analogy.
Kristopher Novak (20:40):
Correct, yes, and again that's why, we urge
some of that preparation right,so that you do know.
I mean, I think, look what wehave seen in the last several
years, you know, and some ofthis, I think, is market driven.
You know the market has beenslowing down since 2021, at the
peak of activity, at the peak ofvalue, and so you know buyers
(21:05):
have a little bit of that buyeraware mentality and you know
less deals are getting done andso they're very much digging in.
You know very, very, very deep,and so you know I'd say two
main pitfalls that we typicallysee are going to be I mentioned
survey risk for versus repaymentrisk, and so the buyer is going
to do the chart review andthat's why we urge folks to at
(21:27):
least do a a a a review.
Just do a small random sampleof, say, 30 charts.
Maybe it's more if it's a largeorganization, just so you
understand.
And it's it's.
It's not around conditionsnecessarily of participation,
but they're checking everythingin those technical elements of
the documentation, theeligibility, how does the coding
look?
You know they're under, theywant to understand that you're
(21:49):
meeting those conditions ofpayment and they're sampling
probably about 10% of yourpatients that are recent and
have built, and they're alsogoing to sample some historical
patients most likely, and sothey're really digging in and
they're not necessarilyexpecting a zero percent error
rate.
We all know how complicated,you know, the technical elements
(22:11):
are across home health andhospice.
We know that one nurse may, youknow, see continued decline
differently in hospice thananother nurse may see or a
medical director may see or anauditor may see.
But they're trying to get asense of you know how are you
doing as it relates to all ofthose various pieces that do
impact conditions of payment.
(22:31):
And they're doing that becauseone of the main things that
they're buying is your Medicareprovider number.
And so, regardless of structure, stock deal versus asset deal
which we won't go into in theamount of time we have today,
but one of I mean they have allof that liability because they
own that provider number,medicare.
If there is a, an audit, asmirk audit, you know you pick
(22:53):
or something.
They don't care who owned thebusiness two years ago.
They're going to the currentowner of the Medicare number and
that's who they're seeking arepayment from.
And so they can never they cannever rid themselves through the
deal of that liability,potential liability, and that'll
get into some negotiation onthe definitive agreement on.
You know the terms around whatyou are standing behind and how
(23:15):
you limit that liability, butnonetheless, we see, oftentimes
Folks have great quality.
You know they've done great intheir surveys over the years.
They feel like they've.
You know they're they're doingwonderful and what they don't
realize is maybe they didn'tupdate a form.
You know, the hospice electionform had some changes in late
2020 and and I can tell you fromexperience that we would be
(23:39):
looking at a two or threepercent eligibility error rate
and we'd be, you know,salivating as the buyer and then
Someone would tell us but theydidn't update their form and
there's a hundred percenttechnical error rate.
So if there is a you pick thatcomes in, you, yeah, it would
likely extrapolate, and then andthen you're looking at a
Scenario where we can'tstructure protection Significant
(24:00):
enough to get us comfortableand it's total oversight.
It's not fraud or abuse, it'sjust oversight around updating
that form.
So that you know, I thinkthat's where we saw the most
pitfalls came in that clinicalreview.
Certainly there's financialpitfalls and that's why we urge
doing some diagnostics aroundyour financials on the front end
, because they're gonna dig deepand you know if you're on cash
(24:24):
base accounting.
Switching over to a cruel, thebuyer is gonna have some
advantage as they look throughyour numbers and try to shift
that advantage to themselves.
As they do talk about we valuethis on X amount of EBITDA or a
revenue multiple To try to putthat in their favor.
And so a couple of areas.
There's a lot.
I mean again highly regulatedbusiness.
(24:44):
Jennifer, you guys do a ton ofwork with folks.
We do in these areas and youknow the complexity and you know
the areas that you can you know, unintentionally run into
issues.
Jennifer (24:57):
Yeah, absolutely.
I mean, it's a Changinglandscape, you know from, from
not only year to year, it couldbe from months to months,
depending on what's happening.
All right, so I have one morequestion for you, chris what's
the quality proposition Wouldyou say in and what you do, how
you help this whole process ofmergers and acquisitions?
Kristopher Novak (25:20):
Sure, I think what we bring to the table is
the experience and the expertise.
Having worked through 400roughly 400 successful
transactions and health careservices.
About 150 of those are in homehealth and hospice.
I think you know, for us, mostof our managing directors have
prior experiences buyers in thissegment as well.
We take a very hyper focus, asI mentioned, so I'm not spread
(25:45):
across a variety of serviceshealth care services I'm focused
on home care.
We live and breathe this 24-7.
You know we, we participatewith the trade associations,
with a lot of other experts Inour segment, because we want to
drive great outcomes for ourclients.
We, you know, what we've seenover the years is we've built
(26:06):
about a 28 percent premium forthe clients that have Gone
through this process with us,and I think that gets into not
just living and breathing andimmersing ourselves in each
segment, but really it comesdown to the data that we've
collected over the last 25 yearsas a firm.
We've got information on over5,000 buyers, and so not only
(26:27):
what are they interested in?
To match up the right partiesfor a transaction, how have
people behaved, how they actedthrough a deal helps us, you
know, as we look at offers andas we work through the process,
to understand you know wheretheir next move may be.
But further to that point, we gothrough a very Defined process
(26:47):
that has been successful in thatpreparation, in that
presentation and also in Reallymanaging that whole process
through that whole timeline tomake sure that you know a buyer
is, you know, behaving how theyshould do that process but also
being reasonable in theirapproach, whether that be what
they're asking for or howthey're leveraging that due
diligence in the negotiation.
(27:09):
And again it's, it's bringing abear.
You know, 25 years as a farm,15 years in the industry, the
experience of what to expect andEvery deal has its ups and
downs and I can't stress thatenough For expectations for
folks as they get into this andwe've seen a lot of those things
and there's problem-solvingthat occurs throughout the
process that will help get to aClose and a fund.
(27:33):
But also try to maximize thatoutcome with you as we work
through that process.
Jennifer (27:38):
Well, chris, thanks so much for joining the podcast.
You've given us a bunch ofgreat information today.
Any final thoughts?
Kristopher Novak (27:44):
Yeah, first I want to say thank you to chap
for hosting myself and the BRAFgroup.
You know, final thoughts, look,as I mentioned, it's a it's a
very, very complicated, verydetailed process.
If there's any questionsrelated to some of the topics
that we hit on today or othersthat we didn't have time to get
to, we, we would love to connect.
You know, I'd say leave leavingthoughts is never forget.
(28:07):
As the seller, this is atwo-way street and there's some,
you know, there's someinformation that you'll want to
gather throughout that processto help maximize your outcome
too, and We'd, you know, we'd,love the opportunity to talk a
little bit more about that andand be support If, if, if, a
sale of your organization issomething that you are
considering.
Jennifer (28:26):
Thanks, chris, for being a partner with chap, and
thanks to all of you out therefor taking time out of your day
to plug into our podcast.
From me and the entire chapteam, stay safe and well and
thanks for all you do.
Hi there, I'm Jennifer Kennedy, the lead for Quality
at CHAP, and welcome to thismonth's CHAPcast.
Today I'm talking withChristopher Novak.
He's the managing director withthe BRAF group and what we're
going to talk about today iseverything healthcare, mergers
and acquisitions.
So welcome to the podcast,chris.
I'm glad to have you and, ifyou would, could you just share
(00:32):
a little bit about yourself withour listeners?
Kristopher Novak (00:35):
Yeah, thank you, jennifer.
I really appreciate the timetoday with CHAP.
So join the BRAF group inAugust of this year as managing
director solely focused on homecare.
We kind of define home care asMedicare, certified home health,
hospice, the Medicaid home andcommunity based services,
private duty nursing and alsopediatric care.
Prior to this I spent 14 yearswith the medecis, running their
(00:59):
M&A department for the lasteight years.
So great to stay with thissegment of healthcare services.
I think it's really importantwhat we do out in the
communities that we serve, youknow giving the aging population
, giving where we are withMedicare, medicare advantage.
You know there's a lot oftailwinds, despite some of the
(01:19):
recent hurdles that we've allbeen working through post
pandemic, and it's great to beon with CHAP.
I've got a long history with alot of folks at CHAP given the
medecis relationship, certainlyDan McPhilamy, but also Daniel
Stevens and Nathan DeGote aswell, and it's just great to be
here.
I should give a shout out toTeresa Harbour as well after all
(01:42):
these years spending timetogether at various conferences.
But you know, the one thing Ireally wanted folks to know
about our relationship with CHAPgoes back to my time with Dan
at a medecis.
And one thing about M&A that'ssort of one of the fun parts is
naming the projects, and we hada lot of great names over the
years, like Centurion andMonarch and Foxtrot.
(02:02):
Dan never got to name anythingand he was always quite jealous
about it.
So maybe Dan will have aproject code name for the
podcast when we wrap up.
Jennifer (02:13):
I like that project code name.
That's awesome.
So you know I'm a nurse, I'm atime nurse.
You know I've worked inhome-based care in most of my 38
years of nursing.
But you know that when we lookat the current landscape of
home-based care and it's notjust home-based care, it's sort
(02:35):
of like all healthcare, thewhole healthcare continuum you
know we know that we have a hugeinflux of baby boomers that are
going to be aging out over thenext decade, two decades, and
that's really going to shoot thedemand for home-based care,
particularly since we're seeinga push of home-based care and
(02:56):
pushing that out of the hospitalinto the community.
And you know there's going tobe a need to meet demand.
And I think that's where theBRAF group comes in to assist
providers in assessing what dowe do now?
Can we handle things?
What's the right strategic moveto make?
And I'm hoping that you cansort of give us a lay of the
(03:20):
land of what at least home-basedcare and that environment looks
like in that respect.
Kristopher Novak (03:26):
Yeah, you hit the nail on the head.
I mean, I think, just givenwhere the aging population is
going, where we're going aroundvalue-based care and the impact
that we know we can make withpatients and their families by
taking care of them at home,we've got incremental
technologies that are allowingus to do more and more at home.
I mean, there's a lot out therearound hospital at home
recently, certainly in our timeat a Metasys, investing and
(03:49):
Contessa but there's others outthere as well that are trying to
solve a lot of problems and atthe same time, we're staring in
the face of the nursing shortageand the labor issues that a lot
of folks have been having.
So I think the next few yearsare going to be very exciting.
There'll be some challenges,but those challenges always
(04:10):
provide great opportunities andI'm just looking forward to
seeing how differententrepreneurs, different
operators, different privateequity groups and other
investors tackle some of thebigger issues that we're going
to have.
We know that care based in thehome is going to help solve a
lot of those problems or justincreasing demand, and it's a
(04:35):
great time to be in the space,around the space, and part of
our approach with the BRAF groupis providing that consultative
approach.
Yes, we are mergers andacquisitions advisors.
Yes, we focus solely on thesell side to help our clients
achieve a great outcome.
But really, in a best casescenario, we're working for 90
days to 180 days, sometimes more, in order to really dig into a
(04:57):
business, with an owner, with anexecutive team, to understand
how they can optimize growth,how they can optimize the care
they're providing and thequality outcomes.
And look, we're certainly notexperts in delivering that care,
but we know the areas that aregoing to be important as buyers
(05:18):
come to the table, work througha transaction, and what they're
looking for, and so we thinkit's important to have that time
to prepare and get ready to go.
Jennifer (05:33):
So from my perspective , chris, given what your group
does, the timing of when someonedecides that they're going to
be in the position to make anacquisition is anybody's guess.
From my perspective ofcompliance, quality, clinical
(05:56):
I'm seeing a few variables thatcan push that timing, like
regulatory burden for one, ourmove in the continuum towards
value-based purchasing.
I've worked with a lot ofmedium to smaller home-based
care groups in my time and Idon't see that many of them are
(06:21):
going to be able to make it.
You know, essentially, or fromthe acquisition side, there
might be organizations poised tosay, okay, well, we're looking
to, you know, expand or grow ourorganization.
You know what is.
(06:42):
What are the timing pieces ofall of this?
When you look at assistingsomebody to say, is it the right
time to look to add to our orgor is it not the right time?
What are sort of the chesspieces of that?
Kristopher Novak (06:58):
Yeah, sure, and there can be a lot of
reasons and motivations forsomeone to say, hey, I think
it's the right time to sell, andwe hear a lot of different
things in that regard.
However, there's really threedecision spheres that you want
to try to overlap in order tomaximize your outcome through
that process.
One is where are you from agrowth perspective?
(07:20):
Two, what are your personalobjectives?
And three, what are the currentmarket dynamics that are out
there today, and so I'll kind ofbreak down each individually.
On the growth side, you know youprefer to sell kind of an
agoldy locks type spectrum,right?
You don't want to sell whengrowth is too hot and you also
(07:43):
don't want to sell when growthis cold, and so you're really
trying to find where you're inthat market growth profile or a
little bit above the marketgrowth profile.
If you're in that hyper growthscenario, you're just going to
get less credit as it relates topurchase price.
No buyer is going to assumethat they're going to continue
to grow in that hyper growthstage through their modeling
(08:06):
period, as they're thinkingabout applying value to your
organization, because they're,of course, looking at the
history of your organization,what you've done, but they're
really looking at the go forward, modeling out sort of the next
five years or so, and they'rerunning all the financial
analysis around discounted cashflows and getting to whatever
metrics that are driving theirinvestment decisions based on
(08:28):
that.
And so if you're growing, youknow 15%, 20% more than likely a
buyer is not going to give youcredit for that and so you'd
really rather wait a littlewhile, achieve that growth, and
we all know you know the law ofdiminishing returns.
It's hard to continue to growat elevated rates when you think
about continued market sharecapture and so continue to
(08:50):
capture that market share.
And it may be 12 or 24 monthsdown the road where then you are
in that sort of warm growthprofile and you've achieved that
growth and you're going to getcredit for that growth as it
relates to your purchase price.
And then certainly look if youprefer not to sell if you're
below that market growth.
However, you know there may beother stipulations that drive
you to sell.
(09:10):
Anyways, I think ultimately,you're probably looking at a
slightly discounted valuationbased on the fact that you know
a buyer is going to assume thatthere's some level of investment
that they have to make in orderto get back to that at least
market growth potential.
Jennifer (09:25):
You know what, as you're talking, I was thinking
how does all this impact access?
So let me give you an example.
You have organizations thatmight be acquiring smaller
medium organizations in ruralcare I'm thinking rural home
based care Right?
(09:45):
So let's say you know a mediumorganization that provides that
rural based care is acquired bya larger organization.
Does the access Remain?
Is it impacted?
What happens there?
I'm in that.
That's that's sort of acritical piece from from my
perspective as a nurse that Ithink about.
Kristopher Novak (10:04):
Sure, no, I think.
Look, I think Byers,particularly in our segment,
right speaking to home care,very specifically here it's an
important outreach into theserural communities.
Sometimes, you know, it's, it'squite a bit to travel to get to
some of the you know, facilitybased, facility based providers,
(10:26):
and so you know I, there arequite a few investors that are
looking into the secondary,tertiary type rural markets.
That's their strategy.
They believe there'sopportunity, you know, from an
optimization perspective, from adifferentiation perspective on
quality or otherwise.
So there's definitely interest,I think, no matter where an
(10:46):
acquires buying in our space, Ithink what folks have to realize
, because everybody's alwaysconcerned, what's gonna happen
to my people, what's gonna haveto my job?
Right, energies is, you know,sort of the term that gets
thrown around a lot, what?
What I think a lot of folksMaybe don't understand is the
court.
Our businesses are based on thegreat work that our clinicians
(11:07):
do out in the field and so itwould be very short sided for a
buyer in our segment to To wantto limit access, to be really
cost controlled within the field.
It's really, you know, ifthere's cost control thoughts
being gone on in the field.
It's really more or less.
How do we optimize the staffand you know how can we grow
market share in order to makethem, you know the most of the
(11:30):
clinicians that we currentlyemploy, which ultimately will
grow the business and be asuccessful you know investment
thesis.
Jennifer (11:38):
Yeah, that's good to hear, you know.
I think I think that might be ageneral concern when clinicians
are looking at acquisitions.
Is, you know, is access goingto decrease and Rural health is
already hard to do.
You know what I mean.
And I'm taking away anorganization that provides that
(12:00):
service, provides that touch Inthe things that folks way out in
and I've driven way out in mytime that they wouldn't lose
that.
I think that's important.
But so thanks for Sort ofexplain that piece of it now.
I have known I've never beenthrough sort of an acquisition
(12:21):
when I was at an organizationmyself, but I've known friends
that say, oh my gosh, this ispainful, right.
So you know, I know that ittakes a.
There's lots of strategy andthere's preparation that goes
into it.
Do you, do you and your grouptry to Level, set the pain level
(12:43):
when you're going through theprocess?
Kristopher Novak (12:46):
we do.
I think it comes understanding.
You know probably what theexpectation should be to work
through the whole process.
I think we always just implorefolks whether you're our clients
, are you're not our clients, isyou know?
Look, there's a strategy thatgoes into this and there is
tactical preparation that Needsto be completed in order to
(13:07):
alleviate some of that pain.
Look, every transaction comesdown to price.
It comes down to the terms ofthe deal and it comes down to
certainty of close, and so wespend our time Our clients on
the front end, really advisingthem on the ways that they can
prepare.
I think you have to know yourstrategy to prepare for anything
Transaction is exactly the same.
(13:29):
So a really good understandingof your strategy is important in
order to set set what thosepreparations need to be
strategically, you know.
I think you have to have anunderstanding of what those
personal objectives are.
Right.
Are you doing this because youwant to retire is a lot
different than I'm doing thisbecause I want to take some risk
off the table, but I want tocontinue to run the business and
(13:50):
I need someone to, you know, tocome in as a financial sponsor
and help me continue to investin the business moving forward.
There may be other familyconsiderations, particularly if
other family members areinvolved in the business, or it
could just be a commitment toyour staff, a commitment to the
community and the legacy thatyou leave behind.
I mean there could be a varietyof Of objectives and once you
(14:14):
really have a good understandingof your personal objectives,
working with an advisor likecraft group, what we can do is
help you build that strategy,help you define what the process
is going to look like and giveyou an understanding and
expectation for what the processis going to be.
We're going to help you tellyour story again.
Some of those just in theobjectives that I listed, which
are just a handful of examples,you know, could really warrant
(14:39):
different stories to be told asyou're preparing the materials
to go market your organization.
And then also, we're going towant to understand and make sure
that we are getting thefeedback and or commitments up
front from buyers as they arepresenting offers to you, so
that you can understand asyou're vetting those offers do
they?
Do they really meet myobjectives?
(15:00):
And that'll help you weedthrough who's the who's the
right partner, who is it?
Is an outright sale?
Is it a private equity group.
Is it another investor so thatyou can make a full decision?
I think you know, when we thinkabout selling your organization,
it's likely one of, if not themost meaningful financial impact
(15:21):
that you'll see in your lifeand you'd prefer to do it once
and not have something stall outand then have to go back to the
drawing board and try againlater.
You know I liken it to, youknow, selling your house selling
you know you more than likelywill work with a real estate
agent to do that.
This is a much more complexbusiness transaction than
(15:44):
selling your house.
I think something to the effectof like 90% of home sales are
actually done through realestate agents, even with, you
know, for sale by owner andeverything else.
Most folks work with theirfinancial advisor as they're
planning out their future andyou know we kind of wear a
number of hats to the processand it is in order to help, you
(16:06):
know, prepare and then alsoexecute on that plan moving
forward.
And part of what we do on thefront end is helping align with
some of the other advisors thatwe highly, highly recommend that
folks bring in, and bring inearly, you know.
I think you know, outside ofthe advisor that can help
develop the plan, push throughthat process, which we'll talk
(16:26):
about in a little bit moredetail on the podcast.
You know, always recommend youknow that you really get some
financial advisors that workthrough transactions on a day in
and day out basis we recommendthat you do a compliance audit
on the front end.
You know survey risk is a lotdifferent than oh yeah.
Repayment risk and that's youknow buyers are delving in more
(16:47):
and more into due diligence.
You need a tax advisor just soyou understand structurally,
with the different dealstructures that are out there,
what it's going to mean for youand what your actual take home
will be.
And then health caretransaction counsel.
I'm not, you know, I'm sure alot of folks have lawyers that
they work with day in and dayout, but this is a very
specialized business transaction.
(17:09):
We are a highly regulatedindustry and so finding counsel
that has experience not only ontransactions but with health
care will help you understandwhat's sort of market terms or
normal terms as you work throughthe negotiation of about a
hundred page long document thatbecomes a definitive agreement
(17:31):
and ultimately is that bindingagreement which leads to the
sale of your organization.
So just a few areas that we dodo that really lay the
foundation, and for us it'smaximizing your ability to tell
the story, to drive to theoutcome and the objectives that
you set forth at the beginning.
But also, you know I can'tstress enough that it provides
(17:54):
you that visibility.
No business is perfect, nobuyers expecting your business
to be perfect.
There's pros and cons havingsuccessfully due diligence to
over 50 deals out of Metasys.
That means we probably you knowwe're very serious and probably
triple that amount oftransactions.
I did not succeed for onereason or another, and that
(18:18):
preparation allows you tounderstand the pros and cons.
It allows you to defend Some ofthe areas of weakness that you
have and it also allows you toelevate and highlight where
you're very strong.
It gets you organized so thatyou can move through this
process as quickly as you canand so that it's less of a
distraction, because the buyeris expecting you to operate your
(18:39):
business through this timeperiod and they're going to want
to get intermittent updatesaround your performance, and so
there's a there's a lot ofreasons why we urge people very
strongly to spend the time onthe front end, to get prepared,
to be thoughtful, and really itelevates your opportunity to get
a really great outcome at theend of the day.
Jennifer (19:01):
So, Chris, I know there's a lot of variables that
would affect the timeline ofwhen the process.
You know how quickly theprocess would occur, but what
would you say would be like anaverage of an organization going
through that process?
Kristopher Novak (19:15):
Yeah, right, on average is about six months.
And that's a little bit ofpreparation.
That's marketing your businessto find out who's interested and
what those offers look like.
It's betting those offers,picking a buyer at that point,
probably providing themexclusivity.
And then you get into, you know, the very detailed due
diligence process which you'realso going to be kind of in
parallel negotiating thepurchase agreement at that time,
(19:38):
ultimately signing and thenworking through whatever
conditions to close, likeregulatory approvals, delivering
consents on payer contracts,leases, and ultimately a close
and fund.
So ultimately that's about sixmonths.
It may be a little bit shorterand it certainly can stretch out
(19:58):
if, if other things pop up inthe midst of that process and
again, in this highly regulatedbusiness we know that that can
occur and sometimes you have towork through things within that
diligence period that you didn'tknow on the front end and you
couldn't have planned for, andso you know it could take.
It could take longer than sixmonths, but on average for the
(20:20):
BRAF group it's right at 181days, when we look at our data
over the last several years,from ultimately making the
decision, signing the engagementwith us and then getting to a
close.
Jennifer (20:29):
So you could say things that pop up, would you
qualify those as the pitfallsduring the process from you know
no detail, if you will lookingat dog analogy.
Kristopher Novak (20:40):
Correct, yes, and again that's why, we urge
some of that preparation right,so that you do know.
I mean, I think, look what wehave seen in the last several
years, you know, and some ofthis, I think, is market driven.
You know the market has beenslowing down since 2021, at the
peak of activity, at the peak ofvalue, and so you know buyers
(21:05):
have a little bit of that buyeraware mentality and you know
less deals are getting done andso they're very much digging in.
You know very, very, very deep,and so you know I'd say two
main pitfalls that we typicallysee are going to be I mentioned
survey risk for versus repaymentrisk, and so the buyer is going
to do the chart review andthat's why we urge folks to at
(21:27):
least do a a a a review.
Just do a small random sampleof, say, 30 charts.
Maybe it's more if it's a largeorganization, just so you
understand.
And it's it's.
It's not around conditionsnecessarily of participation,
but they're checking everythingin those technical elements of
the documentation, theeligibility, how does the coding
look?
You know they're under, theywant to understand that you're
(21:49):
meeting those conditions ofpayment and they're sampling
probably about 10% of yourpatients that are recent and
have built, and they're alsogoing to sample some historical
patients most likely, and sothey're really digging in and
they're not necessarilyexpecting a zero percent error
rate.
We all know how complicated,you know, the technical elements
(22:11):
are across home health andhospice.
We know that one nurse may, youknow, see continued decline
differently in hospice thananother nurse may see or a
medical director may see or anauditor may see.
But they're trying to get asense of you know how are you
doing as it relates to all ofthose various pieces that do
impact conditions of payment.
(22:31):
And they're doing that becauseone of the main things that
they're buying is your Medicareprovider number.
And so, regardless of structure, stock deal versus asset deal
which we won't go into in theamount of time we have today,
but one of I mean they have allof that liability because they
own that provider number,medicare.
If there is a, an audit, asmirk audit, you know you pick
(22:53):
or something.
They don't care who owned thebusiness two years ago.
They're going to the currentowner of the Medicare number and
that's who they're seeking arepayment from.
And so they can never they cannever rid themselves through the
deal of that liability,potential liability, and that'll
get into some negotiation onthe definitive agreement on.
You know the terms around whatyou are standing behind and how
(23:15):
you limit that liability, butnonetheless, we see, oftentimes
Folks have great quality.
You know they've done great intheir surveys over the years.
They feel like they've.
You know they're they're doingwonderful and what they don't
realize is maybe they didn'tupdate a form.
You know, the hospice electionform had some changes in late
2020 and and I can tell you fromexperience that we would be
(23:39):
looking at a two or threepercent eligibility error rate
and we'd be, you know,salivating as the buyer and then
Someone would tell us but theydidn't update their form and
there's a hundred percenttechnical error rate.
So if there is a you pick thatcomes in, you, yeah, it would
likely extrapolate, and then andthen you're looking at a
Scenario where we can'tstructure protection Significant
(24:00):
enough to get us comfortableand it's total oversight.
It's not fraud or abuse, it'sjust oversight around updating
that form.
So that you know, I thinkthat's where we saw the most
pitfalls came in that clinicalreview.
Certainly there's financialpitfalls and that's why we urge
doing some diagnostics aroundyour financials on the front end
, because they're gonna dig deepand you know if you're on cash
(24:24):
base accounting.
Switching over to a cruel, thebuyer is gonna have some
advantage as they look throughyour numbers and try to shift
that advantage to themselves.
As they do talk about we valuethis on X amount of EBITDA or a
revenue multiple To try to putthat in their favor.
And so a couple of areas.
There's a lot.
I mean again highly regulatedbusiness.
(24:44):
Jennifer, you guys do a ton ofwork with folks.
We do in these areas and youknow the complexity and you know
the areas that you can you know, unintentionally run into
issues.
Jennifer (24:57):
Yeah, absolutely.
I mean, it's a Changinglandscape, you know from, from
not only year to year, it couldbe from months to months,
depending on what's happening.
All right, so I have one morequestion for you, chris what's
the quality proposition Wouldyou say in and what you do, how
you help this whole process ofmergers and acquisitions?
Kristopher Novak (25:20):
Sure, I think what we bring to the table is
the experience and the expertise.
Having worked through 400roughly 400 successful
transactions and health careservices.
About 150 of those are in homehealth and hospice.
I think you know, for us, mostof our managing directors have
prior experiences buyers in thissegment as well.
We take a very hyper focus, asI mentioned, so I'm not spread
(25:45):
across a variety of serviceshealth care services I'm focused
on home care.
We live and breathe this 24-7.
You know we, we participatewith the trade associations,
with a lot of other experts Inour segment, because we want to
drive great outcomes for ourclients.
We, you know, what we've seenover the years is we've built
(26:06):
about a 28 percent premium forthe clients that have Gone
through this process with us,and I think that gets into not
just living and breathing andimmersing ourselves in each
segment, but really it comesdown to the data that we've
collected over the last 25 yearsas a firm.
We've got information on over5,000 buyers, and so not only
(26:27):
what are they interested in?
To match up the right partiesfor a transaction, how have
people behaved, how they actedthrough a deal helps us, you
know, as we look at offers andas we work through the process,
to understand you know wheretheir next move may be.
But further to that point, we gothrough a very Defined process
(26:47):
that has been successful in thatpreparation, in that
presentation and also in Reallymanaging that whole process
through that whole timeline tomake sure that you know a buyer
is, you know, behaving how theyshould do that process but also
being reasonable in theirapproach, whether that be what
they're asking for or howthey're leveraging that due
diligence in the negotiation.
(27:09):
And again it's, it's bringing abear.
You know, 25 years as a farm,15 years in the industry, the
experience of what to expect andEvery deal has its ups and
downs and I can't stress thatenough For expectations for
folks as they get into this andwe've seen a lot of those things
and there's problem-solvingthat occurs throughout the
process that will help get to aClose and a fund.
(27:33):
But also try to maximize thatoutcome with you as we work
through that process.
Jennifer (27:38):
Well, chris, thanks so much for joining the podcast.
You've given us a bunch ofgreat information today.
Any final thoughts?
Kristopher Novak (27:44):
Yeah, first I want to say thank you to chap
for hosting myself and the BRAFgroup.
You know, final thoughts, look,as I mentioned, it's a it's a
very, very complicated, verydetailed process.
If there's any questionsrelated to some of the topics
that we hit on today or othersthat we didn't have time to get
to, we, we would love to connect.
You know, I'd say leave leavingthoughts is never forget.
(28:07):
As the seller, this is atwo-way street and there's some,
you know, there's someinformation that you'll want to
gather throughout that processto help maximize your outcome
too, and We'd, you know, we'd,love the opportunity to talk a
little bit more about that andand be support If, if, if, a
sale of your organization issomething that you are
considering.
Jennifer (28:26):
Thanks, chris, for being a partner with chap, and
thanks to all of you out therefor taking time out of your day
to plug into our podcast.
From me and the entire chapteam, stay safe and well and
thanks for all you do.
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