Decoding Mergers and Acquisitions with The Braff Group's Kristopher Novak

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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Transcript

Jennifer: 0:09

Hi there, I'm Jennifer Kennedy, the lead for Quality at CHAP, and welcome to this month's CHAPcast. Today I'm talking with Christopher Novak. He's the managing director with the BRAF group and what we're going to talk about today is everything healthcare, mergers and acquisitions. So welcome to the podcast, chris. I'm glad to have you and, if you would, could you just share a little bit about yourself with our listeners?

Kristopher Novak: 0:35

Yeah, thank you, jennifer. I really appreciate the time today with CHAP. So join the BRAF group in August of this year as managing director solely focused on home care. We kind of define home care as Medicare, certified home health, hospice, the Medicaid home and community based services, private duty nursing and also pediatric care. Prior to this I spent 14 years with the medecis, running their M&A department for the last eight years. So great to stay with this segment of healthcare services.

Kristopher Novak: 1:05

I think it's really important what we do out in the communities that we serve, you know giving the aging population, giving where we are with Medicare, medicare advantage.

Kristopher Novak: 1:17

You know there's a lot of tailwinds, despite some of the recent hurdles that we've all been working through post pandemic, and it's great to be on with CHAP. I've got a long history with a lot of folks at CHAP given the medecis relationship, certainly Dan McPhilamy, but also Daniel Stevens and Nathan DeGote as well, and it's just great to be here. I should give a shout out to Teresa Harbour as well after all these years spending time together at various conferences. But you know, the one thing I really wanted folks to know about our relationship with CHAP goes back to my time with Dan at a medecis. And one thing about M&A that's sort of one of the fun parts is naming the projects, and we had a lot of great names over the years, like Centurion and Monarch and Foxtrot. Dan never got to name anything and he was always quite jealous about it. So maybe Dan will have a project code name for the podcast when we wrap up.

Jennifer: 2:13

I like that project code name. That's awesome. So you know I'm a nurse, I'm a time nurse. You know I've worked in home-based care in most of my 38 years of nursing. But you know that when we look at the current landscape of home-based care and it's not just home-based care, it's sort of like all healthcare, the whole healthcare continuum you know we know that we have a huge influx of baby boomers that are going to be aging out over the next decade, two decades, and that's really going to shoot the demand for home-based care, particularly since we're seeing a push of home-based care and pushing that out of the hospital into the community. And you know there's going to be a need to meet demand. And I think that's where the BRAF group comes in to assist providers in assessing what do we do now? Can we handle things? What's the right strategic move to make? And I'm hoping that you can sort of give us a lay of the land of what at least home-based care and that environment looks like in that respect.

Kristopher Novak: 3:26

Yeah, you hit the nail on the head. I mean, I think, just given where the aging population is going, where we're going around value-based care and the impact that we know we can make with patients and their families by taking care of them at home, we've got incremental technologies that are allowing us to do more and more at home. I mean, there's a lot out there around hospital at home recently, certainly in our time at a Metasys, investing and Contessa but there's others out there as well that are trying to solve a lot of problems and at the same time, we're staring in the face of the nursing shortage and the labor issues that a lot of folks have been having. So I think the next few years are going to be very exciting. There'll be some challenges, but those challenges always provide great opportunities and I'm just looking forward to seeing how different entrepreneurs, different operators, different private equity groups and other investors tackle some of the bigger issues that we're going to have.

Kristopher Novak: 4:24

We know that care based in the home is going to help solve a lot of those problems or just increasing demand, and it's a great time to be in the space, around the space, and part of our approach with the BRAF group is providing that consultative approach. Yes, we are mergers and acquisitions advisors. Yes, we focus solely on the sell side to help our clients achieve a great outcome. But really, in a best case scenario, we're working for 90 days to 180 days, sometimes more, in order to really dig into a business, with an owner, with an executive team, to understand how they can optimize growth, how they can optimize the care they're providing and the quality outcomes. And look, we're certainly not experts in delivering that care, but we know the areas that are going to be important as buyers come to the table, work through a transaction, and what they're looking for, and so we think it's important to have that time to prepare and get ready to go.

Jennifer: 5:33

So from my perspective, chris, given what your group does, the timing of when someone decides that they're going to be in the position to make an acquisition is anybody's guess. From my perspective of compliance, quality, clinical I'm seeing a few variables that can push that timing, like regulatory burden for one, our move in the continuum towards value-based purchasing. I've worked with a lot of medium to smaller home-based care groups in my time and I don't see that many of them are going to be able to make it. You know, essentially, or from the acquisition side, there might be organizations poised to say, okay, well, we're looking to, you know, expand or grow our organization. You know what is. What are the timing pieces of all of this? When you look at assisting somebody to say, is it the right time to look to add to our org or is it not the right time? What are sort of the chess pieces of that?

Kristopher Novak: 6:58

Yeah, sure, and there can be a lot of reasons and motivations for someone to say, hey, I think it's the right time to sell, and we hear a lot of different things in that regard. However, there's really three decision spheres that you want to try to overlap in order to maximize your outcome through that process. One is where are you from a growth perspective? Two, what are your personal objectives? And three, what are the current market dynamics that are out there today, and so I'll kind of break down each individually.

Kristopher Novak: 7:32

On the growth side, you know you prefer to sell kind of an agoldy locks type spectrum, right? You don't want to sell when growth is too hot and you also don't want to sell when growth is cold, and so you're really trying to find where you're in that market growth profile or a little bit above the market growth profile. If you're in that hyper growth scenario, you're just going to get less credit as it relates to purchase price. No buyer is going to assume that they're going to continue to grow in that hyper growth stage through their modeling period, as they're thinking about 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're running all the financial analysis around discounted cash flows and getting to whatever metrics that are driving their investment decisions based on that.

Kristopher Novak: 8:28

And so if you're growing, you know 15%, 20% more than likely a buyer is not going to give you credit for that and so you'd really rather wait a little while, achieve that growth, and we all know you know the law of diminishing returns. It's hard to continue to grow at elevated rates when you think about continued market share capture and so continue to capture that market share. And it may be 12 or 24 months down the road where then you are in that sort of warm growth profile and you've achieved that growth and you're going to get credit for that growth as it relates to your purchase price. And then certainly look if you prefer not to sell if you're below that market growth. However, you know there may be other stipulations that drive you to sell. Anyways, I think ultimately, you're probably looking at a slightly discounted valuation based on the fact that you know a buyer is going to assume that there's some level of investment that they have to make in order to get back to that at least market growth potential.

Jennifer: 9:25

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 that might be acquiring smaller medium organizations in rural care I'm thinking rural home based care Right? So let's say you know a medium organization that provides that rural based care is acquired by a larger organization. Does the access Remain? Is it impacted? What happens there? I'm in that. That's that's sort of a critical piece from from my perspective as a nurse that I think 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 these rural communities. Sometimes, you know, it's, it's quite a bit to travel to get to some of the you know, facility based, facility based providers, and so you know I, there are quite a few investors that are looking into the secondary, tertiary type rural markets. That's their strategy. They believe there's opportunity, you know, from an optimization perspective, from a differentiation perspective on quality or otherwise. So there's definitely interest, I think, no matter where an acquires buying in our space, I think what folks have to realize, because everybody's always concerned, what's gonna happen to my people, what's gonna have to my job? Right, energies is, you know, sort of the term that gets thrown around a lot, what?

Kristopher Novak: 10:59

What I think a lot of folks Maybe don't understand is the court. Our businesses are based on the great work that our clinicians do out in the field and so it would be very short sided for a buyer in our segment to To want to limit access, to be really cost controlled within the field. It's really, you know, if there's cost control thoughts being gone on in the field. It's really more or less. How do we optimize the staff and you know how can we grow market share in order to make them, you know the most of the clinicians that we currently employ, which ultimately will grow the business and be a successful you know investment thesis.

Jennifer: 11:38

Yeah, that's good to hear, you know. I think I think that might be a general concern when clinicians are looking at acquisitions. Is, you know, is access going to decrease and Rural health is already hard to do. You know what I mean. And I'm taking away an organization that provides that service, provides that touch In the things that folks way out in and I've driven way out in my time that they wouldn't lose that. I think that's important. But so thanks for Sort of explain that piece of it now. I have known I've never been through sort of an acquisition when I was at an organization myself, but I've known friends that say, oh my gosh, this is painful, right. So you know, I know that it takes a. There's lots of strategy and there's preparation that goes into it. Do you, do you and your group try to Level, set the pain level when you're going through the process?

Kristopher Novak: 12:46

we do. I think it comes understanding. You know probably what the expectation should be to work through the whole process. I think we always just implore folks whether you're our clients, are you're not our clients, is you know? Look, there's a strategy that goes into this and there is tactical preparation that Needs to be completed in order to alleviate some of that pain. Look, every transaction comes down to price. It comes down to the terms of the deal and it comes down to certainty of close, and so we spend our time Our clients on the front end, really advising them on the ways that they can prepare.

Kristopher Novak: 13:23

I think you have to know your strategy to prepare for anything Transaction is exactly the same. So a really good understanding of your strategy is important in order to set set what those preparations need to be strategically, you know. I think you have to have an understanding of what those personal objectives are. Right. Are you doing this because you want to retire is a lot different than I'm doing this because I want to take some risk off the table, but I want to continue to run the business and I need someone to, you know, to come in as a financial sponsor and help me continue to invest in the business moving forward. There may be other family considerations, particularly if other family members are involved in the business, or it could just be a commitment to your staff, a commitment to the community and the legacy that you leave behind. I mean there could be a variety of Of objectives and once you really have a good understanding of your personal objectives, working with an advisor like craft group, what we can do is help you build that strategy, help you define what the process is going to look like and give you an understanding and expectation for what the process is going to be. We're going to help you tell your story again. Some of those just in the objectives that I listed, which are just a handful of examples, you know, could really warrant different stories to be told as you're preparing the materials to go market your organization. And then also, we're going to want to understand and make sure that we are getting the feedback and or commitments up front from buyers as they are presenting offers to you, so that you can understand as you're vetting those offers do they? Do they really meet my objectives? And that'll help you weed through 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 that you can make a full decision?

Kristopher Novak: 15:11

I think you know, when we think about selling your organization, it's likely one of, if not the most meaningful financial impact that you'll see in your life and you'd prefer to do it once and not have something stall out and then have to go back to the drawing board and try again later. You know I liken it to, you know, selling your house selling you know you more than likely will work with a real estate agent to do that. This is a much more complex business transaction than selling your house. I think something to the effect of like 90% of home sales are actually done through real estate agents, even with, you know, for sale by owner and everything else.

Kristopher Novak: 15:55

Most folks work with their financial advisor as they're planning out their future and you know we kind of wear a number of hats to the process and it is in order to help, you know, prepare and then also execute on that plan moving forward. And part of what we do on the front end is helping align with some of the other advisors that we highly, highly recommend that folks bring in, and bring in early, you know. I think you know, outside of the advisor that can help develop the plan, push through that process, which we'll talk about in a little bit more detail on the podcast. You know, always recommend you know that you really get some financial advisors that work through transactions on a day in and day out basis we recommend that you do a compliance audit on the front end. You know survey risk is a lot different than oh yeah.

Kristopher Novak: 16:44

Repayment risk and that's you know buyers are delving in more and more into due diligence. You need a tax advisor just so you understand structurally, with the different deal structures that are out there, what it's going to mean for you and what your actual take home will be. And then health care transaction counsel. I'm not, you know, I'm sure a lot of folks have lawyers that they work with day in and day out, but this is a very specialized business transaction. We are a highly regulated industry and so finding counsel that has experience not only on transactions but with health care will help you understand what's sort of market terms or normal terms as you work through the negotiation of about a hundred page long document that becomes a definitive agreement and ultimately is that binding agreement which leads to the sale of your organization. So just a few areas that we do do that really lay the foundation, and for us it's maximizing your ability to tell the story, to drive to the outcome and the objectives that you set forth at the beginning. But also, you know I can't stress enough that it provides you that visibility.

Kristopher Novak: 17:56

No business is perfect, no buyers expecting your business to be perfect. There's pros and cons having successfully due diligence to over 50 deals out of Metasys. That means we probably you know we're very serious and probably triple that amount of transactions. I did not succeed for one reason or another, and that preparation allows you to understand the pros and cons. It allows you to defend Some of the areas of weakness that you have and it also allows you to elevate and highlight where you're very strong. It gets you organized so that you can move through this process as quickly as you can and so that it's less of a distraction, because the buyer is expecting you to operate your business through this time period and they're going to want to get intermittent updates around your performance, and so there's a there's a lot of reasons why we urge people very strongly to spend the time on the front end, to get prepared, to be thoughtful, and really it elevates your opportunity to get a really great outcome at the end of the day.

Jennifer: 19:01

So, Chris, I know there's a lot of variables that would affect the timeline of when the process. You know how quickly the process would occur, but what would you say would be like an average of an organization going through that process?

Kristopher Novak: 19:15

Yeah, right, on average is about six months.

Kristopher Novak: 19:17

And that's a little bit of preparation.

Kristopher Novak: 19:19

That's marketing your business to find out who's interested and what those offers look like.

Kristopher Novak: 19:23

It's betting those offers, picking a buyer at that point, probably providing them exclusivity. And then you get into, you know, the very detailed due diligence process which you're also going to be kind of in parallel negotiating the purchase agreement at that time, ultimately signing and then working through whatever conditions to close, like regulatory approvals, delivering consents on payer contracts, leases, and ultimately a close and fund. So ultimately that's about six months. It may be a little bit shorter and it certainly can stretch out if, if other things pop up in the midst of that process and again, in this highly regulated business we know that that can occur and sometimes you have to work through things within that diligence period that you didn't know on the front end and you couldn't have planned for, and so you know it could take. It could take longer than six months, but on average for the BRAF group it's right at 181 days, when we look at our data over the last several years, from ultimately making the decision, signing the engagement with us and then getting to a close.

Jennifer: 20:29

So you could say things that pop up, would you qualify those as the pitfalls during the process from you know no detail, if you will looking at 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 we have seen in the last several years, you know, and some of this, I think, is market driven. You know the market has been slowing down since 2021, at the peak of activity, at the peak of value, and so you know buyers have a little bit of that buyer aware mentality and you know less deals are getting done and so they're very much digging in. You know very, very, very deep, and so you know I'd say two main pitfalls that we typically see are going to be I mentioned survey risk for versus repayment risk, and so the buyer is going to do the chart review and that's why we urge folks to at least do a a a a review. Just do a small random sample of, say, 30 charts. Maybe it's more if it's a large organization, just so you understand. And it's it's. It's not around conditions necessarily of participation, but they're checking everything in those technical elements of the documentation, the eligibility, how does the coding look? You know they're under, they want to understand that you're meeting those conditions of payment and they're sampling probably about 10% of your patients that are recent and have built, and they're also going to sample some historical patients most likely, and so they're really digging in and they're not necessarily expecting a zero percent error rate. We all know how complicated, you know, the technical elements are across home health and hospice. We know that one nurse may, you know, see continued decline differently in hospice than another nurse may see or a medical director may see or an auditor may see. But they're trying to get a sense of you know how are you doing as it relates to all of those various pieces that do impact conditions of payment. And they're doing that because one of the main things that they're buying is your Medicare provider number. And so, regardless of structure, stock deal versus asset deal which we won't go into in the amount of time we have today, but one of I mean they have all of that liability because they own that provider number, medicare. If there is a, an audit, a smirk audit, you know you pick or something. They don't care who owned the business two years ago. They're going to the current owner of the Medicare number and that's who they're seeking a repayment from. And so they can never they can never rid themselves through the deal of that liability, potential liability, and that'll get into some negotiation on the definitive agreement on.

Kristopher Novak: 23:12

You know the terms around what you are standing behind and how you limit that liability, but nonetheless, we see, oftentimes Folks have great quality. You know they've done great in their surveys over the years. They feel like they've. You know they're they're doing wonderful and what they don't realize is maybe they didn't update a form. You know, the hospice election form had some changes in late 2020 and and I can tell you from experience that we would be looking at a two or three percent eligibility error rate and we'd be, you know, salivating as the buyer and then Someone would tell us but they didn't update their form and there's a hundred percent technical error rate.

Kristopher Novak: 23:50

So if there is a you pick that comes in, you, yeah, it would likely extrapolate, and then and then you're looking at a Scenario where we can't structure protection Significant enough to get us comfortable and it's total oversight. It's not fraud or abuse, it's just oversight around updating that form. So that you know, I think that's where we saw the most pitfalls came in that clinical review. Certainly there's financial pitfalls and that's why we urge doing some diagnostics around your financials on the front end, because they're gonna dig deep and you know if you're on cash base accounting. Switching over to a cruel, the buyer is gonna have some advantage as they look through your numbers and try to shift that advantage to themselves. As they do talk about we value this on X amount of EBITDA or a revenue multiple To try to put that in their favor. And so a couple of areas. There's a lot. I mean again highly regulated business. Jennifer, you guys do a ton of work with folks.

Kristopher Novak: 24:48

We do in these areas and you know 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 Changing landscape, you know from, from not only year to year, it could be from months to months, depending on what's happening. All right, so I have one more question for you, chris what's the quality proposition Would you say in and what you do, how you help this whole process of mergers and acquisitions?

Kristopher Novak: 25:20

Sure, I think what we bring to the table is the experience and the expertise. Having worked through 400 roughly 400 successful transactions and health care services. About 150 of those are in home health and hospice. I think you know, for us, most of our managing directors have prior experiences buyers in this segment as well. We take a very hyper focus, as I mentioned, so I'm not spread across a variety of services health care services I'm focused on home care. We live and breathe this 24-7. You know we, we participate with the trade associations, with a lot of other experts In our segment, because we want to drive great outcomes for our clients.

Kristopher Novak: 26:03

We, you know, what we've seen over the years is we've built about a 28 percent premium for the clients that have Gone through this process with us, and I think that gets into not just living and breathing and immersing ourselves in each segment, but really it comes down to the data that we've collected over the last 25 years as a firm.

Kristopher Novak: 26:24

We've got information on over 5,000 buyers, and so not only what are they interested in?

Kristopher Novak: 26:28

To match up the right parties for a transaction, how have people behaved, how they acted through a deal helps us, you know, as we look at offers and as we work through the process, to understand you know where their next move may be.

Kristopher Novak: 26:43

But further to that point, we go through a very Defined process that has been successful in that preparation, in that presentation and also in Really managing that whole process through that whole timeline to make sure that you know a buyer is, you know, behaving how they should do that process but also being reasonable in their approach, whether that be what they're asking for or how they're leveraging that due diligence in the negotiation. And again it's, it's bringing a bear. You know, 25 years as a farm, 15 years in the industry, the experience of what to expect and Every deal has its ups and downs and I can't stress that enough For expectations for folks as they get into this and we've seen a lot of those things and there's problem-solving that occurs throughout the process that will help get to a Close and a fund. But also try to maximize that outcome 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 of great information today. Any final thoughts?

Kristopher Novak: 27:44

Yeah, first I want to say thank you to chap for hosting myself and the BRAF group. You know, final thoughts, look, as I mentioned, it's a it's a very, very complicated, very detailed process. If there's any questions related to some of the topics that we hit on today or others that we didn't have time to get to, we, we would love to connect. You know, I'd say leave leaving thoughts is never forget. As the seller, this is a two-way street and there's some, you know, there's some information that you'll want to gather throughout that process to help maximize your outcome too, and We'd, you know, we'd, love the opportunity to talk a little bit more about that and and be support If, if, if, a sale of your organization is something that you are considering.

Jennifer: 28:26

Thanks, chris, for being a partner with chap, and thanks to all of you out there for taking time out of your day to plug into our podcast. From me and the entire chap team, stay safe and well and thanks for all you do.