M&A in Healthcare with John Palusci

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I'm Kisam Patel and you're listening to M and A Science, where we talk.

With deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals. Foreign welcome to the M and A Science Podcast. This podcast is part of a mission to rethink how M and A is done. The old school seller led approach? It's dead. Buyer led M and A is all about strategy, alignment and efficiency, putting value creation at the center of every deal. And let's be real, it's not just about closing the deal, it's about making it successful. We uncover what truly works at M and A by learning directly from the best. I'm your host Kisam Patel, CEO and Founder at Deal Room and Chief Scientist here at M and A Science. I'm joined by John Pelusi, recent strategic Finance and M and A leader at Bayada Home Healthcare, a mission driven nonprofit organization delivering home health, hospice and personal care services across the US and globally. John played a central role in scaling Bayada's acquisition strategy, building a repeatable M and A engine tailored to the complexities of a highly regulated People first healthcare environment. He's worked across the full deal life cycle, from sourcing and diligence to integration, with a sharp focus on long term value creation and mission alignment. Today we're digging into how he helped shape a buyer led M and A model inside a nonprofit structure, how to evaluate deals as a permanent owner, and what makes or breaks a healthcare acquisition. John, how you doing?

Great. Good to be here.

Thanks for coming to our Deal Room office in Boston.

Congrats Yeah, looks great.

Can we kick things off a little bit about your background?

Recent leader at Bayada focusing on M and A. Probably a non traditional nonlinear M and A background. Ton of people who start in M and A, but I definitely didn't went to school for chemistry of all things and by the end of that had a real high tolerance for pain for the details and really complex things and wanted to do anything but chemistry by the end. But then from there found Bayada really in an IT implementation gig. It was their first attempt to get off of a very old legacy, somewhat paper based system into the early electronic medical health records stuff. I got to learn that business soup to nuts really quickly because you were replacing every process with a new system. I was getting into the whole data things, moving around between systems, how it all came together and through the integration work through that. That's where I actually learned accounting from an IT perspective, which I don't know if I recommend for a lot of people. I went from there to getting into analytics and data warehousing and trying to connect data to financial results. And that's where for my relationship with the CFO at the time because I was the one pulling reports for him for quarterly management meetings and earnings reports and got to sit next to him during big deals and see how it actually came into play. And that was my first exposure into M and A. Was working with him for a while, focusing on just running the business. And then he and the founder said, hey, you should probably learn finance how it really works. They supported me going to Wharton. I did Wharton on the weekends, their executive MBA program. And that's where I got to really learn the real high finance and fell into taking a corporate valuation course. And that's where I loved the work, how it actually works, the discounted cash flows, the comps building the detailed models and wanted to take that back to Bayada to actually implement those frameworks, which are textbook text, textbook frameworks into how deals get done. But then when I went back after the MBA, I chartered the FP&A team. I was maybe a billion dollars at the time and I was the traditional grumpy finance leader, always saying no to the deal team. This is too expensive. Do you understand what would need to be true to justify this? They called me Dr. No. And then after a few years we did the deals anyway. But after a few years of doing that, the CFO said, hey, would you like to be on the other side of this and be on the deal team? Find deals that you'd say yes to that's when I really started being on the front end working with the corp dev leader to source and find the deals. A lot of it was inbound but to really frame up deals from that standpoint.

Hey, so you were like really like organically home brewed?

Very much so, yeah.

Product for the M and A team. What did the actual like deal Journey look like? How many deals have you worked on and what types of deals?

Yeah, no, I'd like sat alongside a few deals very early on pre mba. But when I really got into M and A was when Bayada was on its joint venture with Health Systems Journey that was partnering with Health Systems to either Bayada contribute operations to form a new venture, the hospital contributes theirs, maybe both are contributing or you're starting from scratch to build something new. When those transactions and I did six of them during my time there, you are doing three or four deals in one. You're valuing yours, you're valuing theirs, you're valuing what it looks like when you put it together. You're arguing over value but then the end of it. You're not walking away, you're married and you're working together to make sure that the sum is greater than the parts. Most of my chops were cut on those joint venture transactions that again I was involved in bringing them to life. But then I was also the CFO over the portfolio after the fact that I actually had to live with the performas I had underwritten which really tailors how I think about deals. It's not just about getting the deal done and chucking it over the wall. It's about living with what you buy and the value you said you were going to create. Got to live through that for about five years in the joint venture world. And then after that after the JV engine slowed down, it was returning back to traditional tuck in acquisitions, market entry. Typical things where you do part ways at the end of it. Over the course of the career it was maybe 10 to 15 transactions that we ended up closing but looked at a ton along the way but only ended up closing 15 or so from up until now. Up until now? Yeah.

Wow, that's still a good run. I am curious. You cover the whole life cycle. What's your favorite part? The deal.

I'm an academic at heart. The valuation process is like my favorite. I grew up in like the discounted cash flows school of valuation. Like yes, there's comps and what other people pay but ultimately it's what the seller would be doing with it if not for A transaction, it's what you'll be doing it after you buy it. In healthcare, especially a not for profit, you have to typically get a third party appraiser to come in and do a fair market valuation. And sometimes you've settled on a purchase price and you're just testing whether you fall within a certain third party's opinion. Sometimes they'll say, we'll let the third party determine the purchase price. And so you've got this other, often jointly engaged, but an objective stakeholder, like determining your purchase price. And both sides are part of the conversation and influencing the deal, which is mostly discounted cash flows. You get to see both sides, sophistications, assumptions. You're ultimately arguing over what a generic third party would come in if they bought this thing and how they would run it. And that determines the value. It's all very hypothetical and academic.

That's what I was curious about. From what I've learned, the valuation is based on the perception of value from the buyer.

Exactly. It's very much buyer led and it's fun and interesting. And then oftentimes the appraiser is calling the baby ugly, which is a tough position to be in. But if you structure the conversation right, you've got a really good partner in the appraiser who's done a lot of these, knows what good looks like. They can smooth it over. But at the heart of it, you're really agreeing on where the value is coming from. It's not just throwing numbers out and agreeing to one and then debating it later. It all has to ultimately be grounded in reality and practicality, which is really fun. And you get to work with really smart people on both sides. You build it together. It can get stressful because you probably come to ultimate disagreements on things, but it's all out there and there's really nothing to hide behind.

That's always the challenge and I'm personally exposed to it now on what I'm working on. But just the bid, ask, spread. Yeah, it's always a gap there. Have you learned anything to bridge it and make it that part easier? Get the third party?

Yeah.

No, I mean, I feel like that would be worse. Fight more.

It's making sure that there's good alignment on the partner for sure. And sometimes to help smooth things over, like they have their appraiser, you work with them, or you may have your own, or you both so happen to like the same one. So you want to make sure there's trust in the appraiser and then ultimately the appraiser may come back with a result that the seller just or the buyer doesn't want to buy into. And that could just end the deal right there. There's some gross misalignment of what either side thought the value was and that could end the deal.

I never thought about using a third party. That's an interesting idea.

Yeah. I mean it's the equivalent of having your bankers go at it with their models. But the alignment of bankers is maybe different than the buyer and seller. And so you have to be wary of that.

In most processes I'm working on, I don't want them to be competitive. So I try to keep the bankers out of it.

Exactly. So yeah. So having a neutral arbiter is not the right word. But someone who's jointlying gigs representing both sides, just trying to get a good academic answer.

You guys do that pretty often. Use a third party to.

Yeah, I mean and for. Not for profit.

You almost have to.

You have to. And you can either do that. Third party is always the best and most defendable. Other times, if it's a small enough deal, it may not be worth the price. So you can attest and have good backup that like you're paying fair market value. But yeah, the bigger the deal, the more likelihood you're going to want a third party to @ least check your math.

What's your sourcing engine look like? Because you mentioned you look at a bunch of deals but they end up doing a handful of them.

Yeah, I mean it's mostly inbound. You build relationships with. I mean in the home health space, there's only a few brokers, there's a few big ones and then it's highly local. Bayout is a big place and they show up on the Google search for the presence. A lot of it's inbound. Maybe we'll do a little bit of looking. If we know exactly what we want. It could be the list that you get from the brokers. Hey, here's what we have for sale versus a very directed connection. The CEO and CFO have got their own connections. People reach out to them directly for ideas and then probably less than 10%. There's a bank involved investment bank or something that brings it to us. But those are mostly in the minority.

So not a lot of investment banks. But there are brokers. Basically.

There are brokers. Yeah.

And then most of your deals comes from the brokers.

Very few buy side brokers. It's all like sell side.

I've noticed that in highly fragmented sectors they end up with a Lot of brokers that just make a great career.

We've run into one or two where like it's a guy, he just makes his like little connection and he doesn't do much and he gets a piece of it and he just rinses and repeats and you know, it's a good gig if you can. You've carved it out.

Yeah, you go deep in that niche and again fragmented and you got very active buyers like you out there. And you know, in terms of building your funnel, the stage gates, what does that look like for your organization?

It all starts with a really clear and stable strategy where M and A is referenced explicitly. Where we probably had trouble initially was when there was not clear criteria from the top that you needed M and A or that it was important or where you were going to choose to play. Making sure that it's very explicit so that you've always something to refer back to, whether it fits in as unclear. But strategy is usually pretty clear criteria.

That's a big thing. That's definitely buyer led.

Absolutely. And then it's for the people who are actually helping with the buy decision or in Bayada's case like the operators who are going to be accountable for the results. It's what markets, what size. Is it a long tenured business? Is it just the opportunity to enter a market? Sometimes it's just like buying something really small so you can land and expand versus buying presence. It's getting really clear on that because as I mentioned, our funnel is really wide and gets really narrow because so many things. A few years ago we were really seriously evaluating almost everything that came in. There's a lot of time for everyone, for us, for the operator teams to look at everything. You're basically saying, what do you think about this? What do you think about that? Most operators like growth. They're like, yeah sure, I'm interested. And they spend a lot of time and then something comes out of the woodwork and you throw it away. Trying to get to know as quickly as possible on everything that comes in. Whether it's the quick reply from that inbound email to no after a few hours of work to know after maybe a week or two of work having very good criteria filters just makes everyone's life easier.

Yeah, get to go, no go decision faster or gates.

Right. It's like, hey, we're going to go from just two people knowing about this deal to five people knowing about working on this to 10 people working your way through. Versus go is release the hounds on advisors and teams. It's being thoughtful and stageful about it.

Where's your big drop off? What are the big reasons why you would pull a deal out of yeah, healthcare.

Highly regulated and the regulations are often state specific. Unless you're already in the state and know how things work, you may not be super smart on it. A lot of the times the states or even the federal government gets in the way and a deal physically cannot happen. In Medicare agencies, for example, the actual license to bill Medicare can't change hands more frequently than every three years. If it comes out of the woodwork that oh you actually bought this provider number two years ago, you can't do the deal, there's nothing to buy, or the state isn't friendly to outside participants coming in and setting up shop. You're looking for those regulatory hurdles that will stop you from doing a deal. Other red flags are definitely in healthcare. Definitely in home healthcare. It's a very person public community interest industry. The sellers are usually the founder and they want to make sure that their people are taken care of, their clients are taken care of, and maybe even the way of doing business remains the same. Even if that's kind of what got them into their situation. Sometimes they want to put like requirements, you're going to keep this person or you're going to not care about the payer mix which can make or break a deal. They put requirements on you after the deal that just don't make sense for the buyer. Again, in some deals you part ways but sometimes you're buying something from a company, you're spying a part of a company and they're remaining behind and can actually influence how successful you are. Post close you want to be on good terms. But if they're going to require you to not run the business the way you want to run it, that's a reason to kill the deal.

The state regulations. The founders got some interesting requirements. Biata is a non for profit. What's fascinating, we've talked about this in previous interviews that Bayada was a for profit converted to a nonprofit which I thought was like a pretty this is a multi billion dollar company.

Oh yeah, it was.

Can you tell us like a little bit of that story just for reference?

It's incredible. Everyone should google it. So the founder Mark Baiada started the company 50 years ago and kept it privately held through 2000s, early 2000s. And he wanted to make sure that the mission and values continued into perpetuity. The true founder wanted the lasting legacy to be left behind after his time. Lots of research into how this has worked in the past, other founder led transitions, and he ultimately landed on transitioning to a not for profit as the ultimate way to cement in how Bayada was operating. Because that's part of being not for profit is you set your mission and your vision and all those kinds of things and they really can't change and you can't go against it or else you lose your tax exempt status. In 2019, it was the official conversion to not for profit. I was doing FP and A at the time and I helped them with that. It was giving up a multi billion dollar equity event, maybe for his family in the future to truly double down on the mission and values which were always there. Nothing changed in the operations as a result of that. If anything, it only validated what he was doing and really actually installed a lot more discipline in how decisions were made. Now that you had an independent board, for example, that was something we didn't have before. You didn't necessarily have the founder behind you to make up for your mistakes, but actually it was all about being independent and doing the right thing.

How does being nonprofit, and that's really epic, by the way.

I think the last time a transition like that occurred was like the Mayo Clinic in 1912. That big give up in conversion. Yeah, it was a big deal.

A lot of value to give up, but for the greater cause as a nonprofit, how does that change the way you do M and A?

It's fascinating. It forces you to do M and A the way you're supposed to when you're a not for profit. You have a singular mission and vision. And if you acquire something that deviates really far outside of that, outside of your core competency, like it puts you at risk, it kind of narrows your scope of focus a little bit. Of course you can acquire things that totally do what you do. But when you get into adjacencies, oh, we're going to look at tech platforms that support home care, or we're going to look at a particular provider network that is about increasing quality in the community. You have to watch those guardrails. It keeps you from becoming like that corporate conglomerate that's just about optimizing returns and improving your cost of capital and has to remain focused. And we all know people get into trouble when they've got outside their core focus. So it forces you to stay in that. But the other piece that it gives you is since you can't really be buying things for the sole nature of selling them in five years, financial sponsors that are either looking to Sell or they're looking for the next big recap or the infusion of capital. You're buying something to own it forever and run it forever and not necessarily turn it around and sell it. You can have more patience with the deal. You're not necessarily looking to grow it like crazy for five years so you can sell it. You can wait a little bit, five, six, seven, eight years, maybe longer. I'd have had a 100 year vision. The deal. Hopefully it doesn't take 100 years, but.

That means you can pay more.

It doesn't and that's where it can get tough because your time horizon may be longer, but your time value of money comes into play. Someone pricing for an event in five years is looking at what they can sell it for. Ebitda, multiples, expansion, all that kind of stuff. There's a short term cash infusion that ultimately comes out of that and not for profit. That's not necessarily there or may take a really long time. And at some point your discount rate overtakes that. Your ultimate purchase price, which in my world is reflecting your discounted cash flows, time value, money, all that kind of stuff. It probably pushes your purchase price down. As a result, it can be seen as not as competitive. But it's because someone who's selling to a not for profit is if it's the right partner, not just doing it for the big payout. It's all the other reasons of joining a mission oriented organization.

They're not going to pay a premium. What about risk tolerance? I know you got to stay true to the mission, but does it give you leeway to take bigger bets?

It does because you can be more patient. I'd say our risk tolerance is interesting. We've probably gotten less tolerant for liabilities and things that come out of the woodwork. In healthcare, liabilities can pop up seven years later. That had nothing to do with you. That's something that the acquired company did that maybe they didn't even know about, but it still follows you. Even if in an asset transaction it can follow you being really thoughtful about how you structure indemnifications, escrows and success reliability. Is that seller going to be around in some capacity in five years to maybe make good on fixing that liability. That's something about focused on a ton. It probably lended us more towards focusing on less like the big bang acquisitions and more like the hey, we're going to buy into a market and then expand on our own time and get more of the cash on cash returns from like the Organic growth after the fact, let's sell the buying revenue kind of thing. I don't know if it was necessarily like the not for profit stuff or just me coming in as a leader for how we looked at deals, but it definitely changed some of the tone and tenor for really only executing on sure things.

What do you measure on financially? Because if for example, private equity's bottom line is irr, what's your.

No, I mean we're looking at the same thing. It's irr, npv, that kind of stuff. As we're looking at things, it's always grounded in the what needs to be true to at least hit the hurdle rate. It's not necessarily your downside case, but it's your conservative based case. So let's at least be able to meet your cost of capital which maybe is a little bit risk adjusted. Not trying to hit like a MOIC of 3, 4, 5 or something crazy like that. It's much more grounded to some sense you would think it would be allow you to pay a little more because you're trying to optimize the denominator in a way. It's still the textbook fundamentals of corporate finance. Granted. Plus if you're served for bad, it's like you're serving more people, you're employing more people, you're creating greater access. There's all those non financial things that you're hitting as well that don't overtake the financial fundamentals but are part of the story.

Firelight M and A is all about putting strategy and post close value at the center of the deal. How do you screen early stage deals through that lens to get to it? No, quickly when it's not aligned?

We covered it mostly, but it's really good filter gating criteria. Knowing what you want out of it is big and that all comes from the strategy and not like asking your leadership to recreate the wheel on every deal. Like you should have a very structured way for how you present opportunities. You're always asking and answering the same questions for every deal so that they're not reorienting because they've got take jobs. Making it as easy to say yes, as easy to say no as possible is just better for everyone. It's consistency, structure, repeatability versus rebuilding the wheel each time. Even if you're only ultimately closing a few deals a year. It builds credibility to have a repeatable process and not have it be something new every time.

What do you do to get that? Standardization?

It's as simple as having your standard investment deck that you put together the conceptual pro formas, which maybe we'll talk about standard format of answering key questions on what need to be true for volumes, labor, top and bottom line, those things. You work really close with your operators on what they care about in a deal. You're always asking those questions and making sure that they get those answers as well as having a good sense of with your diligence team integration team of what they need to know to determine the complexity of a deal. We have a 1, 2, 3 scale of how complex they are and what are the various criteria for that. Because if you end up bringing too many high complex deal to the team, at some point you're going to run out of capacity and can't get them all done or can't get them all done. Well, you have to be aware of the pipeline, the portfolio at all times to make sure you're cognizant of what else is going on. And sometimes we've had great deals before us, but hey, we've got some other bigger stuff that was really complex and is more certain and we'll try again later.

So it's like a lot of templating, the process, basically.

Yeah, for sure. Yeah, it is, yeah.

You mentioned the conceptual Performa. Can you talk me through what a conceptual performer is?

I don't know if it's a term I came up with and maybe you and I can trademark it.

It came out, you heard it here first.

Yeah. It came out of frankly me being a little frustrated when I would put up something that was labeled pro forma and then five years down the line it would get brought up usually after do one stop. See, the pro forma said this and it's me saying this was really early days with no information. This was really the very first step to not even to say go, but to learn more. I called the conceptual pro forma so that it looked different, so that it was not like the underwriting pro forma, the closing pro forma. The output was really basic, like top, middle, bottom line, purchase price, diligence costs, irr, npv, payback time, all that stuff. A very basic consistent format that was informed with a very basic one page set of preliminary diligence questions that we ask everyone that if you're doing it well, if you have all the data, it should take a really good analyst, no more than a day to sort through the data, put together the rough valuation estimation, like the guidance of what the seller's expecting and then what would need to be true post close to meet your hurdle rate. Very quick, low effort. You may reach out to the marketing team to figure out like hey, if we need this to grow 10x in 10 years or 5 years, like what kind of market share does that equate to? And if the marketing team says oh you'll need to have 75% of the market for this to be true, you say oh that's probably not going to happen. Or it's working with the recruiting team to say hey, we're going to need to triple the workforce in three years. What's the recruiting environment like? And they say oh, there's plenty of people available or one I looked at. It's like you're going to have to hire the entire nursing workforce of the state of Indiana for this to work to pressure test all of those things. Again, it's about getting quickly to a no or determine if there's a there there under very conservative post close assumptions. And that's part of that sort of initial package that makes its way to the executive team. Analyst puts that together in a day and really the corp dev team, the analyst me work with the operator who's excited about the deal and it's the operator presenting it to the exec team with the support of corp dev me on all the reasons I want to do it but then supported with some real finance along the way.

So this conceptual performa is almost like your like what if scenario.

Yeah, and I'm sure everyone does their napkin math but it's structured, it's standard, folks know what to expect. It's easy to sensitize for your what if scenarios and you can put all, you can even Monte Carlo it if you want which breaks people's brains but you can get a sense of it. It's a very easy format to work with that people get but then has beneath it key assumptions on volumes, rates, overhead, that kind of stuff. It means you need to really know the model, the business model. Like it's harder to apply that to a brand new business that you're not in than one you're just adding onto. You need really good analysts who partner with the operators and can speak their language on what needs to go right, what can't go wrong for that deal to work.

Gotta connect the dots in like your industry. It is like super people oriented industry. How do you manage that transition to.

Make sure you don't get what it's.

All about, people waiting on you.

Right. Home healthcare is the asset, is the assembled workforce is what they call it. It is the people who are taking care of people and they have the relationships with the clients, with the other employees, with the referral sources that are sending business in. If they all leave before the deal, I don't know what you bought. It's all about the people. And we've learned that the hard way. We haven't perfected it, but I think we've gotten a lot better. It's not going to sound like rocket science, but it's about winning hearts and minds of the people who are transitioning, communicating at just the right time, which sometimes the states or localities require you to notify things people in certain timeframes, you have to live within that world. But you want to tell people at the right time to inform them of the change, but not so far in advance that it doesn't mean anything to them. Telling them a year in advance of a deal happening, it either just spooks them or doesn't really tell them anything. So telling them at the right time, maybe it's 90 days beforehand. That's not just the communication. It is like that's the start of this warm hug of the acquiring organization, of this is why this is a net positive for you. You're joining a big family, access to resources you've never had before in Bayada. It's a very stable known name that's going to be around for 100 years. A permanent capital base, steady, stable leadership. It's selling to them, why it's good for them and it works for some and hopefully most. What's interesting and what we found is things that are coming to market. There's usually something going on, the business may be in decline and people are unhappy and are already thinking about leaving and they hear about a deal and that's the last straw for them and they're going to leave anyway. You're looking for the people who are pretty loyal to the organization and who are loyal to their patients, their clients, loyal to their colleagues. And you want to tell that story of how this is just better for them. Sure, compensation is part of it and there's ways to manage that. But it's about painting that vision of how this is better for them than otherwise.

So really timing things right to let them know and emphasizing the benefits. You ever had a deal blow up in your face? Be honest with me.

Yeah, no, I mean stuff comes out of the woodwork.

Tell me, tell me about some deals that blow up your face. Story time here.

I don't know if it was a blow up, but it was like a big, like, I knew it, I told you so in Post acute healthcare and maybe hospitals, but definitely, like in home health, hospice, skilled nursing facilities. A lot of states have this concept called a certificate of need, which is like your right to operate healthcare in a certain geography. Think of it as like your liquor license in Philadelphia or your taxi medallion in New York. A limited thing that lets you operate and states will allow you to apply for one. And it's a public process. You kind of have to prove to them that another one needs to be issued. But there are some states where they've said, hey, there's enough providers in the market and they're restricted. We're not going to issue any more. The only way you can get one is to buy one. It's a moat. When they come on the market, it's rare. And when they do transact, it's usually privately, so there's no public data about it. And so the only sort of way you know what they're worth is maybe what you paid for the last one.

Wow.

But it's all really in the eye of the beholder. You're buying right to operate, which for one operator may be worth millions and another one may be worth tens of millions. Like, it's all in the eye of the beholder. Anyway, what was crazy about this deal, one came up and it was for someone doing skilled nursing services, which is not a con service usually, but they said they had a con that was grandfathered in in the 70s. That's like when the concept came about and they were actually pricing. There was a broker, a local broker, who said they'd done these before. We're pricing it based on, hey, this is a rare opportunity for a con in this date. These never come up for market and we're going to price it at some number. That was part of our strategy. Great, let's talk. This is a market we want to get into for ourselves. We're like, I think you're underpricing the con, but great. It's worth more to us than maybe you think it's worth to a typical buyer. But as we did our very early diligence, like we got the regulatory folks involved, they were saying, I can't find record of this company having this con, which is normal, by the way. Like when folks were grandfathered in, the state told people, hey, you're good, but there was no piece of paper. Like, some states have registries on these things that were on paper. Extra credit if they put them on the web, even more extra credit if they keep them up to date. The only way that new people have this ability to operate is if they were operating and no one had shut them down yet. It's like a faith based thing anyway. So we couldn't find any record of it. And we sort of asked the broker like, hey, can you prove to us that you have this certificate of need? And they said, no, it's not a piece of paper. We're grandfathered in. We've got local counsel who guarantee that we are grandfathered in and whoever buys this will be grandfathered into operating. They'll be good. And we said, great. This is a very rare opportunity to get something for a good price. But along the way we're like, okay, did they really know what they have? And I'm doing side pricing of the business, what they have, and the C O N, I'm ready for it to price differently. Two months of this go by of back and forth and research and then the broker goes silent for like two weeks. And then they come back and they said, turns out we were wrong. We don't have a con. We need to reevaluate valuation expectations. And we're so sorry. Thanks for talking with us. We'll reconnect in a month or two. So it was like this big, aha. We knew what we were talking about. I told you so. But it ended up meaning a deal couldn't happen and there was nothing really to buy.

So you didn't buy it.

There was nothing to buy. We didn't close on it or even pursue anything with. It wasn't a blow up per se.

But you ever had a deal blow.

Up, post close, like it didn't go well. Yeah, yeah. And this is where it gets into. Like, do you choose to integrate quickly or slowly? Sometimes you're buying something where it's like, all right, they've got what they need to keep operating. There's no rush to integrate them or onboard them onto your platforms. You sort of hope they keep going on smoothly and then you can pace integration out in a nice way. And we did one where just the business was already in decline. It just kept on declining. You're trying to catch that falling knife and to stop it from falling, which is tough. And it was just one of those things where it just never recovered. Maybe it's turning around now, but as things were falling, you realized you had to integrate to help slow things down, at least fix the bones of it. But the damage had been done. Every deal. Some of them have their thorns. That was one of the thorns. It wasn't a big blow up, it was just one of those where it's like we got more eyes wide open on businesses in decline and how you price them and how you set expectations with your own leadership post close. Because even if you price it incorrectly to buy something and then still see a decline hurts even if it's fully expected.

What's the philosophy now? Go integrate as fast as you can.

We like integrating quickly. Yeah, because you're balancing how much change is too much change. If you don't integrate quickly, the people on the receiving end of it, there's the shock from change of ownership, which in a very people centric thing, there's always a shock if you integrate later. Then there's this other shock which you hope that you're building up trust and credibility in the in between and that they're willing to like sit with you through it and that they'll come out okay. On the other side, we found that it's just better to rip the band aid off and just go through it quickly. Get that extra year of turning things around.

Yeah. Don't make it more painful as it needs to be. Rip the band aid off. Can we talk about deal structure?

Sure.

You've done some cashless deals. Teach me how to do some cashless deals. Hey, everybody, listen to this. You got a company to sell. I got a cashless offer for you.

And this may be unique to nonprofit, maybe unique to home health care, but it's probably one of the most beautiful things I've seen as an M and a person.

I dream about this all the time.

Yeah, I know.

For profit.

I know that'd be ideal. And so, I mean, this goes to the heart of like why people do start these businesses. It's a community benefit. They're helping their peers in their community. They're hiring people and employing them. We've maybe done three of these in the past few years. It's not often, but it's possible. The founder is. Maybe they're financially secure but their business is going downhill and maybe it started to lose money. Where their options are close up shop and just send everyone to the wind. Sell it to someone who's willing to pay something or this other thing which is find a really good successor in the market. This is in markets where we're in and well known, where you're finding a great landing place for the employees and the clients after the fact. You don't really sign anything. It's an agreement that we're going to be here to catch your employees. When you announce this, you do all the work for integration. You spin up your onboarding teams and your client transition teams and you're there at the announcement of, hey, we're here to connect you to jobs, we're here to transition you onto the services. But no money is exchanging hands. So you don't have a hurdle rate you're trying to meet. You're just trying to do what's right by everyone. The operators are engaged because the cost of acquiring a employer, a client is less than when you're buying it. So they're engaged to do it. Right. But it really depends on the seller and kind of where they're at. Are they about evaluation or are they about continuity in their community?

That's what I'm interested is a scenario where it's like, ah, there's not that much goodwill here. Like it's probably not going to get much value anyways.

So yeah, or it's, it's going to be so complicated. Or the deal costs are going to outweigh any value. I mean, some of these are. They're usually pretty small deals. Like they probably would have transacted for under a million.

Okay. It's a smaller deal. The main driver is more about a smoother continuity and just giving a greater good. Hey, the missions aligned.

Yeah.

We want a good transition for the people. All right.

Yeah. I don't know if you can do.

It, but anybody has some ideas for me, let me know.

It's funny, like it's always, especially when you're working with the founder, like we'll actually ask early as a joke or in jest about would you consider doing this for nothing? And then sometimes they bite you put.

The little dangle of bait.

Yeah. Because like going through diligence, going through, you know, negotiations, like it can be taxing on an organization.

It's a lot easier. Then if you have a cashless deal, what are other levers that you have to pull on? Because I not rolling over equity. You got owner financing, you got earnouts. What are levers that you're using?

I haven't done a ton of earnouts. Medicare, especially with Medicare and Medicaid, there's regulatory guardrails. You have to watch out for that. Make that tough. Usually it becomes into like continuity of employment. Ideally, if you've got a leader who's there, like it's, hey, you can come be a great leader and do even greater things with Bayada and you can focus less on payroll and the not so fun stuff of running a business and focus on growth or focusing on helping your community. It's about removing distraction if you're able to bring those people over to the organization, it's letting them flourish post deal. But if it's someone who's looking to retire after the fact, maybe it's a good handoff to one of their relatives to come join the organization, but you're.

Not trying to retain that leadership for another three years or so.

I mean, if someone is looking to retire like they want to say max.

Six months, a lot of them are retired.

If they're earlier in their career and if it's a big enough business that can support the cost of them being a leader, it's come be a leader of a division, then it's more of.

A retention versus trying to. Because you're not equity. Most of your deals are cash deals, then.

Yeah, it's almost all cash.

Yeah, okay, fair enough. It's one or the other. Go cash, all cash or cashless. That's right.

Yeah.

Spin the wheel. We'll figure out how we're going to structure this. The execution part, this is the thing I've noticed. You got to find the right deal aligns with their strategy. That's given. But the execution, aligning your diligence and integration planning together. And you talk me through that in terms of how you line that and how that sort of optimizes a successful integration.

At Bayada, the diligence integration team of the same team there was.

Ooh, you guys heard that same people right there. That solves 100 paper cut problems through all of this.

Like there's none of the throw the grenade over the wall to the next team to deal with. Whether it's from corp dev to diligence, integration to ops, there's no handoff. Like everyone was organically, amorphously involved at just the right time. And it's the same team, they know what they're looking for. For Bayada, it was really structuring early diligence on if there weren't any gating items to get through. And like pre loi stage, I was like, all right, what are your first really big questions that you want to invest time and maybe external help into solving get past those stage gates. But then it goes into integration planning, which again in healthcare services is about the people stuff. It's heavy HR job title, mapping, finding a place for everyone, planning plans for people who aren't going to make it, and making sure that communication strategy is solid, happening, well received so that it's just, it's a smooth landing for everyone and having continuity in the people involved. It's the same People from that core diligence team. But then it's also Lisa Payada, all the functional leaders across all shared services. It's the same people who are involved in deals. They know what they're going to get out of the diligence team and the integration team versus again if we only close one or two deals a year and you're not doing it all the time making sure that people don't forget how things get done, it's being consistent.

I see my marketing team slipped a question in this outline. This is what it says. It says you were an early adopter of a buyer control process and used deal room to manage diligence. What impact did that have on speed, transparency and seller experience?

We were early days in that journey and before that we were like every other one of your pre customers. Spreadsheet madness tracking. Here's the current status of questions, here's what has received and hasn't trying to reconcile those things. Sometimes it's even the lawyers tracking them if they're billing you for managing your mess. We love just the idea of a very easy interface. The concept of linking your questions to your data room and your actual data room files was big. I think it helped organize the sellers who are responding so they're not just like seeing a list in a spreadsheet. They see a nice slick tool that's secure, that they can grant access to the right people. They can hold themselves accountable to what's outstanding, what's been reviewed, what hasn't been and so forth. Makes it very easy for them to keep track of what's going on. Where it really helped Bayada was in the speed of review, flagging risks issues, follow ups. It went from a weekly meeting diligence meeting of so what do people think? Anyone seeing anything that they don't like to very discreet. And this document, I don't like this or I know we asked for this and they said they provided it but it's not what we need and it's very transparent. You can stack it, rank it. It also gets built trust in the organization on the deal team that you're running a very tight process that you're not making it up every time it's repeatable, it's standard. You're often asking the same questions and we can all hold each other accountable till either we're behind on the seller providing data or behind on reviewing things, we're behind on acknowledging that there's no risks. It just puts it all out there. There's nothing to hide behind and especially when you're in early stages of a deal and an loi. You're talking about how long diligence is going to take and you're posturing about how quickly it can go and those kinds of things. It really puts it out there when things are taking longer, why it's taking longer and you're not arguing about it. Both the buyer and seller are looking at the same dashboard on deal room about what's outstanding and what's not. And you can say, this is why we're stuck. It could be on our side, could be you. If you've got something in the middle, gatekeeping that information. It's just nobody trusts the process.

That's awesome, man. I can't even make up that stuff. Hey, I was just thinking, you're right. You were one of our first major healthcare companies. But that was like seven years ago.

I think when I joined like the joint venture. It had to be 2019ish.

Yeah. So good. Six years ago because I learned so much about healthcare compliance.

Oh, all that stuff. Yeah. I mean, very heavy security requirements that kind of. Thank you for suffering through that with us.

We had a level up, I just want to say, and even the team involved, we were really thankful that you guys were so nice to work with because we were back then we were what, maybe 15, 20 people. So you guys were really like patient with us and we're scrambling and doing the best we could and we made it happen. So that's really cool. And just to hear it from your view, so you got the system, you create a lot of the workflows and hold some accountability, prioritization. I guess I'm kind of curious from the seller point of view because I feel like early on you got to build trust and that's part of the alignment. It's probably getting the deal structure and then now you're getting this execution where you're actually using your approach and model. How does that part like impact the seller as you get through it? Because I feel like that's when it gets tough. I've been on the other side of deals and I remember there's one where I caught myself blowing up. I tried to be a nice, calm person and people that know me know that there was like one of those deals where it was like the third time or maybe even fourth time of asking for the same document and I lost it. I lost it. How does that come in play as you execute through the deal, like the process you describe, is it creating more friction? Is there ways you're building Trust. What are you doing?

No, it's part of the why the seller has chosen you. Hopefully not solely based on valuation, but it's based on you're gonna do right by them. Maybe financially, ideally in the process that you're not gonna blow this thing up. Cause maybe you'll. The deal will blow up and you'll part ways, but then the seller's left with something broken. Nobody wants the deal to blow up at the last hour. That's the worst. Nobody wins. Coming in with a very structured process that you've done before. Especially for bad. When you're in the small middle market, like the sellers, they haven't done a lot of deals. Like maybe the founders. This is a second gig and they've done a deal before. But they don't do this. It can be intimidating. In early days, you'd send over the diligence spreadsheet with a thousand things on it and it's, this is our diligence list and eyes wide open. And maybe, I don't know if that killed the deal, but it probably didn't feel good to be a seller to see that in front of you because a lot of those things are rote and aren't even meant to answer specific questions. They just check the box. And when you're framing it with the seller, it's, you chose us for a reason. We have a process that works. It's very logical, it's very transparent. And it's ultimately, if this thing goes through like it's the buyer taking on the risk. We want to make sure that this goes as smoothly as possible. And that can only go well if we're in the driver's seat. I really don't know any other way. And maybe if we got the sense of a seller not wanting to go that way, we probably wouldn't want to work with them.

Give them the heads up you're going to dry the process. Do you warn them, hey, this is going to be painful?

You probably don't say painful, but it's excruciating. It's work. Yeah. Sometimes it's asking questions that you wish you didn't have to answer. Having the same team work with them the whole way through is helpful. You build a good stable partnership. For us Corp dev is definitely very heavy on the front end, but then we have them along the way in lesser capacity.

The sort of modern thinking about M and A, there's the concept of integration led diligence. Would you consider what you're describing?

Oh, yeah. Everything is about answering the questions. You need to answer to integrate.

Well, so it's integration led diligence.

Yeah, but that's because I think the nature of Bayada, it's like you're buying to run it for forever. It's not a purely like, how much money is this thing making? How much can we sell it for good or bad?

I wanted to pick your brain on one of the things you mentioned about buying the declining business. And you gotta mention that as an example. What did you learn from that? Because I'm looking at some deals right now where they're declining businesses. How do you get the sense of a true turnaround potential versus your own deal fever hype thing going on?

Yeah, I know. That's what's.

Do you say yes to it when you walk away?

You can't assume that if you've got something that's growing over time or declining over time, you have to be ready for it to decline faster.

Interesting.

That gets into like your conceptual pro forma and for some of these it's like, how bad could this go? And over what time period are you willing to wait for it to recover? Which for bad it can be a while. We looked at some where it's, hey, let's assume we're going to lose 30% top line and take five years to recover it and we'll manage margin along the way. Does that still work? Because it's a deal we still want to do for all the other softer reasons, Again, like your downside scenario, which may be your super conservative base case, assumes that. And we definitely, if it's a declining business, it's. We have a few points on the line to understand attrition rates and those kinds of things, to have some informed framework, first year and then how long it takes to turn things around, what the work actually is to turn things around. But that's the benefit of the nonprofit is like you can wait and you can take time, but it has to make sense. You try to price it in and that's where again, having a third party appraiser come in is an interesting wrinkle into it. Because every arm's length buyer says they're going to turn something around and then you're arguing about some hypothetical buyer and what they would hypothetically do to turn things around. And whether it's practical, whether it's what you would do, whether it's what the seller would do, and you're arguing about a ghost, essentially, even if you can get it priced right, that's incorporated into the price or it ends up being A steal. It still hurts to have a business show up on your books that's declining. That's why that conceptual and that real underwriting performa you have to constantly track against. Yep. We knew we were going to be this low. Six months in. Yep. We knew it was going to take this long for this to break even. Ten months in it's on track even if it's not doing well. You kind of just have to ground people to the commitments they made and just make sure you've got a really tight lock on what people signed up for at the get go.

Catching the falling knife. I like your point. Don't get optimistic that the decline is going to stop. That even planned worst case that could actually accelerate. So anybody listening? Especially if I'm looking at your business, I'm going to turn that valuation down a turn because there is, there's one I'm looking at where it's declining revenue.

It may just be that the industry, it's really hard to turn that ship because it's not just the business itself, it's everything around it and maybe pushing it to decline and it's not something that you can fix really quickly.

Yeah. Have you seen the rule of thumb of how much you would. It's just we were a different industry so software is so different. But when I look at declining software I look at that as a really big issue. But yeah, I don't.

No rules of thumb. We have a few.

I'm going back to the cashless transaction on those deals.

That's sometimes the pitch. You're losing money on this. You may probably need to throw more cash into it. Wouldn't you rather just cut bait and have a great experience for your staff?

I'm putting you on my deal team, man. You're going to come, we'll go work on some things together. I like that approach. Advice, lessons learned for M and A leaders listening, trying to build a buyer LED engine especially if they're in a highly regulated, people driven industry like yours. But what have you learned?

Doing the right thing. It always pays off. Everyone sort of knows if you're trying to pull one under or trade on asymmetric information or anything like that, it builds trust, credibility. It makes the deal go smoother. It's just always worked out. It's when deals where someone was hiding something on either side, something comes out of the woodwork or someone had different intentions or was trying to do something the wrong way where the deal blows up or it's not good after the fact and it can be really tough conversations. And I know definitely again it's people centric doing right by the people who are involved in the deal is what matters. I can't understate that. Probably learned it some of the hard way and maybe it's not available to everyone who are doing deals. I definitely found it to work out that way.

Do the right thing.

It's easy.

Some people, I can see there are people out there. There are people out there that can't for some reason struggle. I don't know how do you explain that? Maybe you got access to some healthcare research of just. Some people are just wired to do that.

Yeah. Maybe it's about wiring.

Yeah, yeah. That sucks too. When you gotta work on deals with folks that really.

That don't align. Yeah. I mean that can kill it.

They're just not capable of doing the right thing. That's a whole other discussion. If anybody's listening to this and wants to talk about that, of doing deals with somebody that's incapable of doing the right thing, you know what I'm talking about? People that catch them in their fibs and things like that and they blow all trust and credibility. But you still want to buy that.

They still want to buy it. Yeah. It can be tough.

And trust me, I got one. I just hit my head on the wall. It's because I don't want it coming from my background done the advisory side, I don't want to do that deal. But then there's a strong business case.

And you're like, yep, I know your.

Team wants to do it. Yeah, yeah. Anyways, anybody wants to come, reach out to me, I gotta ask you, what's the craziest thing you've seen in M and A?

It has to do with people who didn't want to do the right thing. I remember we were looking at one and it was in a market we were already in. Very long tenured pillar of the community was looking for that successor but wanted monetary associated with it. It was declining business. We were trying to price stuff in. They wanted so many post deal hooks on how you were gonna. What kind of quality requirements you were gonna get to in healthcare. You get publicly rated by Medicare. You have to hit certain quality marks. All these things that like ultimately are good. But it's like that's for me, the buyer to deal with so many requirements. And even with that, we still wanted to do the deal way too late in diligence. We found out they had taken a big loan from COVID from the government. They hadn't paid it Back. And it was one of those loans you have to pay back. We found it and we said, this stays with you. You've got a foundation. They're like, nope, you got to take that loan and you got to pay it back. The loan payback was like 3x the valuation that they wanted. So they basically wanted us to take on this crazy liability instant net negative net present value.

This came up post loi.

Yeah, it was post loi. Yeah. It was like we were like really far down the line.

So it blew up the deal.

Oh. We're like, no thanks. Yeah. Just blew it up right then and there. And that you also got a sense of like the kind of folks they were.

There was no. They didn't tell you any of this. It didn't show up on any of the balance sheet.

Well, we learn no, no, no. And that now we know to ask skeletons.

Yeah.

Give us all your federally flown history and all that kind of stuff. You learn from that. And that was just, you know, us learning. Right. Especially in that time. We were all learning about that. That kind of stuff. All those things added up with them. It's oof. Like I don't want to be a partner with you if a you're going to try to saddle me with this last minute. And then you also wanted all these post close hooks that we were still going to be in the community together. We said, nope, we're done. Sorry. Wow, that's wild.

That's crazy. John, this has been a great conversation.

A hoot.

Thanks for coming down and sharing the experience. Should have done more. It's been all these years we worked together and finally got you here.

I needed some time to build some good stories, so it was good to wait.

I know you were always busy. That was elder. I really appreciate you taking the time helping me become a better M and a scientist. If you've listened this far, congratulations. You are an M and a scientist. You'd love to hear from. You reach out to me. You're more than welcome and invited to reach out to me on LinkedIn. Love to connect with you. I'm a little weary if you ask me for a bunch of big favors because I get way too many. But I do love the feedback. I'll take the criticism too. I try to get better at this. Any topic ideas are always helpful with that. Until next time. Here's to the deal.

Here's to the deal.

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