people shaking hands
What to know before you go
by Richard Cheng

Health care mergers and acquisitions (M&A) grew more than 50% in 2021 compared to 2020. A significant portion of these M&A activities derived from consolidation and private equity roll-ups and more is anticipated in 2022, especially if market forces compel health care providers to sell, coupled with payment adjustments from the Centers for Medicare & Medicaid Services (CMS). Home health agencies (HHAs) are no exception to the growing health care M&A market, as more prospective suitors seek attractive deals in home health care due to the increasing emphasis on health care services outside of inpatient settings and anticipated increased CMS payments for home health services in 2022.

Before You Buy or Sell

Before buyers and sellers rush into a transaction, there are multiple preliminary issues HHAs should be prepared to discuss and consider, including:

  • What is the objective for the transaction?
  • Who is buying and who is selling (parties)?
  • What is being purchased or acquired?
  • What is the price and payment schedule (deal points)?
  • What is the transaction’s structure?

While the objective may sound elementary, each party should ask themselves why they are engaging in the transaction. Is the buyer’s goal to grow the business for a period of time (e.g., three to five years) and then sell it to a third party, or is the buyer acquiring the HHA to operate it long term? Depending on the reason, the strategies and mindset may differ based on the objective for the transaction.

Depending on the circumstances, defining the parties involved in a transaction and what is being acquired can be challenging. Further, it is critical to have a meeting of the minds regarding the deal points. Throughout the negotiation process, the parties should focus on the material terms of the proposed transaction, such as purchase price, payment schedule, assumed liabilities, excluded assets (if it is an asset purchase structure), post-closing relationships (e.g., assumed employees), restrictive covenants and proposed closing date. Lastly, the parties should agree on the transaction structure because this will set the stage for a series of events that will happen throughout the due diligence process until closing (e.g., extent of due diligence, liability risk assessment, regulatory filings, etc.).

Structure Considerations

Most home health agency purchases typically involve one of three different structures—asset purchase, stock or membership interest purchase, or merger.

In an asset purchase, the buyer acquires certain assets, assumes certain liabilities associated with the acquired assets and excludes other liabilities. The primary benefit for the buyer in an asset purchase is to avoid assuming certain of the seller’s liabilities, and the buyer is allowed to pick and choose which assets are being purchased. The seller keeps all remaining assets and the entity, including any remaining liabilities not assumed through the buyer’s acquisition of the purchased assets. Some primary drawbacks to an asset purchase structure include substantial time needed for agreement consents, regulatory filings such as change of ownership with CMS and the state licensing agency, assignment of contracts and leases and other supply chain issues. Further, the parties will need to anticipate notification filing requirements. Both the seller and buyer should have a strong understanding of how the filings need to be made and the requisite time frames for such filings.

Under a stock or membership purchase structure, the buyer acquires the equity of the selling or target company from the owner or owners. Using a stock or membership interest, buyers benefit because fewer consents, approvals and assignments need to be obtained from third-party payers, regulators and contract parties because the target remains intact with only changes to its shareholders or members.

In addition, unlike a change of ownership filed with an asset purchase and compelling the parties to manage payment and tie-in notice issues, the stock or membership interest purchase will only require a change of information, which results in needing fewer onerous regulatory approvals or post-closing adjustments. Sellers likely prefer this structure because no assets or liabilities exist after the closing, unless specifically excluded pursuant to the stock or membership interest purchase agreement. This structure typically poses more risk for the buyer since the buyer is substituting the seller, and thereby is exposed to all potential liabilities accumulated by the seller. To address these concerns, the buyer can hold back portions of the purchase price, create broad indemnification agreements, demand specific representation and warranties and be thorough with the due diligence process.

A merger involves one entity merging into another. The process is predicated on the desires of the parties and state law. The merging company will terminate, but its liabilities and rights are assumed by the surviving company. Similar to a stock or membership purchase structure, one disadvantage of a merger is that the surviving company will inherit the merging company’s liabilities. One way to address this concern is to create a wholly owned subsidiary company that merges with the selling entity. This results in the acquirer being the sole remaining equity holder in the subsidiary.

Common Documents

  • Confidentiality agreement—Here, the parties will need to define the confidential information, carve out exclusions, identify prohibited use, define breaching events, outline the return of confidential information, address no-shop/standstill issues, etc.
  • Letter of intent—Although generally nonbinding, this sets forth the material terms of the proposed transaction and demonstrates the terms that were memorialized by the parties. It should identify the basic structure of the transaction.
  • Definitive agreement: asset, stock or membership interest or merger—This is the primary document that facilitates the transaction containing key items such as purchase price, covenants, indemnifications, representations and warranties, closing deliverables, etc.
  • Bill of sale—This serves as proof of title to nontitled assets.
  • Assignment and assumption agreements—These set forth the agreements that are to be transferred.
  • Disclosures schedule—This is usually produced by the seller.
  • License agreements
  • Escrow
  • Resolutions

As is the case for many regulated industries, HHA transactions are unique and require a specific set of skills. It is critical for HHAs engaged in a transaction to see the process in four key steps:

  • initial discussions and preliminary diligence
  • due diligence
  • negotiations
  • implementation

These steps will circle back to the most important aspect of the process—the goals of each party. Identify these goals as an initial step and the process will have a greater chance for success.

Richard Cheng is a health care attorney focused on corporate transactions, regulatory and compliance matters. He represents a variety of health care providers (e.g., nursing facilities, home health agencies, hospices, assisted living facilities), investors and private equity groups in health care purchases/sales, operations and before administrative agencies. He is certified in health care compliance and worked as an occupational therapist before becoming an attorney.