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44. Mergers & Acquisitions for Mission Driven Non-Profits: An Interview with Mark Kulik
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Mark Kulik
Foreign.
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Ray Spadoni
Welcome to Leading Organizations that Matter, a podcast about leadership, organizational culture and how we find meaning and purpose in our work. I'm your host, Ray Spadoni, former healthcare CEO, current consultant, author, teacher and speaker. Today's topic is Mergers and Acquisitions for Mission Driven Nonprofits. An interview with Mark Kulik. When I think about mergers and acquisitions, I tend to think about the buying and selling and consolidating that takes place among for profit entities. But more and more nonprofits are engaging in these sorts of transactions, sometimes born out of strategic planning efforts and opportunism, but sometimes as a last resort or even as an act of desperation. In this episode, we explore this topic and try to provide a framework by which leaders of mission driven nonprofits can think about this. I'm delighted to interview Mark, senior Managing Director for home health, home care, hospice, pediatric and Private duty mergers and Acquisitions for the Braff Group, a firm that he joined some 16 years or so ago, during which time he's overseen the completion of over 2 billion in transactions. His experience goes back further by another couple of decades as an executive and operator in these industries. Mark is one of less than 100 professionals in the United States certified as a Merger and Acquisition Master Intermediary. He's also a certified Merger and Acquisition professional. In this interview, Mark will talk a bit more about his firm and what he does. He graduated from Fordham University with a degree in Economics and finance. He's an active participant in national health care professional associations, and he serves as an advisory board member of Hillcrest Health Services. On to the interview.
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Mark Kulik
Hi Mark, thank you for joining me on the podcast. It's great to see you.
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Likewise. Ray, Good afternoon. Happy to join you.
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Oh great. Well, thank you. Let's just dive right into it. I work with many not for profits nonprofits who are observing what's happening in the world around them. They're mulling the possibilities of consolidations that are taking place. They m and a merger acquisition, and sometimes they're thinking about it from a position of strength, sometimes not so much. And I'm finding that in a number of those organizations, the level of experience, the knowledge about mergers and acquisitions doesn't always necessarily run particularly deep. So in many ways I'm hoping this episode will serve as a bit of a primer and an overview for them. In my experience, and I'm very curious about yours, nonprofit mission driven organizations tend to think a little bit differently about mergers and acquisitions than do their for profit counterparts. What has your experience been in this regard?
- [03:23]
Yeah, a great place to start. You Know, up until a few years ago, it wasn't really a topic in the, in the nonprofit world. Certainly our firm goes back 26 years and we've been doing this for a long time, but for the most part it was always on the for profit side. So, you know, I've been reflecting back and prepared for the conversation today and I said let me do some homework here and some numbers. So let me share some numbers with, with you and our listeners that might raise a couple of eyebrows. If we look at 2020 to 2023 and through the three quarters of 2024, that's our, that's our purview here. If you look at non for profit transactions, 18% of all the home health and hospice transaction that occurred in 2022 were nonprofits. 25% of all transactions in 2023, nonprofit sellers. Through the third quarter of 2024, 33% of all the transactions year to date. Home health hospice transactions involved not for profit seller. If we, if we peel that layer back a little bit, Same same time frame 22, 23 year to date. 24. There was a non for profit buyer in 50% of those cases in 2022. So 18 of all transactions were involving nonprofit seller. 50% with not for profit buyer. In 2023, 25% of all transactions not for profits, 68% were not for profit buyers. And then year to date in 2024, 33% of all the transactions in the industry not for home health hospice, 53% were involved in not for profit buyers. So very dramatically in the last several years there's been enormous spike in the involvement of mergers and acquisitions in the nonprofit world. And that was never the case before. And I think that's, it's driven by several key things. Our environment is increased demand, reduced reimbursement and this huge launch forward into value based reimbursement and value based environment. And that requires constant vigilance to details. I've been in the business for almost 40 years and major differences from when it was a cost reimbursement environment to today. And that takes an enormous transformation and change to how you run a business. And I think that the keynote there is irrespective of nonprofit or for profit, the rules of the game are the same. The reimbursement is the same, the process is the same. So you have mission driven organization, but the context is we have to operate within the same rules as everyone else. And that requires some of the same disciplines as everyone else as well.
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Okay, well, good. That's, it's Great and quite interesting to hear the numbers. So thank you for preparing that. I am surprised by some of that, the proportionality to nonprofits. So consider my eyebrows raised. Can you talk a little bit Marc, about your firm? What's the role of the firm as you help organizations who are going through this? You know, sort of high level. What are the steps, what are the phases, how long does it take? You know, just, just give us sort of a walkthrough for those who aren't so familiar with this.
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Yeah. So the braf group is 26 years old. We are a very much a boutique firm, a boutique banking firm in that we focus in on a handful of healthcare services. So you look at at healthcare as being a huge spectrum and it narrows down as you, as you work through providers or products or services, etc. We're on the services side, no brick and mortar all services. And we focus in on home health, hospice, home care and pediatrics. That's one sector that I head up that sector. Then the next group over is home medical equipment for us old guys, DME durable medical equipment and a respiratory therapy infusion and then behavioral health is a sector and lastly staffing. So Those are the four main areas. That's all we do. 100 of activity is just in that area. So we've gotten very immersed into all facets, operations, reimbursement, regulatory oversight, lobbying efforts, advocacy. We, we have to because we're just initially focused. So that has helped us to really stay sharp and deep knowledged in our respective areas of expertise on the services side. So what we do is we bring all that experience, all that knowledge, all experience to if it's a non profit, to the board, to the C suite and we share our experience as to what we've seen, what works, what doesn't work, what's on the horizon, what our predictions are, where we believe that the marketplace is going. How do you go ahead and identify issues that are affecting you locally? Because across the country in some areas there's for example huge penetration of Medicare Advantage. You go out west, not so much. And some of the square states out there, it's not even an issue. So you have to get local obviously relative to advice. And that's what we bring to each of our clients that we go ahead and meet with. The other part of your question goes to what happens in that conversation and what takes place. And I listened to your podcast from a short while ago and I thought you had a great construct for that. You had kind of a four step process. First step was Self assessment. Second was clarification of objectives. Third was development of options. And fourth was strategic and tactical formulation. That's a wonderful encapsulation of what we do. It's exactly what we do, we help the boards do to help them bring clarity to what the current status is. Sometimes they're not clear on that. And then secondly, what are the options going forward and how would it work, et cetera.
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Great, great. Well, good to know where simpatico in our thought process. Us old guys as you, as you refer to us. But that's good. So for, you know, an organization, let's say that the, some of the nonprofits that you're working with start to finish. What does that look like from a timing perspective?
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Yeah, let me preface it by saying that there's an element of being reactive versus being proactive. And I say that because especially on the, on the non profit side, often in my involvement, I've done a number of nonprofit transactions. It's almost a reactive stage that I enter the conversation and that, that provides certain disadvantages to come in at that point. Certainly there's a lot of pressure. Certainly I'm there for a reason. And, and I would submit that the M and A topic has been swirling around, you know, in the reactive scenario, I think in your book you call that into chaos versus from chaos. So ideally you want to come in, in a proactive where things might be going well. But the board says, hey, looks like, let's look down the horizon 3, 4, 5, 10 years. Let's see what the marketplace looks like at that. Let's envision that that's the board's responsibility. And how does that look and what, what, what's the, the environment like and what will it be like during that time frame? That's the best time for us to come in because we really can add a lot of value at that stage. Long before it's a critical situation and we're reacting or the entity, the provider is reacting to maybe some terrible circumstances. So that's the, that's the, that's the appropriate time to come in. That gives us time to look at and assess the, the, the provider, how they're operating, how, how they're doing relative to competition. And then oftentimes if the decision is to move forward and to sell, for example, it gives time to prepare. You know, much like your house, you wouldn't want to sell your house tomorrow morning. Making a decision tonight over dinner and having no time to do some painting, make sure the landscape is in good shape, make sure that the carpet is clean. You'd want to do all those things to maximize the purchase price and the attractiveness of your house. Likewise with M and A, you want time to get things in order or to verify the status of things. For example, today one of the huge issues is clinical compliance. And it's what every buyer insists upon. And they, they're looking for almost a pristine organization. It'd be nice to go ahead and verify that, that your, that your operations are in such a state that you are pristine because everyone believes they've got wonderful people. No one that I ever met is trying to do a bad job or is overlooking a regulatory requirement, but it happens. So it's nice to, for example, do a pre. Go to market a pre. Decision to, To. To sell and, and just assess where you stand in the clinical department. For one example. You can do that when you're preactive, when you're proactive, rather when you're reactive. Not a lot of time to get that done. If you, if you're in a reactive mode, great.
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Well, you know, Mark, I, I like this distinction of reactive versus proactive. It's pretty clear. And I know sometimes there are organizations who will be likely reactive and may view this world with a lot of trepidation and, you know, as a, as something that they want to do, last resort or maybe even out of desperation versus those who are more proactive.
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There's a vision.
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They're. They're stepping forward, not sort of deflecting back, and are doing it perhaps more from a position of strength. As you think about the motivations for the organizations you encounter. You gave us some statistics before, but generally speaking, when you're speaking with a potential client of yours, someone who's, who's thinking about this, what are you encountering in this reactive versus proactive dynamic?
- [13:53]
Yeah, typically, like I mentioned, that's when I get involved, is when it comes to a state where things aren't going well, the business has lost money, continue to lose. To lose money. And it's at a, either a, a large rate of losing or a growing rate of losing money. So they're relying upon benefactors or activities to support and, and offset the losses that they've been incurring in their operations. So it's hard because in, in the nonprofit, it's a very materialistic environment. Typically it's been there for a long time, typically 50, 75, 100 years. You've got, you've got an environment where it has been part of the community, heavily involved, in fact, may be involved in different ways relative to Meals on wheels or thrift stores involved in different facets of the community. So it's not simply providing a single service to the marketplace. And it's hard to kind of look in the mirror and say, gosh, we're not doing that well, we're not performing that well. And so one keeps to try and keep optimistic and keep working down that road. And oftentimes it's when it gets too far down that road where it's like, oh my gosh, we're too far underwater and let's go ahead and do something about it now. So it's a real requirement, I would say, especially in this environment. In these last few years, as you know, there's been a major change in certified home health reimbursement pdgm. There is a enormous growth of Medicare Advantage reimbursement wise. There was a threat of a carbon program for hospice that has been put off. But that's coming up on the horizon here. 2030 is when it's supposed to be revisited again. There's talk now about a major change to hospice reimbursement that's on the table now, making its way through Congress. So you've got significant changes in, in the operating environment of a home health or a hospice. Medicare, same thing, the advancement of medic. Medicaid. Excuse me, Medicaid advantage, same thing, advancing. So this is a great time to do a self inspection, irrespective of how you're operating, of how you, how you're currently performing. It's a great time because on the horizon, I would say certainly in two to four or five years, there's going to be continued significant changes to reimbursement, to regulatory oversight. We're seeing now various states getting involved in M and A oversight to approve transactions. So they're stepping into the fold. This is not the same environment that it was back in our cost reimbursement days where you kind of were able to just kind of chug along and make minor changes to do well, you really got to go ahead and have a very honed edge to your leadership team to be able to operate efficiently. So coming in and acknowledging all that and at a board level saying, you know what, there's nothing to be done here today, but let's make certain that we are in good shape. Let's make certain that the environment that we're in is not going to change dramatically. And it catches by surprise. I think that's the, that's the biggest thing I would say that I've seen relative to when I get a phone call or when I get involved.
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Great. So you know, there are a lot of things you mentioned, several of them that are happening in the environment, some of which creates challenge and, and constrain resources or force a redirection into certain areas. We've seen a lot of that with compliance, all the various audits that have taken place and so forth. So a non profit organization, nonprofit, not for profit organization that is looking at all these, all of these various factors and thinking that it needs to merge with another organization or be acquired by another organization. Do you think about and encounter organizations that are saying to you we want to go along with a like minded, you know, similar histories, similar values, similar, you know, culture, nonprofit, or should they be thinking about for profits? There are some large and pretty successful for profit chains that are expanding. You know, there are going to be some hoops they're going to have to jump through in terms of the conversion and various things with attorney generals and so forth. But first of all, do you encounter prospects and clients who are thinking this way and if so, how do you advise them?
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Yeah, key central question, I think the natural tendency for the C suite or for the board is to default to let's seek out or let's work with another nonprofit organization because we're birds of a feather and we, we certainly will collaborate much more easily than, than with a, with a for profit entity. But again, you got to dig down a little bit deeper than that. Typically in a not for profit to non for profit transaction, there really is no consideration going back and forth. There's no purchase price going back and forth. Most often it's a single member substitution solution that allows two entities to combine into one on the not for profit side. But I would say that again, given all the forces and the factors that we discussed for the past few minutes, it serves the board well to consider, open up the purview there and consider, okay, what would a transaction look like with a for profit entity? How would that impact us? So I've had two recent large, not nonprofit transactions that were public Journey Care in Chicago. That was a couple of years ago. They were purchased by Addis and then Haven Hospice most recently was purchased by Bright Spring or a few months ago this year. Both of those were sizable, longstanding nonprofit, mission driven organizations that opted to sell to a for profit entity. And that was a process to go through, working with the board, discussing the pros and cons, et cetera. But if you fast forward to the end to the conclusion, what did that produce? Well, in both cases, both of those nonprofits, the foundations received the proceeds from the transaction. There was actual money that was, that was transacted and that money went to the foundation. And the foundation was able to continue its mission to that community not so much with the provision of hands on services like home health or hospice or home care, but with grants. And in, in, in their vision is to expand that impact. So for example, if I own a certified home health agency, and that's what I've been doing as my not for profit, I've got those services going in the marketplace. But what if the marketplace could really use a clinic or two clinics or, or primary care or ambulatory services, etc. With my foundation monies I'm able to provide grants that could support existing organizations to care for indigent or non, non, non insured people in need. So it was able to, able to extend their mission by not provision of services, but by provision of, of grant monies that allow those organizations to go ahead and, and continue to further reach into the community and help that our various needs that were not addressed by the not for profit before. And it also allows donations to come into the foundation and, and long benefactors to stay connected. So it's, it's a practical solution. I think every organization should go through it because it's all local, but they should go through it locally with local considerations for the factors in the history and the employees, et cetera. But I would say that I wouldn't necessarily 100% default to, well, it's got to be another non profit organization that I consider, I would say open up the window all the way, consider everyone and look at the pros and cons based upon the particular situation in that local community.
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It's probably too early to say for the two deals you just described, but as you look at these over a longer timeframe for the organizations that have done what you just described, have a sense of how it plays out. And I know just as a sort of related aside here, nonprofit boards tend to think about preservation of mission. They're very focused and aware of the long term history of the organizations and they tend to think forward into how will this be remembered in the future for what we did relative to the mission and for the historical community that we've served. So, you know, a little bit of a time horizon sort of jump. How do these things play out in your experience?
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Yeah, it's again another great question. I think you have to look back a bit too as to what happens in the marketplace so many Years ago you had the San Diego Hospice, huge organization that ran into a bunch of challenges and closed that no one ever thought a not for profit would close. I think more recently, if I'm not mistaken, there was a hospice in the Philadelphia area 100 year plus and didn't sell, didn't merge, closed. So I think the reality is things have changed, environments have changed. On the for profit side, I'm not sure about yourself, but, but when I heard that LHC Group was selling to United Toptum, I was like, wow, that is a huge, the largest provider, well capitalized public company, well known in the marketplace, involved in the most joint ventures, multiple hundreds of joint ventures with health systems. I thought they were perfectly well positioned. And when they decided to, to sell and combine with another entity, in this case an insurance company, I thought there's, there's no given rules, there's no given standards. So I, I think that the, the point I'm trying to make is the changing environment necessitates the assessment of where's my position, where do I stand, what's happening locally, how well am I performing, how well can I attract and retain talent, what's my competition doing, what's happening with reimbursement, with regulations, with oversight. All those things come into play in assessing what do I do and, and do I continue my mission in my current form or not? I think that's the responsible way to look at it. Given the nature of what we've seen here just in the past five years, the things that have happened just in the past five years. Take Covid out of the picture just in the past five years. You have to have that, that level of futuristic thinking, I believe, just to ensure that what you're doing today is still on target with what the mission is of the organization and what the future of the organization is.
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Well, preservation of the mission, you know, with respect to how this will be viewed into the future, the legacy question is coincidentally going to be a topic on this podcast in a couple of weeks. And really coincidentally, the former CEO of that Philadelphia organization you mentioned will be the guest here. So we are, we're planning to dig deeper into that because having been the CEO of organizations that have pondered this very question, it's a staggeringly impactful fork in the road moment for these organizations. And no one wants to go the wrong way, and no one wants to go far up the wrong direction to then learn that they went up the wrong path. And so to that end, since you've worked with a number of these organizations who've gone through this. I wonder if you could comment, Mark on some of the lessons learned as leaders mull this over. Having gone through the process, what are the surprises? Or is there something that ends up as an afterthought that people say if I knew then what I know now, than you know that sort of a situation.
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Yeah. So what comes to mind is an example out of the healthcare world, Kodak. When we were growing up, Ray Kodak was the company to take pictures. No, I didn't think of anything else. In fact you kind of referred to Kodak moments and such. Who would ever thought that Fast forward to today that I'm not even sure what Kodak does anymore. They had such an enormous market share film and I think for a while they went into copier machines and such competing with, with, with Xerox. But I'm not even sure they exist anywhere to provide any services. And I bring it up only to say that that was their mission. Right. Memories and, and family moments and capturing in a film. And here today, it doesn't even exist anymore. So no matter who you are, no matter what business you're in, you got to keep a look at what is our mission and is it right to preserve that particular mission or is it morphed into something else? Actually we should be doing something else. So if I'm the CEO of a company and I'm looking at my, my, my business. If I'm looking to, to merge why I'm looking to sell why? If I think I should buy, why that's the first point and the first person I think that, that you need to do self reflection because it sounds great to extend but let's say it's to, it's to buy. Well, am I buying a complimentary service line? If I'm a hospice provider, do I buy home health and try and get some synergies there for referrals? If I'm a hospice provider, do I say I'm not doing that I want to go into palliative care? Because I don't see palliative care being presented in my marketplace here. If it's not that, am I going to go ahead and I want to buy more geography, I want to acquire something different state or more geography in my same state. All those are valid strategies but the question behind it is why? What's, what's the reason to do that as opposed to it's a nice thought or you were approached, someone approached you saying hey we're struggling. Could you take us on? Can we combine our companies together I think that the resistance to just assume that there's going to be synergies is probably the first warning. I would say it sounds good that Ray has an agency, I have an agency. Let's go ahead and combine. And there'll be synergies there, but you're going to work at those synergies. You know, the first one is, do we need Mark and Ray, or do we just need Mark or Ray? So it takes kind of a mature thought process there to say, wait a minute, that might be a nice offer, and it's nice that it's coming to us. And I'm flattered, but is it the right decision and right consideration for my entity going forward, or is it a distraction? Or is it something where one plus one equals one and a half? We don't, we don't even get to two. We're just, we're stuck at one and a half because of the, because of the unforeseen things we didn't take into account before. We went ahead and went down that road. And, and I think that's happened to, to many nonprofits that they, they went down the road of. It was nice to acquire someone else who was struggling. We thought we could take it over and turn it around, and that kind of just made more of an acute problem than they had before. So I look at into. My first question is why? What's the current status? Why are you considering anything to do anything different than you're doing right now? What do you believe are the merits in doing so? So that's where I tend to start in my conversations. And then of course, that leads to all kinds of conversations about what's working, what's not working, who your staff are, etc. And I would probably say the second thing is that latter point, which is assessment of your team. So everyone has a wonderful team and there's a lot of talent out there right now, but are they able to. Are their talents such that they're able to go ahead and effectively merge another entity into your organization? Is that part of their skill set? If it's to grow, are they able to go ahead and extend themselves beyond the current defined area of your service area? Is that talent skill level there? And they have to be critical with that, whether it's on the financial side or the sales and marketing side, or the operations side, or the IT side? You have to look, look at your, your talent, leadership and say, okay, do I have the people that really can, can handle this, or are they overwhelmed right now? Are we at max capacity right now because you can innocently cripple your organization or you can bring more harm if you don't look and say do I have the right leadership that's going to be able to extend my mission, Going to be able to blend my mission. We'll talk about one other thing I think is critically important that's missed often in a moment. But are they the right people to go ahead and perfect that transaction? Because frankly, the legal piece of it, the M and A legal documents, that's the easy part, by far and away. The more critical part is the successful integration of two entities into one new combined entity. By far and away.
- [31:15]
Yeah, that's. I think we could have a whole podcast episode on, on specifically on that. But you know, you touched on one of my favorite case studies which is, is Kodak. And there was a time when Kodak and Fujifilm were the two major manufacturers of, of film stock. And you know, they had other business lines and so forth, but that was a big part of what they did. And you know, there's some complications in that. One's a US Company, one's Japanese, but generally speaking, they were both large, had a lot of presence in the field, and Kodak essentially owns and is monetizing patents today. That's their business model. That's who they are. That's about it. Fujifilm is a giant. They're the fourth largest camera manufacturer on the planet and they seem to be doing quite well and they made a lot of decisions as they went along. Kodak was very risk averse. They were always reluctant to cannibalize the sale of film by investing too heavily in digital processors. Fujifilm leaned heavily into the future and they made some bets that paid off. So glad you brought up Kodak. It, it gives me a, an idea for a future podcast episode to go deeper into that topic. So that's great. So maybe the classic question for someone who's in the banking side of this and who works with transactions, but you talk a little bit about the market, you talked about the numbers of transactions that are taking place and so forth. But like maybe more macro global sort of, you know what's happening out there. We know we've seen some interest rate trends, we've had some economic challeng. You and I are recording this podcast the morning after a presidential election. So you know, there's been a lot happening out there that could influence the markets. What has that been like for your clients and for the organizations you work with who are wanting to go through.
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A process like this? Yeah, in the macro sense it's been the best of times and the worst of times. If, if you go back to 20, 2020, the end of 19 and 2020, we from an M A perspective, we're sitting on a rocking chair saying, okay, things have kind of paused because this thing called PDGM was being put into place the first of the year, January 1, 2020. So everything on the certified home health side was kind of like slowing down dramatically because of, of not knowing what was going to happen. And of course there was the threats of who is going to survive or not survive because of the cutover from, from perspective payment. So but then of course covet hit and what would have been, I think a very dramatic impact to the industry was camouflage because of this injection of monies that the government made to everyone to, especially to home health and, and to hospice and what took place and what took controls for the next couple of years. So M and A wise, it was a shocker. Record levels of activity, certainly all time levels for hospice and home health in those years. Record level of valuations, sky high valuations during those two years because the conditions for the buyers were very favorable. If you recall, interest rates were down to virtually zero. So you could borrow money very cheaply. The government was pumping money in. The demand for health care services was insatiable. So you're looking at investors saying, well, I'm not going to invest into the leisure resort industry because there's nothing, nothing going on with cruise ships and hotels, but there is a lot going on in healthcare. So we had the best time during those couple of years because of all the conditions that were unique. Right. Once every 100 years, every thousand years. And healthcare, certainly our sector post acute care took advantage of that and record level evaluations and activity following that in the first, after the first quarter or so of 2022 and for the rest of that year and all of 23 into 24 worst of times, things came grinding to a halt. Why? Well, inflation spiked. If you recall at one point we're at 9% inflation year over year and I think at this point around 21 or so from four years ago. So inflation spiked up, the cost of money spiked up. The parallel is if you're trying to buy a house, the cost of mortgages spiked up. If you're trying to go ahead and renovate your house, the cost of supplies spiked up because of inflation and supply chain issues that were hangovers from, from COVID and that had all downward effects on the M and A world. So we went from Record levels of activities down to record or near record low levels of activities and valuations for the past couple of years. So Tom, it's interesting not just because we had the highs and lows, but the contrast came back to back. It wasn't like it took 10 years for that to happen. It took 10 weeks to go from record level highs to, to record level low numbers of transactions. So that's what's been taking place relative to the M and A marketplace. And then you layer on top of that we were waiting for rate reimbursement news and we got that for hospice a while ago and we just got that for home health. And of course the nail biting over is going to be another rate cut. And that's what CMS came out with. They kind of backed off to basically a break even a 0.5% bump for next year. But then don't forget we're layering in the first impact of, of home health. Value based purchasing takes effect in January as well. So you got that layering and that's coming up. No one's really spoken about that. That layer is coming on top. And then we had the presidential elections that just got finalized yesterday. So there was this level of uncertainty that kind of tapped the brakes of activity for, for this year for sure and going back into last year. And I believe that we're about to see a complete turnaround, a dramatic turnaround. If you see the, the indexes, the major indexes today skyrocket. All time highs, Dow Jones all time high. S P is up, Nasdaq is up. So there's now if you're a business person, you're now thinking positive, Certainly check your 401k. That has appreciated nicely in the last 24 hours. But we're also seeing this week too, the Fed is supposed to be announcing a second rate cut. So we'll see if, if Mr. Powell comes through with that rate cut. He announced a, a 0.5% rate cut in September. People are expecting at least 0.25% rate cut this time. And we'll see if the elections have changed that that decision or not. But that will help to bring down rates and then I believe there'll be anticipation for reduction and continued reduction in inflation. So all those things that, that facilitate transactions, lower cost of capital, lower inflation and stability, regulatory stability and oversight. And I'm now hearing for the first time some stability Ray, in labor for the first time years that the labor force has kind of settled down and not changing and not leaving and now owners for profit Nonprofits are having a bit more peace of mind about their labor force consistency. So there's the contrast in comparison between the two time frames.
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Okay, so it, perhaps it has been the best and worst of times, but you sound pretty optimistic looking, looking up the road here. I mean, as you look to the future, you're pretty bullish.
- [38:54]
It sounds like I am. And I say that because I think in these past couple of weeks there was not a rate cut. Inflation is coming down. The Fed is, I think is going to reduce the, the, the Fed rate, which will bring down rates across the board. But more so than that, just anecdotally, I'm talking to my friends in the industry that are in the consulting side, due diligence side, financial oversight side. They're all busy, they're, they're all back to being busy. They're all back to being engaged in various projects, M and A type projects. And that is the precursor. You know, when the buy side community is out there making those engagements, hiring those teams, then that, that lead, that's the precursor to a leading indicator to things picking up, which is the next step, which is my step, the transaction step of the process. So we think that, we think that next year is going to be a return to pre Covid levels of activity again after we've had about 24 months of being a depressed activity and valuations.
- [39:56]
Okay. Well, you know, sort of in the spirit of the precursors that you described, I'm seeing in my own consulting work there's been a higher degree of percolation around these sorts of issues and probably a transition over the past couple of years from you know, oh darn, are we going to have to, to gee, maybe this helps us achie some of our longer term strategic objectives mindset, which has been a shift just in terms of the organizations that I'm working with, maybe just to go back a bit and you touched on this Mark, but maybe the last question or the last category to talk about is going back to the organizations that are thinking about this and mulling this over very seriously as to the reasons they should. Very complicated, requires a good bit of soul searching. And the four step process that you described earlier, and we've touched on that, but now looking at the projects that have gone ahead and have been successful, as you look at the ones where you'd say, boy, that was a good process, objectives were met, parties are happy, this really accomplished something. Are there a couple of characteristics of the success stories or the sorts of things that you feel should describe an organization so that the organization as they're doing the sole searching can say yeah that's us, or we've got some work to do, we've got some gaps to close. What's, what's the, what's the recipe for success just in terms of the transactions.
- [41:40]
You'Ve been through, you know, and it's not automatic. I think, I think a person that has had no experience kind of thinks oh it's pretty automatic. Two people get together and they, they get the documents, they think of it in terms of legal terms, the contract gets signed and you move on. But the, the contract is kind of perfunctory. The hard work needs to come beforehand. So critical success factors from my perspective, irrespective of for profit or non profit, number one is the leadership team who you have surrounding once you've made a decision to buy or sell, let's say it's sell the leadership team around, you bring them in and counting on their maturity and their confidentiality. Here's what we're doing, here's what we're looking at, here's our objective, here's why. Getting buy in and making them feel like they are in the know and they have some input to the control of their future. Because in my years as an operator, long before I've been doing this, my experience, I was acquired, I was also the acquirer. And when you inform your team, the initial reaction, some are surprised. Some like, oh this is great, we're going to buy somebody else tomorrow morning after they went home and had dinner with their family and their spouse. Mark, what about me? What about my title? What about my corner office? What about my vacation? What about my, my, my 401k? What about my bonus plan? It, it turns within 24 hours to wait a minute, wait a minute. What does this do to me and my future, my family? So you've got to have leadership that is aware of that, prepared for that and stays on top of that. That's a critical, critical linchpin because we're service businesses, we don't have any assets, we're not Kodak with, with any intellectual property per se. So that's, that's critical is, is taking care, taking care of your staff and getting buy in from your staff and then providing clear, crisp, clean objectives and, and vision for that team is critical too because rumors kill things. But with, with the proper vision, it's inspiring. You inspire those people. They, they, they elevate if you do it properly. So that I would say is critical, number one. Number two is preparation and I think that's where a lot of people, I mentioned this earlier, but really don't maximize the outcome. Meaning you're going to go into a highly investigatory process. If you're selling for sure, you've got to have your records tied up and clean and accurate ticking and tying, as they say in the accounting world. But compliance, I mentioned that earlier, not just clinical, but even hr. Are your records up to snuff? Are all the insurances up to snuff for your clinical staff? Are there CES current? Is there license current? I mean, that level of granularity has got to be there. And the files have to be appropriately documented as well. On the, on the management tools, KPIs and management tools, buyers will be asking for that as well. What I see is as a critical failure is nobody looks at those reports. For example, referral reports. You kind of have a feeling, here's our biggest three referral sources, but we don't know exactly where it's coming from or if you ever set up your EMR system properly. And the hospital has a dozen different discharge points, yet the report you get just shows one. So you get a report out that says hospital X's gives us 50% of our referrals. And the virus says, oh my gosh, you have a fail point of 50%. Well, now it's got 12 different referral sources inside that are independent, but we never tracked it that way. You got to make sure that those, those operating reports have that level of granularity and integrity because that's what the buyer will be looking at. They want to understand the functioning of the operation and how risky or riskless.
- [45:29]
Right.
- [45:30]
That that acquisition is going to be. So key lessons, either side, for profit, not for profit, leadership. And then, and then the, the preparation. If the third thing I would add, if it's a non profit organization, keeping your board informed, keeping the board informed and updated. In those two transactions that I mentioned, the leadership team did a superb job, superb job of involving and keeping their board informed. And as, as you probably can imagine, it was really a unanimous decision for many things. But keeping the board informed was critical. I was able to present to both boards numerous times. I think that breeds confidence and that also breeds endorsement ultimately into actions going forward. So that's, that's on the nonprofit side.
- [46:17]
Great, great. Lots of good advice buried in there. Very clear. So, so thank you, Mark. I'm hoping that for leaders boards or even just those who are curious and who are sort of students of this, that they will find this to Be a very useful overview podcast episode. I think it is. I think we covered a lot, so I'm very grateful to you for taking the time. I think this is going to be very helpful. I can think of two organizations I'm going to forward this to as soon as it's edited and published. So again, thank you, Mark. I appreciate you being here. If folks are interested in learning more about you, about your firm, about some of the topics that we've discussed here, how can they, how can they find you?
- [47:06]
Yeah. Thank you for that. So several ways. First, you can Google the Braff Group and Braf is spelled B as in boy, R A F. F as in Fred and Frank. I do that all day long. The Braf Group. B as boy. Right. I bet. So it's the Braf Group or a Google Ad or the braff group.com. you'll get to my, my page in there and get to our company or just call me directly. My, my office number is 770-955-1766 and happy to have a private conversation and, and nothing that even you know. Our, our company mission is not, you know, we're not focused just on who's our next client. We, we pay it forward. So I just love having conversations like this. Providing general guidance for giving my, my experience. I was an operator, so I was, I was so on the nursing side, on the whole medical equipment side. I was in technology for a while and had been now in M and A world for about 20 years doing this. But I draw upon those experiences. I draw upon actually running companies like you have in the past. So we draw upon our prior experiences. I'd love to share that and be of help if ever I can.
- [48:13]
Yeah, no question. Super helpful. Again, Mark, thank you. I think we'll, I'll, I'll stop the recording there, but I am, I'm grateful. I think this is a great interview and I think this is going to be very helpful to a lot of folks.
- [48:30]
Thank you. I enjoyed it myself.
- [48:33]
Ray Spadoni
Thanks for listening. I hope that you'll consider leaving a five star review on Apple Podcasts or your platform of choice that will help others find us here. My mission is to help empower organizations that matter by supporting those who lead them. Feel free to learn more about me and my work at Red Sail Advisors.