Behind CARD’s Chapter 11 Filing: What Do We Know So Far?

Jul 5, 2023

The Center for Autism and Related Disorders has filed for Chapter 11 bankruptcy protections and entered into a stalking horse bid agreement with a group led by its founder and ex-CEO Doreen Granpeesheh. The news comes after months of rumors regarding CARD’s status. In this episode, Sara Litvak and Anna Bullard interview Dexter Braff of The Braff Group to find out what he knows about the bankruptcy filing and what it means for the marketplace. Find out as well their thoughts on the current challenges faced by the healthcare industry, what bankruptcy in the space looks like, and where demand for autism services currently stands. All of these, plus lessons we can all learn on high-leveraged debt in this enlightening conversation.

Behind CARD’s Chapter 11 Filing: What Do We Know So Far?

Lessons Learned On High Leveraged Debt

What a great way to start our conversation in Season 2 by looking at this crazy thing that’s happened in our field, which I don’t think has ever happened. We’ve had one organization file for Chapter 11 or bankruptcy. In this episode, we’re going to dive in deep. Anna and I are going to talk with Dexter Braff about what this means and what we know so far.

Welcome, Dexter Braff. We couldn’t have this conversation without you. Candidly, both Anna and I started having this conversation without you, and then we had to pause and say we should have this conversation with Dexter. Thank you so much for joining us. It’s nice to have you here. Maybe before we dive in, give us two sentences about who you are and where folks can find you. We are here to talk about the news of the Center for Autism and Related Disorder Chapter 11 Bankruptcy Filing.

Thanks, Sara and Anna. Good to see you. I’m President of The Braff Group. We are a healthcare-focused mergers and acquisitions advisory company. Among other things, we have narrow niches in-home care, hospice, infusion therapy, home medical equipment, healthcare staffing and behavioral healthcare. One of our major verticals within behavioral healthcare has been autism services. We’re closing in on our 400th transaction. We’ve been around the block a few times and have seen a lot of things. I’m not sure we’ve seen anything quite what we’ve seen with the CARD deal but I guess we’ll talk about that. Thanks for having me.

First of all, you’ve been a keynote speaker and the original sponsor of the Autism Investor Summit every year, which is an event that BHC hosts every year. Every year, you give this fantastic keynote address talking about trends and headwinds and what’s happening in the space. When we had our first summit in 2018, that was right around the Blackstone deal.

I can’t remember if it happened or was about to happen, but long story short, we’ve come a long way from there. Can you give us a little bit of background and history about that deal and why it was so important for the field? What are some of your cautionary tales about it? You had so much narrative around it since 2018, and we’re sitting here in a very different position. Maybe give us a high level.

I was at a different conference when the deal was announced, and I forget which one it was. I remember going, “What? Blackstone buying CARD? What’s that all about?” The reason why I was so surprised is that for a company like Blackstone, a company as large as CARD was at the time, that was going down market for what they would typically buy.

They typically buy companies with EBITDA, Earnings Before Interest, Tax, Depreciation, and Amortization, equal to what CARD’s revenues were. It was an unusual transaction for them to get involved with. The autism space was hot. Blackstone had had some experience in healthcare services when they had acquired Apria and Coram as part of that deal. It was an eye-opener. It was very good for the industry. Let’s be very clear about that.

What do you mean by good for the industry?

Very good for sellers of autism services or providers, regardless of how people feel about PE. If I was a seller, I love the fact that Blackstone got into it. First of all, they paid a lot for it. When PE companies start to surround themselves and look at a sector, it always pushes the sector’s value up. The sector was already trading at high valuations prior to Blackstone coming in.

It only contributed to the momentum that was moving those valuations up into areas that we had previously never seen for healthcare service providers with insurance reimbursement, as we’ve seen in the other spaces that we’ve operated in. It brought attention to the space and enabled sellers to leverage that attention as buyers were focusing their attention on the space.

It’s a privately held company. It was hard to be able to get a lot of information about them. After the bankruptcy was announced, our team got together and said, “Let’s review the bankruptcy filings, talk amongst ourselves, send out our feelers to people who know and see if we can pull together a picture of what happened.” We have a fairly decent idea of what happened with caution that we’re doing the best we can with skeletal information.

The bankruptcy filing itself is about 150 pages long and written by lawyers, not for the general public. It’s written with all the lawyers that could make anybody’s head spin. We’ve been able to pull out the most important things. The nature of the bankruptcy essentially is that the buyers have a definitive agreement in place to buy the operating assets of CARD for $25 million.

We should note that when CARD sold, it sold for approximately $700 million. That’s the opposite of what you try and do when you’re a PE firm. You’d prefer that I buy it for $25 million and sell it for $700 million. I say that with my tongue firmly planted on my cheek. To the best of our understanding, the buyer is getting all the operating assets. They’re not getting any cash. They are getting the accounts receivable.

They’re also assuming all of the working capital liabilities of the firm. Accounts payable are the normal day-to-day payables that a company would have. They’re not picking up any of the long-term interest-bearing debt. We’re not positive how much that is, but we’re assuming it’s in the plus or minus $200 million range in the amount of debt that’s outstanding. They are picking up the benefits packages of their employees, the 401(k)s and all that stuff.

I believe there’s some specific information about picking up the employment contracts of employees. There’s some breakdown of who they have to cover and not. I didn’t go into that level of detail but they’re going to be retaining a lot of the staff. The nature of the deal is they don’t own it yet because they originally tried to do the deal outside of the bankruptcy proceeding. An initial offer or several initial offers that had come in before they filed for bankruptcy did not come to pass.

What they wound up doing is filing the bankruptcy and this deal at the same time. The offer that’s been made for the company is part of what’s called a stalking horse offer. A stalking horse offer means that there’s an offer that has been accepted by the company, that has been approved by the bankruptcy court, that is then published for the world to see, such as folks like you and I.

TSR 1 Dexter Braff | CARD Chapter 11 Filing

CARD Chapter 11 Filing: A stalking horse offer means that there’s an offer that has been accepted by the company that has been approved by the bankruptcy court that is then published for the world to see like folks you and I.

 

It gives opportunities for other bidders to come in, top that offer and win it from this initial buyer. If the initial buyer is topped and does not wind up getting the company, they are going to be paid a breakup fee. It’s a relatively modest breakup fee. It’s a $750,000 breakup fee plus up to $350,000 worth of expenses related to putting the deal together. I’m sure their expenses were more than that.

You’re not making a profit on this. You may make a small margin on that. If a buyer is going to top it, they have to top the purchase price and cover the breakup fee and the legal expenses. As I read the document, it’s going to go into an auction process where each round of the auction has to be at least $500,000 more than what the previous bid was.

When I look at that, as an observation, that’s a very small increment. It’s hard to imagine that this $25 million offer is suddenly going to become $75 million at $500,000 increments unless somebody decides they want to go out there high, but there’s no reason to. You keep going until somebody says no. I don’t think the court has high expectations because otherwise, they would’ve set those levels at least at $1 million.

I’m not a bankruptcy lawyer. Maybe a bankruptcy person will say, “No, Dexter. That’s a very appropriate level based on its relative to the purchase price.” From my observation, it doesn’t seem to be a whole lot because it’s not enough to elevate the value of the deal in any significant way. We don’t know how that’s going to happen. I would not be overly optimistic that there’s going to be a lot of toppers here. The deal looks like it’s a $25 million deal and it’s like, “I’m buying roughly $160 million in revenues for $25 million.” We have to understand that the company is bleeding money.

There is interim financing in place, or maybe it’s about to become in place for about $18 million. The filing says that that financing, which is called Debtor in Possession Financing, DIP Financing, will only last through the end of August 2023. If we’re in the middle of June 2023, let’s average that out to be 3 months, and it’s less than 3 months, that would suppose that I might be going through cash at a rate of $6 million a month. 3 months with $18 million, that’s very rough. It could be less because it could have been some buildup of new debt that had not been covered.

Let’s say it’s $4 million or $5 million worth of debt or losses. The buyer is responsible for those losses going forward. Let’s say it’s ten months of those losses or the total losses over that period are going to be $30 million or $40 million. That $25 million purchase price becomes $65 million or $70 million when you factor in the amount of losses. I’m guessing they will have to go out and raise their new debt to be able to finance state-of-day operations.

That increases the value of the transaction in terms of what they’re investing to make the numbers work. $25 million, on the surface, looks like it’s low. It is. Even $60 million or $65 million on the surface looks low but it’s not $25 million when you factor in all of the expense that’s going to accrue to whoever the white, the ultimate buyer is going to be. That’s a long diatribe on piecing it all together.

I was at AIS. Your keynote was one of the most talked about in 2023. Every year it is, honestly but in 2023, it was interesting and had a lot of meat to it that was unique. Maybe people weren’t at AIS. I’m curious how you feel about the headwinds, the things you talked about and how this would impact that talk if you gave it again.

There’s one of the things that we’ve been saying for a long time, and regrettably, you and I talked about this a couple of times. Some people were a little bit frustrated with me and The Braff Group. We were saying for a long time, “Values are high. If you’re thinking about selling, sell now.” People were thinking that was entirely self-serving and we were trying to drum up business.

While we always try and drum up business, that’s certainly part of what we do. We’re not in the habit of selling things that we didn’t think were true. The reality of it is valuations were exceedingly high in areas that we had never seen before. The valuation on the Blackstone deal is a little bit difficult to understand, but we did put out fillers and try to get a better understanding of what they paid.

From what we’re able to understand, no one knew what the multiple on that deal was. The reason why nobody knew what the multiple of that deal was is nobody knew what the earnings were that the buyer was buying because so much of what the earnings of what the buyer was buying was based on pro forma. Every new branch that we’ve opened in the last X number of weeks, months or years develops into a mature location consistent with what the platform of all of our locations has generated over their lifetime.

I have heard from others that the EBITDA of the company that was being acquired at the time that Blackstone acquired it for $700 million was anywhere from break-even to $50 million in EBITDA. That’s a pretty wide range. Even if you split it down the middle at $25 million or $20 million, that means the buyer was paying more than 30 times EBITDA for a transaction.

That is absurdly high for anything in the healthcare services arena. That was relatively small. I don’t know what their revenues were at the time. Sara, you may have known what they were, but I doubt that they were $200 million. I’m assuming they’re $160 million, although they did carve off some business in the West. Do you know what it was, Sara?

I believe the revenue was at $250 million.

They’ve come down it but part of that is because they closed down operations in the West or a lot of Western locations.

I did understand the multiple to be at around 18X.

It’s 18X times a phantom X and that’s the issue.

What is the EBITDA on that? You can work backwards if you know the sale price was anywhere from $600 million to $800 million in revenue, and you can extrapolate from it. It was unprecedented.

It’s no secret that valuations in the space have been far above what we would normally have anticipated in a healthcare service arena for many years. It held up far longer than we might have otherwise anticipated. The actual activity as it relates to Blackstone and CARD, I honestly don’t think it changes anything from where we sat in April 2023.

It was already priced in. People already knew that there wasn’t a vibrant market for CARD valuations that were going to keep that anywhere near whole. The rumor mill was already talking about those things. We also had other companies that had already had some high-profile issues. LME was having issues. Sara, you know that there were certainly more than CARD out there that were experiencing stuff.

People may look at this and see some numbers and go, “I knew it wasn’t great. I didn’t know it was this not great.” I don’t know that anyone’s opinion about the space is going to be more prejudiced against where it would be than where it was back in April 2023. As I said in our meeting in April 2023, we were surprised but happy that there were nine transactions in the first quarter. We are still receiving offers from our clients of valuations that do not reflect the disaster. We’re not seeing people going, “We’ll buy you for 3X.” That’s not the case at all. We’re still seeing valuations for our clients above what we would normally expect them to be.

We’ve said many times that the average overtime valuation for a healthcare service provider is going to be 5 to 6 times EBITDA and anything above that, you’re in the premium range. We’re certainly still seeing valuations in the 7X and 8X. Getting to 10X is going to be hard but even 8X or 9X. With home health agencies and substance use disorder providers, it’s very difficult to get above eight. These are as solid, if not more so, given the circumstances that we have seen in the recent past as it relates to autism.

TSR 1 Dexter Braff | CARD Chapter 11 Filing

CARD Chapter 11 Filing: The average overtime valuation for a healthcare service provider is going to be 5 to 6 times EBITDA and anything above that, you’re in the premium range.

 

Dexter, I want to stand corrected a little bit on the numbers because I did pull a source on PE Hub. It’s an article from 2018 and the title is Blackstone Walks Away with the Win for Autism Treatment Company CARD but they cite $600 million as the largest sponsor deal in the autism treatment space. $600 million is the value. The adjusted EBITDA in 2017 was $23 million and $20 and $33 million for 2018 proforma. The revenue was about $130 million and $175 million, respectively. I was a little high on the revenue.

These numbers move around. The key number you said was proforma. I’m not saying this is CARD so this is not about CARD or a situation but we have looked at companies with actual EBITDA of negative and proforma EBITDA of $30 million and $40 million. That’s not unusual at all. Whether or not somebody should necessarily believe all of that is a different story. Sometimes proforma adjustments are very rational and can be “easily” understood in sites and accepted.

Sometimes there’s a lot more hubris involved in some of those proforma adjustments. We also have to remember it’s sometimes fun to pile on these types of things. We have to remember that CARD, like everybody else, went through COVID. COVID took many companies and smashed down their revenues and earnings to very low levels.

One of the things that we’ve always been very consistent about is that when you pay a high valuation, you have to arbitrage down the investment by doing lots of startups. Startups are very risky. They’re cheaper than acquisitions. It’s the way to get the total investment over the EBITDA lower than what they paid but startups are not guaranteed. Acquisitions aren’t guaranteed but startups are far less guaranteed.

Maybe you know this better than I do, Sara, but my understanding is that from the period that the company was acquired and where we are in 2023, CARD may have opened up as many as 100 locations. If you open up 100 locations, that’s not cheap. That costs a lot of money. Not only is the investment in those locations but it’s bearing the losses over that period.

The logic and the reason for doing the startups to arbitrage down the valuation to a more reasonable level was perfectly on target but you have to be able to execute. They did this at the very time that we were 1 year or 2 away from a pandemic. We had a shortage of BCBAs. You can speak much more about that. All the other complications that the pandemic and issues around supply chain, inflation and all of those things that conspired against every company conspired against CARD but added to the woes that were built in from the first day that the deal was announced.

Let me ask this question and I don’t even know if you have the answer to this but thinking about that $25 million bid that Doreen is putting on a bankrupt organization, why would someone pursue that? What’s in it for them? It sounds like a sinking ship or it’s bleeding dollars. Have you seen this done before? What’s the logic behind it? I have my opinions on this as well but I’m curious.

I don’t know the principal. I’ve never met her and I don’t know much about her. We got into the autism space at a time when they had been starting to get out. My people might know her better but I don’t. It is not unusual. What is not unusual is for entrepreneurs who have built up companies and have sold them to miss being back in the business and owning and operating something.

There is joy in being an industry leader in owning a business and being able to provide services. Particularly in the autism space, the connection with clients, children and parents is more intimate than in other relationships that we’ve seen. Virtually everybody in healthcare services tends to get into the space because they have some clinical connection to the service line. Whatever that clinical connection is in most healthcare service sectors, what it is in autism, you can double that.

We have seen that in the way of interacting with owners of autism firms. We have had people express discomfort with us because we are trying to help people make money off of their ownership in autism and that’s felt to almost be a sacrament. I get it and we honor that. That’s lovely. There is a way to combine finance and joy and provide good services to kids.

What you might be seeing here is somebody who wants to get back into the business, seize an opportunity to be able to make a relatively modest investment and turn it around but more so, get back into a situation that they enjoyed and felt that they might have been out of the game for a while and missed that activity.

I don’t know how much money the principal walked away with from the first deal but I suspect that she’s not putting a lot of that amount of money back in. I don’t know how much personal risk in terms of financial exposure she’s going to be taking. I would be fairly confident that she’s not betting everything that she has on this. It’s relatively modest.

I believe she still has a 21% stake in the organization.

She’s paying $25 million, so she’s only paying $20 million because $5 million of that is going back to her. It’s going to the debtor, so she doesn’t get any of that. I read somewhere, and I could be wrong, that she had gotten roughly $300 million of the purchase price. Does that ring a bell to you in any way, shape, or form?

I would say, at least.

She may have posted that on LinkedIn. There was some post. I can’t remember but it was roughly $300 million. That’s been public.

Even if she winds up putting $50 million of her money into it, in addition to wherever the $25 million is coming from to try and finance losses if a good portion of that money is still there unless she lives a lifestyle above her means, which I don’t know what she does. I don’t think that she’s sacrificed her or her family’s financial security. That would be my guess. It’s a challenge both professionally. It’s an opportunity to get back into business.

Maybe it’s an opportunity to say, and I don’t mean this in any negative way, “You couldn’t do it, but I can.” There’s some joy and competitiveness in that. Most entrepreneurs have that going in the back of their minds. I suspect it probably has a whole lot less to do with dollars and a whole lot more to do with professional and personal goals and objectives.

You hit on all of the right things there. My understanding is if Doreen was not coming in, then there’s a strong possibility that CARD would have to close its doors. My understanding is this idea that if she’s able to do this, then patients won’t lose care. People keep their jobs. There’s this continuity of care piece that’s so important. I know Doreen. We’re all local here in Los Angeles. If you live in Los Angeles, you know who Doreen is. I’ve been lucky to get to know her over the years. I’ve heard you say this too, Sara. She’s a pioneer in the industry. She’s one of the first founders in ABA, and I don’t think she gets half the credit she deserves.

It’ll be exciting to see this. There’s this perspective that when private equity comes in, you lose sight of the people and the patients. This is a cautionary tale. I don’t think all private equity can have that approach, but I do think that this is an interesting cautionary tale of imbalance and management salaries versus worker-level salaries. It’ll be interesting to see the ship get righted so that we can see how good looks at this scale.

I do think we continue to have a shortage of staff. We continue to have a need where people with autism need care. The idea that the whole industry will be served by mom and pops or by small businesses can’t be the case. There’s a need for scale and this national approach to treatment. It’s more of, “What does that look like? What does good look at that scale?” It looks very different than at a smaller scale. You need something that can expand with the need.

One of the things that’s instructive to bear in mind is that I’d have to do an inventory. We’ve been in business for many years. I was doing it for someone else for ten. I used to have hair. Every attractive space, maybe all spaces but certainly spaces that have been high profile, it’s not unusual to go through these ups, almost what looks like crashes and returns. It’s happened in home health more than once. It’s happened probably at least three times that I could identify.

It’s happened in the whole medical equipment industry, where a stroke of a pen reimbursement for the most profitable segment dropped by 25%. That’s a revenue dropped. Everybody goes, “Nobody’s going to want to be in it.” The industry then self-corrects, figures out a new way of providing the delivery, reinvents itself, innovates and then comes back because the fundamental reason for the need for the service and the value it offers to the community is fundamentally there.

When you have those elements in place, that’s going to always provide a background, a foundation upon which strong companies are going to be able to continue to provide high-level service. They continue to be able to be strong financially, provide good service and still be interested in consolidating smaller entities to be even stronger, have the greatest coverage area and be nimble enough to reach challenges. This is autism’s. It happened relatively early in its consolidation life. Consolidation started in our mind somewhere around 2015 or 2014 when it began to take off. It’s 2023.

As they say, when you ramp up that fast, you’re going to have a faster ramp down. If you said to me, “Dexter, are you no longer interested in working in the autism space,” nothing could be further from the truth. We may see a period of quiet or a period where sellers are going to be a little bit more circumspect, where sellers may be licking their wounds that maybe they weren’t able to get some of those higher valuations.

When you ramp up that fast, you're going to have a faster ramp down. Click To Tweet

It’s very common. It happens all the time. The market adapts. Both buyers and sellers adapt. Employers and employees adapt. The demand for the service still far exceeds the number of caregivers and needs in the community. We all know that that means that the future for the provision of services at a high dollar level that’s still going to be profitable is not going anywhere. It’s a blip. They don’t spell doom and gloom.

Dexter, one question to me is important. For a lot of people that are maybe not in the private equity space or the financial space the way you are, when they hear bankruptcy, it’s like, “It’s the worst.” It sounds so scary and terrible, but how normal is bankruptcy in the space of healthcare?

It’s very scary and unhappy for lenders, let’s put it that way. As I understand, lenders are going to have a complete wipe-up. Whatever’s on their books, they’re getting nothing. The $25 million is going to be covering mostly that debtor in possession financing, which is new debt, not any of the old debt. The bankruptcy court does that. They make them seem senior to everybody else to keep hard from not imploding and simply shutting down its doors.

Lenders get nothing on this. Let’s also understand that no lender likes to have write-offs. We get that. The reason why they charge interest is to be able to cover these types of situations. If they didn’t have those types of situations, the amount of interest they could charge would be very little. They’d make money and have no risk but they don’t do that.

When they put together their portfolio, and they extend their debt out, in their calculations, they have an expectation of a certain amount of debt to go bad. As part of CARD, it’s a large amount of money, $200 million or whatever that money is. I don’t know what the balance sheets look of all the lenders that are involved with this transaction. This is not 100% of their portfolio. Problematic and unfortunate, nobody likes it, but it’s all part of the game. It’s all priced into the amount of interest that’s being paid.

Yes, it does make people nervous. Certainly, lenders are coming in for rounds immediately. We did report this, Sara, at AIS. We said that the definition of EBITDA in 2023 is not what it was in 2022. In 2022, the definition of EBITDA was earnings. If everything that we think is going to go great, goes great, and nothing bad that can happen will ever happen. At the conference, we said EBITDA is, “I’m assuming the worst is going to happen.” That’s what EBITDA is in 2023.

TSR 1 Dexter Braff | CARD Chapter 11 Filing

CARD Chapter 11 Filing: The definition of EBITDA now is not what it was a year ago. A year ago, the definition of EBITDA was “nothing bad that can happen will ever happen.” At the conference, EBITDA is “I’m assuming the worst is going to happen.”

 

Everyone had to adjust to that type of reporting after COVID because the environment used to be a lot more predictable.

There’s no question about that. Add the experiences of people within the space. You have the generalized issue around everyone in our industry being agnostic and more disciplined about EBITDA. You then have the unique attributes of CARD. It’s something that is part of the game of investing. It’s not common. I don’t want to say that we see lots of companies going bankrupt. We don’t, but do we see lots of companies going bankrupt in environments that changed dramatically and unexpectedly? Yes. What do we have here? The dramatic was COVID. COVID gave us to some industries and took us away from other industries. Let’s look at all the bankruptcies that COVID has spawned in restaurants and entertainment.

You have Zoom, which we’re using. I remember when Peloton was going through the roof because no one was going to gyms, and they needed to exercise at home.

Peloton screwed up because, by the great case study, they were like, “We’re making gazillions. Let’s expand and open up new manufacturing. Let’s do this.” I always was wondering, “Are you assuming that we are going to be in lockdown for the rest of our lives? If that’s the case, I would’ve taken out the money in suicide medication because that would’ve been a much better bet.” Peloton, I believe, had to declare bankruptcy.

I don’t know if it was bankruptcy, but they did significant layoffs.

They did have to make a big change.

They got Hilton to put Pelotons in every single Hilton across the country, which probably saved them a lot.

I can say that I was glad that I already had a treadmill in my house, so I was in good shape.

Let me restate what I heard, and you tell me if I heard it correctly, which is that multiples already lowered post in the 2018 period as of 2023. You’re already seeing if you were saying a 5X to 7X on the multiple. This will not necessarily impact multiples in any way. That’s on the finance side. The piece that I’m trying to understand beyond that is, multiples aside, what does this mean for transactions in general? I can say this because this is public knowledge. I told you this at AIS. It used to be that investors were knocking door to door saying, “I want to buy.”

At AIS, we’d constantly see there’s 1 attractive person at the bar and 10 people who want to be with that. It was the ratio. This is the first year where I’ve seen the tides turning. I have people reaching out and saying, “I want to sell.” There are not as many buyers who are interested, which is a unique shift. It’s not a great time to sell. Do you think that’s going to change again? How would you guide organizations or owners who do want to sell? Do you want to transition out what that timing might look like?

Do I expect transaction demand to slow? Absolutely. I’ll also tell you that that’s happening across all healthcare services. Even though the autism space was the beneficiary of the highest premium valuations, premium valuations extended across all spaces that we were operating. It was a good time to be an M&A person in ‘21 and ‘22. As a result of that, smart M&A companies, I’d like to think that we’re one of them, were saying, “We don’t expect 2023 to be the same as ‘22 and ‘21 because it can’t be. The world doesn’t operate like that.”

There already was that kind of element in play. It’s certainly more acute in the autism space. I had said the nine transactions in Q1 seemed high to me. We’d been averaging roughly 40 transactions a year for a few years. If we wound up the year at $25 million, that wouldn’t surprise me at all. That would be a significant drop-off but that’s what happened.

Demand for services is still there.

Demand for services but buyers are sketchy. The world has sent out a lot of negative messages around space about home medical equipment when oxygen was dropped by 25% and the justice department was investigating the largest home health agencies. Hospice agencies were being investigated for over utilization. Similar realities were uncovered in infusion therapy. It cools down the market, gets buyers to back off a bit and gets sellers to regroup. What “always” happens is that it figures out a better way to do business in markets where the product and service are still needed. When that happens and stabilization occurs, the buyers come back again.

Does it ever come back to that high level? It can. We’ve seen that happen in other spaces but it may take 2, 3 or 4 years for that to occur. During that interim period, the highest quality providers consistent with what we spoke about in April 2023, the companies that are still doing well or figured it out, their valuations will still be at premium levels. Not 15 times EBITDA but 8 to 10. They’ll still be able to get that because the space still has an opportunity going forward. The number of those people that fit those characteristics is going to be far fewer than those that were at the peak, if I had an autism company and $2 million in revenues, I could sell.

Anna and I had an opportunity to speak with a previous bankruptcy attorney before this conversation.

It’s a very complicated world. I can tell you that it’s not a money-losing situation for bankruptcy attorneys.

No, she was on the lender’s side. Think about how much you’re dealing with there. The reason I bring it up is because of her perspective. When I told her what happened, she was like, “It is highly common.” She essentially talked about bankruptcy as it’s a restructuring exercise. There’s a difference between liquidation where you’re going out of business and liquidating versus Chapter 11 where you’re truly restructuring your debt. She was sharing that this happens all the time. Every store that you probably know has probably gone through that. We were reading the list, and I was like, “California Pizza Kitchen, Forever 21, Lane Bryant.”

I was even saying Apple was one. We know that in ’98. Apple filed for bankruptcy.

I thought that was an interesting perspective too. There’s a little bit of this up in arms of like, “The sky is falling,” but also this idea that when you get to these high revenues and a more commercial approach to doing any type of business, whether it’s selling shoes or serving a vulnerable population or even hospitals, you need to be able to lean on these legal protections or strategies that exist around restructuring your debt.

Understand when it’s time to say there’s no end in sight if we keep this debt on our balance sheet. I thought that was an interesting perspective. How much do you think is the restructuring such as this because of private equity, or would an organization that does not have private equity also be vulnerable to this type of outcome?

If my private equity colleagues had a couple of drinks and weren’t feeling they were being taped, they would say they’re more subject to that type of outcome. That’s because private equity can be very aggressive. When they’re competing for assets, private equity bids up valuations.

Private equity can be very aggressive. When they're competing for assets, private equity bids up valuations. Click To Tweet

I would think they’re taking more debt as well. This idea of financing growth oftentimes brings in investors to finance growth. You can’t scale or broaden without some type of financing. That usually happens with investors.

Many entrepreneurs, I don’t know necessarily most but most would be the case, probably would not be comfortable carrying that amount of debt which could leave my personal family in peril.

It’s because they secure something against them.

If I go to a buyer and it’s a privately held company and the buyer is privately held, I ask, “Do you want my client to take a paper to finance part of your purchase price?” We go, “Will you guarantee that with your house?” The answer is always no and F-no. Private equity, because it’s institutional and there aren’t necessarily individual humans that have to bear that individual risk, is going to be less likely to be as fearful of that.

Nobody likes to declare bankruptcy. It’s not good for someone’s resumé and all of those things. It’s not like it’s a runaway train. The fact of the matter is that the business of investors is theoretically to be able to leverage as much debt as possible. The reality of it is that the formula for returning purchase price, return on equity is to deploy as much debt as possible and play as close to the edge as possible to generate the high rates of return.

The higher the rate of return, the more money that everybody makes. Those high rates of return leave you vulnerable to unknowns. The unknowns that happened at CARD were the same unknowns that happened in all businesses, plus COVID and an EBITDA that wasn’t, by all reports, real. If I’m doing my spreadsheets and penciling in, “I’ve got $30 million of EBITDA and this is X. I love my spreadsheet and I carry the one,” life is good.

However, if that EBITDA isn’t $25 million or $30 million and it’s $10 million, nothing works at that point. The entire formula falls on its face. You’ve got a lot of pieces. It’s a good case study for investors, B-school students and students of industry, which we all are because we’re all learning about knowing, “Here are the issues that we need to be careful about. Do we ever want to lever up to the point where if some small thing goes wrong, we’re out in healthcare?” That’s probably a very poor decision to make.

You made a good point, Dexter. It’s something that I’ve said when I worked for an ABA company. I would say this all the time and I still say it. It came up at AIS so many times. ABA services are local. No matter how big you are, you still have to figure out how to deliver those services on a local level. That came up again when we did talks, even in your talk about expansion. To your point about planning all these clinics all over the United States, that’s great but still, it has to be able to be localized to be successful.

One of the things that’s odd in healthcare services and we represent sellers is a benefit for our company. We don’t have to take stock of the buyers’ strategies. I prefer buyers to be successful. It makes them more apt to do more transactions. I’m not talking about CARD or any healthcare service provider. What is the advantage for me in Pittsburgh as a consumer of healthcare services and as a payer for healthcare services that the person providing those healthcare services does $80 million of revenue in California? Nothing.

Theoretically, you would hope that they’re big and more profitable so they could be more competitive. The reality of it is in healthcare services, that’s patently untrue. We rarely, if ever, see buyers with profit margins greater than the companies that they acquire, it’s always less because they are not creating efficiencies. They’re creating middle management that other companies don’t have to bear.

It doesn’t take them from 20% EBITDA to 5%, but it doesn’t take them from 20% to 25%. Since there aren’t very many national payers for services, there’s very little advantage to being national. There’s a great advantage to being a strong local provider. I can dominate a market. I can negotiate with individual insurance companies because I have the ability to provide services that my competitors can’t but it doesn’t help me to have a national footprint in that local regional market.

That’s why local regional players can compete quite effectively, sometimes even better, than national players can have in a specific local market. In many cases, there’s also a natural bias against big companies because the assumption is that a local provider, owner or operated, is going to care more about my children and clients than a large, unknown, publicly traded company. Whether it’s true or not, it doesn’t matter.

Local regional players can compete quite effectively, sometimes even better, than national players can in a specific local market. Click To Tweet

Thank you so much, Dexter. I can’t believe how quickly the hour went.

It was so fascinating.

It’s interesting. I appreciate the opportunity. As you can imagine, we’ve talked a lot about it internally here. I was at another conference. It was a home care conference, and there were a lot of side talks about, “What do you know about Blackstone and CARD?” It’s a step at a time. In 2024, we’ll go, “That was interesting.” We’ll be talking about something else.

In August 2023, we’ll know whether Doreen is able to take it over or not. That will be a telling time as well if that goes through. We’ll certainly be giving updates here as this progresses. Thank you, Dexter. It’s always a pleasure to talk to you.

Thanks a lot.

 

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About Dexter Braff

TSR 1 Dexter Braff | CARD Chapter 11 FilingDexter W. Braff is the Founder and President of The Braff Group, one of the nation’s leading health care merger and acquisition advisory firms (source: Refinitiv). Since its founding in 1998, The Braff Group has closed transactions with an aggregate transaction value in excess of $5 billion.

With 30 plus years of experience representing health care service companies, Dexter is recognized as one of the preeminent industry experts in health care M&A. He has written and contributed to feature articles that have appeared in numerous health care industry publications and has written a chapter in the Handbook of Business Valuation published by John Wiley & Sons. He is frequently interviewed on various topics regarding health care mergers and acquisitions by news outlets including Bloomberg News, CNBC, USA Today, The Huffington Post, BHB News, Hospice News, and HHCN News, along with various health care sector journals. Additionally, Dexter is the author of The Braff Report, a respected periodic market analysis of specific health care sectors including Behavioral Health, Home Health and Hospice, Health Care Staffing Services, Home Medical Equipment and Pharmacy Services as well as Viewpoints, which are treatises on various aspects of completing a transaction.

Dexter has been the keynote speaker, panelist or speaker on various issues regarding health care mergers and acquisitions or finance at conferences across the country including Home Care Innovation + Investment, McGuireWoods Healthcare Private Equity and Finance Conference, BRG Healthcare Leadership Conference, National Association for Home Care & Hospice Annual Conference and Financial Management Conference, National Hospice and Palliative Care Organization, HME News Business Summit, Staffing Industry Analyst’s Healthcare Staffing Summit, Treatment Center Investment & Valuation Retreat, Autism Investor Summit, NATHO’s Conference for Healthcare Staffing Executives, CCAPP Addiction Leadership Conference and Aging Media’s INVEST, FUTURE, VALUE, ELEVATE and HOMECARE conferences on Behavior Health, Home Health, Home Care and Hospice. Dexter has presented seminars, webinars and moderated or participated in discussion panels for numerous entities including Expert Webcast, Aging Media’s Behavioral Health Business and Home Health Care News and Staffing Industry Analyst.

Dexter holds an MBA from the University of Pittsburgh, a Master of Science from the University of Oregon, a Bachelor of Arts from Cornell University, and received the Vincent W. Lanfear Award for academic achievement from the University of Pittsburgh. Dexter has been selected to serve on the board of several companies and institutions including the advisory board for the Home Care Innovation & Investment Conference. Dexter was inducted into The Home Care and Hospice Financial Managers Association Hall of Fame as “Dealmaker Extraordinaire” in 2019.

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