Why Beacon Created an AI Committee for M&A_and What They’re Testing Next Part 1

Kison: [00:00:00] I am Kison Patel, and you are listening to M&A Science where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M&A deals.

Kison: Hello and welcome to the M&A Science podcast. [00:00:30] This podcast is part of a mission to rethink how M&A is done. The old school seller led approach, it's dead buyer led M&A, is all about strategy, alignment, and efficiency. And let's be real. It's not just about closing the deal, it's about making it successful.

Kison: We uncover what truly works in M&A by learning directly from the best. I'm your host, Kison Patel, founder and CEO of deal room and chief scientist here at M&A Science. Today's guest is Harrison [00:01:00] Thomas, chief Growth Officer at Beacon Specialized Living Services. Harrison leads growth in M&A in one of the most operationally complex corners of healthcare, home and community-based services.

Kison: From acquiring unsophisticated mom and pop providers, the navigating high-touch integrations across fragmented state systems. Harrison brings a nuanced boots on the ground perspective and what it really takes to scale in this sector. In this [00:01:30] interview, we're gonna talk about the unique challenges of M&A and the highly regulated Medicaid funded healthcare service, and learn how to approach due diligence in mom and pop businesses with hidden liabilities.

Kison: Harrison, how you doing today?

Harrison Thomas: Doing great, Kison. Thanks for having me.

Kison: Thanks for hosting your office here, just outside of Nashville.

Harrison Thomas: Welcome to Middle Tennessee. It's a pretty day. It's gonna rain for the next four days, so I'm glad you're here today.

Kison: It's been a beautiful day. Can we kick things off a little bit about your background?

Harrison Thomas: I'm Chief Growth Officer at Beacon. I've been here at the organization for a little [00:02:00] over eight years now. I originally started in healthcare. Nashville is the healthcare capital. A lot of people don't realize that we have some of the largest health systems in the country based outta here, and thus everybody that makes money knows how to spend their money in healthcare, and that's one place they do it.

Harrison Thomas: Started working for a large publicly traded company here in Nashville, doing corporate development for a number of years. Learned a lot on finance side as well as just the strategic partnerships. Company was actually one going through activist investors, so learned a lot about how do you navigate a [00:02:30] little bit of pressure from the external capital space.

Harrison Thomas: So that was how I started in healthcare. Ended up getting into behavioral health, getting into technology. Had a real estate degree from college, so a lot of different experience, and that all culminated in Beacon Specialized Living. So I was approached by Darren Hodgkin, the CEO at Beacon, and Darren and I had overlap at one of my companies.

Harrison Thomas: And from there started looking at what Beacon did and really got excited about the mission of the company and where we were going.

Kison: It's a pretty broad deal experience. Been at the helm of the [00:03:00] corporate world and now you're on this platform. Can you talk me through what Beacon's M&A strategy looks like, how you've seen it evolve over the eight years you've been here?

Harrison Thomas: So Beacon is a home community based service provider. So that means we are in the Medicaid reimbursed space, serving individuals with developmental disabilities and severe mental health needs. We as a niche support some of the most challenging behaviors of individuals anywhere in the country. And because of that, we started in [00:03:30] southwest Michigan.

Harrison Thomas: I actually moved my wife to Michigan. She was 34 weeks pregnant last day. She could travel and. When we started up there, we had about 200 employees. Now we're a little over 3000 employees. Starting from where we were to where we are, it was really about taking what was a very underserved population. We've taken the mantra and the founder of the business that we will be the provider of choice when there are not other providers that are willing to take on the needs of the individuals to be served.

Harrison Thomas: Because we take that mantra, we are really able to [00:04:00] step in and look at different market segments, not just where we started in Michigan, but in the other eight states We've entered and been able to focus on that very specific niche of people with challenging behaviors. For an M&A perspective, we're a little different.

Harrison Thomas: We're not a roll-up shop. We're very focused on finding the right type of quality provider, someone that aligns with what we like to think we do and the existing markets that we're in, but that also has a culture of care and compassion and dignity for the individual served, and then [00:04:30] saying, what does it look like if we overlay our capital structure, our infrastructure?

Harrison Thomas: The supports in the back office and the additional clinical and medical team that we have that most mom and pop providers don't have. And then how do we then accelerate growth and find more people to be served? So our m and H focus has really been that to find those type of providers.

Kison: So you've seen the growth from 200 to 3000 employees operating in one state now in eight different states.

Kison: Big focus on operational efficiency and optimizing revenue. [00:05:00]

Harrison Thomas: Yeah, absolutely. Actually, when I started Beacon, my role, I've had the title Chief Growth Officer the whole time, but I was A CFO was in charge of it. I was in charge of facilities. So for a number of years I had the full gamut of experience, which has been great from an M&A perspective, because I've really gotten to look at how do these businesses operate?

Harrison Thomas: What are the key value drivers? What are the financial metrics that matter? And frankly, in the human services space, there's very simple metrics that you pay attention to. [00:05:30] What is the labors, the cost of the revenue? What are the staffing ratios that you use to support a lot of these financial and kind of KPI Metrics are simple to focus on.

Harrison Thomas: Having the lens of the finance chief, I was really able to say, this is what you have to do to make a viable business, but also what are the frankly dis synergies that we're gonna end up overlaying because we're a much more sophisticated organization with a lot more comprehensive back office.

Kison: We built the template to evaluate these deals.

Kison: But then you also got an understanding of DYS synergies too, which I think is [00:06:00] things you learn over time.

Harrison Thomas: Absolutely. When we talk about our PTO policy, our health benefits, our all of the support structure that we have, the technology we're bringing to the table, those other providers don't have that, so we're usually walking them back.

Kison: How many deals have you done in eight years?

Harrison Thomas: Here at Beacon, we've probably gone through around 15, 16 deals in the last seven, eight years.

Kison: That's a good number.

Harrison Thomas: Yeah. We've closed the humor of this is, and we can actually talk about how we've leveraged the CRM with deal room. We did a major pipeline cleanup and.

Harrison Thomas: We're [00:06:30] closing maybe two to 3% of the deals that really enter the front end of the pipeline and that we en engage in some form of diligence. And there's just so many factors where they fall out in the deal flow, that 15, 16 deals that we've closed, there's a lot on the front end to be able to get down to that number.

Kison: We'll talk about that. You are a deal room customer. We're not gonna make this into a big commercial pitch for a deal room. So if we look at these deals, the 1516 deals, one of the things you mentioned to me is about 80% of your [00:07:00] pipeline consist of deals that are sub 600 K ebitda. What makes the size sort of viable or not viable?

Kison: There's like pros and cons, I guess going bigger versus smaller.

Harrison Thomas: Yeah, so our space is a niche that I didn't even know about in healthcare, home and community based services. The very nature of what the providers that are in our space do is a lot of times 24 7 care for individuals with these challenging needs.

Harrison Thomas: Thus, most of those organizations really are founded out of kind of a [00:07:30] mom and pop structure. It's a lot of times it's caregivers that say someone asks them to open a second home or a third home, or it's someone that's coming out of nursing or some other background. It's very rare that we would have someone come in with an MBA that starts a business in this space.

Harrison Thomas: That's unusual. What we see is those providers really scale to the point at which their capacity of their ability to touch the people they're supporting taps out, building a back office, building training, and recruiting and clinical, [00:08:00] and all the accounting functions and HR functions. It's not what they do.

Harrison Thomas: They're caregivers. They just wanna support people. Because of that, we almost see these thresholds of EBITDA and earnings that they reached that they don't really surpass. And that threshold of that 600, a lot of those mom and pops can get up to that. It's that small business owner, but they've not invested in the additional infrastructure that goes beyond their ability to actually go support the home.

Harrison Thomas: 'cause very often we find out that the owners are the people going and feeling the midnight shift when somebody calls off and there's no [00:08:30] one to actually support. That's where it gets really complex because these smaller deals, one, they don't have clean books. Every time we go through the numbers, the hardest exercise is actually trying to scrub the financials.

Harrison Thomas: No one's doing things on our acru basis. It's all cash. So when we start talking to 'em about, Hey, the run rate looks like this, what is run rate? What does that mean? We actually scrub The timing of your inflows now flows. This is what it's gonna look like. So we spend a lot of time handholding these providers to try to help them [00:09:00] understand their own business from a financial perspective or from a KPI perspective.

Harrison Thomas: Even if they're doing a half million dollar business, there may only be serving a dozen people. Two of those individuals leave and the census changes. The business has fundamentally changed. So we spend, we have to go into depth with them and explain, Hey, this is where the business is trending compared to where you think it's at.

Kison: You just get that trust or is it earned?

Harrison Thomas: That is very much the complex part of my job. A robot could replace all the diligence that I do, but it's [00:09:30] the empathy, it's the emotional intelligence to actually engage with people to try to understand where they're coming from. I spent a lot of time, I've got a kid that came over and is working with me, came from our capital partner side.

Harrison Thomas: He's way smarter than I am, but I told him, I said, this is the thing you've gotta learn. You gotta learn how to interact with people. You gotta out learn how to win the trust. You gotta learn how to win the business, and it's very much a transparency game. I kind of opened the kimono and let everybody understand exactly where we're coming from.

Harrison Thomas: Exactly what we're seeing upfront and tell 'em where we're gonna run into [00:10:00] issues before we ever get to 'em so that it doesn't blow up the deal further down the road.

Kison: Gimme an example, like if you were to tell 'em like, Hey, these are the issues that I could foresee happening. Like what are examples of that?

Harrison Thomas: There's a lot of different stuff when they start unpacking how they run their business. They might have, oh, this is our staffing, or We've got two different operating companies. Not a lot of companies who, they create multiple operating companies and have people working under each umbrella, but they're not paying them overtime because those individuals are working 40 hours here and 40 hours there.

Harrison Thomas: Mm-hmm. Department of Labor [00:10:30] doesn't view that as someone not earning overtime. We have to make them aware of that or we'll see that they're billing practices. They're not doing the reconciliations that are the way they're required at the state level. We have to get in involved and unpack with them why that's not right.

Harrison Thomas: A lot of times I'll bring in a third party. It's a sensitive line to say, are we just trying to. Push down the numbers are we trying to negotiate with them? And I try to make sure, look, this is not me negotiating with you right now. This is me trying to open up and make sure you [00:11:00] understand what's actually happening here and whether or not that meets labor laws, billing laws, regulatory laws, and why that's something we have to account for in the way we build the structure.

Harrison Thomas: And that's where we spend a lot of time in the handholding.

Kison: Sounds like fun, but Yeah. Uh, being candid upfront, Hey, these are how we operate to this level of standard in terms of how you're following the rules and billing practices. I always just thinking about like my personal expenses, that was my thing.

Kison: Why I brought thinking the finance. I brought CFOs no more person personal expenses on the [00:11:30] company.

Harrison Thomas: That's funny that you say that. There's not a single mom and pop business that I haven't had to spend majority of my time discussing what adjusted EBITDA means. So whether it's their family's cars, whether it's their NBA basketball tickets, their condo in Miami, the whatever it is.

Harrison Thomas: Every deal we look at, there's all that stuff that's kind of buried in there, and it takes a little while to actually get in and figure out what's real and not real on the adjusted side. And actually give you an example of a company that led to [00:12:00] one of the more complicated situations where they had represented a lot of adjustments and their ebitda.

Harrison Thomas: We gave them credit for those adjustments. I saw all the individual transactions come out, but they had actually never booked 'em to the p and l. It was all sitting on the balance sheet. Had we had a quality of earnings done, we would've easily have picked up on that. But I was at the time still wearing CFO hat, doing multiple different actions, but it was too small of a transaction.

Harrison Thomas: I didn't want to justify paying six figures for quality of earnings [00:12:30] on this little deal. And then when we got done with it, six months later, finances looking at the numbers, they're saying, Hey, this is not at the run rate we thought we were buying. We start unpacking. We go, the adjustments aren't trending the way they were.

Harrison Thomas: This piece is not showing up and go well. We start looking at where were those actually sitting? And the controller started working with the controller of the company. We looked at it and go, oh, you represented all of these adjustments in the p and l that were never in the p and l. Because of that, even though we had all the detail, we'd seen all the transactions, it was sitting to the side, [00:13:00] and we had to have a real conversation around escrow, around what does that mean?

Harrison Thomas: Because you've misstated the financials. That's very often a complex situation in trying to give people appropriate credit, and they always want all the credit when they're with a broker, but stepping back from it and saying, look, you don't get the credit for it if it's not real.

Kison: Yeah. Let's break this down for the people, maybe new to M&A is when you do sign your purchase agreement.

Kison: Mm-hmm. You represent these facts. What do they call? They call 'em your, uh, your disclosures basically. Dis

Harrison Thomas: disclosure statement [00:13:30] doesn't, yeah,

Kison: right. You got your disclosure schedule, which is like, this is what you're confirming, this is what you're agreeing to. And then if. Some of those things for not, not to be true is essentially your recourse is either there's an escrow on the side or there's like a reps and warranty policy, which you can put a claim against.

Harrison Thomas: Yeah, so a couple pieces there. Reps and warranty in the size deals we're talking about, they're hard to come by and the reps and warranty market as a whole is very difficult in the smaller deal space and they're not underwriting policies anymore. So reps and warranty is really not even something we [00:14:00] consider.

Harrison Thomas: And when Beacon actually recapped, we struggled to even pursue a reps and warranty policy in our space. They actually didn't do that. To your point, escrow's the other place. When we start negotiating a deal with a seller, we come to them with a term sheet. One of the terms that we're presenting is what are the escrow amounts that we're looking for, that escrow amount.

Harrison Thomas: I'm looking for a larger percentage of the sale proceeds to go into escrow. Based on how small the deal is, because you need a higher percentage. The liability that we're exposed to as an [00:14:30] acquirer is substantially higher, and there's potential for things that don't actually transpire the way we thought they would.

Harrison Thomas: We'll talk a little bit about the liabilities we have. But that is what we're focused on, is making sure that we have enough dollars in escrow. And when that starts teed into a bigger chunk of the total purchase, price, sellers get very concerned 'cause they think that they're getting all the money today.

Harrison Thomas: And if there's nothing found and everything you stated is factual and we have no issues down the road, every one of those dollars will come back to you. But every once in a while you have to tap into the escrow.

Kison: [00:15:00] What's the usual range of an escrow? As a percentage typically?

Harrison Thomas: Yeah. It's a percentage for us on the, yeah, we're usually 15 20% of purchase price is what we're gonna be looking for.

Kison: And then what's the hold period?

Harrison Thomas: In our space, it's gonna be anywhere from 12 to 30 months, and what we usually see is kind of a step desk grow, depending on how big the deal is. Particularly for larger deals, there can be a lot of money sitting on the sideline. We will look at a release at 12 months and release at 24 months.

Harrison Thomas: Nice

Kison: regulatory burden. And [00:15:30] then historical liabilities. How does that work in your industry? What are the things you uncover? How do you get around it?

Harrison Thomas: The complexity of being in healthcare is that you don't just get to close a deal and set the liabilities to the side. So asset deal, stock deal.

Harrison Thomas: Fundamentally, you acquire the stock, you acquire all the historical liabilities of the company asset deal. The intent of doing an asset deal is that we will be able to acquire the company without the liabilities. It doesn't work that way in healthcare. The government doesn't view it that [00:16:00] way. States don't view it that way.

Harrison Thomas: You are able to set to aside a lot of the liability in an asset transaction, not as favorable to the seller. Typically, and I'll give you a little more detail, we often have to get in a conversation with the seller. Around doing a 3 38 H 10 election and a step up in basis because for them to treat an asset transaction the same way they would in a stock transaction, which is more favorable on the tax side for them, and I'm not a tax attorney, so don't owe me to this.

Harrison Thomas: They're [00:16:30] usually set up as an S corp, which allows us to engage in a 3 38 H 10 and step up their tax exposure to such that they are treated on a cap gains basis. They have the same net proceeds as they would if it's a stock deal. So we usually have to walk people down the path of why we want to do an asset deal in states where we already exist, states where Beacon doesn't exist, we're actually using a stock deal because a lot of times that's how we're gonna get a license in the state.

Harrison Thomas: We've entered a couple states de novo without having [00:17:00] any presence or any acquisition. And in doing so, it's taken up to 24 to 36 months just to get through the provider licensing process. If I can go acquire a company that's gonna give me the ability to actually get the license in that market at the time of close, if I do it under a stock transaction, I'm carrying a lot more of the liabilities, do it under an asset transaction.

Harrison Thomas: I can set some of that to the side. But the reality is, department of Labor and or Medicaid billing, Medicaid fraud is something that you don't [00:17:30] just get to say, oh, that was on the previous owner's plate. So we spend a lot of time on the diligence trying to understand one, where do they sit with their billing practices, and are there potentially issues that were uncovered?

Harrison Thomas: And if there are, we actually have a duty to report that information. That's where we have to come to the seller and say, Hey, we saw such and such. I'll give you an example of that. We acquired a company. The state had changed its billing practices during COVID. The [00:18:00] state was actually leveraging this provider to.

Harrison Thomas: Teach other providers in the state how to do the new billing practice. 'cause he was so advanced in the way he was doing the billing. After acquisition, the provider moved on, retired and we used a third party biller, an expert in the state. And when the third party biller started reviewing the billing, realized that person was not actually doing the additional step of reconciliation of billing that was required.

Harrison Thomas: In doing so, there was actually money owed back to the state. Then you start getting into trouble [00:18:30] damages and some other major issues. And we had to bring in that third party biller, meet with the seller, explain not just what is the liability that's towed back to the state. But now fundamentally we're running a much lower run rate business than we were expecting.

Harrison Thomas: We need to actually come in and we had to renegotiate purchase price a little bit tied to some of the escrow. So you have billing issues like that. You have the labor issues I alluded to earlier, it's overtime practices. We're providing 24 hours of support care. A lot of times people are. [00:19:00] Doing incorrect nighttime shifts, paying people whether or not someone's awake on call, those things can impact what rates of pay they receive tied to minimum wage.

Harrison Thomas: That gets a little sticky for us, so we have to pay attention to labor practices. And then there's also the compliance issues and regulatory burden of how are they operating the program such that if there had been multiple different compliance hits on the quality side, which there is a tremendous amount of oversight with state regulatory bodies assessing how [00:19:30] operations work in each of our programs, if somebody had been hit with multiple different incident reports, that could have happened in the past if I acquired that company.

Harrison Thomas: It's not like that was the previous owner. Now beacon's the new owner. It's, Hey, we may absorb whatever those historical incidents are, and that's a part of our record now. And you may have gotten away with 10 incidents, but then the 11th one is gonna be the one that triggers a provisional or conditional license that could really put us into a tailspin.

Kison: He's listening to this. You shouldn't be complaining about the deals you're working on. This [00:20:00] sounds like way more,

Harrison Thomas: there's complexity in our space. Even though it can be very small deals, there's a lot of complexity and liability that we really have to dance around.

Kison: This is serious liabilities. You gave examples of billing practices.

Kison: They need labor issues. The fact that this accountability transfer is over, whether you're doing a stock or asset sale. You mentioned the strategy of leveraging stock for these, getting to the new market and into regulatory systems, approvals faster versus asset. Do you ever get any pushback from the sell [00:20:30] side in terms of how it impacts their taxes between asset and stock sale?

Harrison Thomas: Yeah. That's where people start pushing back when they meet with their accountant that their feedback is, I'm gonna make a lot more money if we do this on our stock deal. But the majority of companies that are organized appropriately are organized as scorp in our space. The ones that are organized as an scorp, the.

Harrison Thomas: That's where we have the ability to do the 3 38 H 10. And I try to take a very honest approach to negotiating deals with people. If I want to do the asset deal [00:21:00] badly enough, I'm usually willing to pay the step up in basis with the 3 38 H 10 election such that we can treat as an asset deal, but that the owner is gonna be able to walk away with the same amount of money that they would have if it was an asset or a stock deal.

Kison: Got it. So not a huge difference.

Harrison Thomas: No, not for them. But now that doesn't apply in every transaction, but so many of the companies that we're dealing with are S Corp, so we can do that.

Kison: Got it. So that's like a special election that allows them to. Not have the [00:21:30] same treatment as like a C corp and yeah, I'd be

Harrison Thomas: scared to act like I'm a tax person, but I've spent enough time with CPAs and some of our lawyers to try to figure out how to dance around some of that more disclaimers.

Harrison Thomas: There's to this

Kison: podcast, Brian, none of this is tax advice.

Harrison Thomas: Absolutely not tax advice, but the 3 3 8 H 10, and then you also have the F reorg. Both of those are way over my head, but we have really good professional service partners who can figure that out for us.

Kison: You told me this phrase last time we talked.

Kison: The more diligence you do, the less likely you're to close the deal. How do you balance that fine line?

Harrison Thomas: It [00:22:00] is a complex place to be at times leading transactions because on the one hand, I'm negotiating with the seller and their deal team, and then on the other hand, I'm negotiating with my board and trying to convince them that we want to close a deal.

Harrison Thomas: We go down a number of different diligence activities when we do deals. Quality of earnings is one that is frankly a non-negotiable for me now because after that one transaction I said I'm not gonna get caught in a situation where we don't fully vet the financials thoroughly. And we have really good [00:22:30] partners who do that work for us.

Harrison Thomas: The other is we have a legal team that we've worked with for a number of years and they understand the healthcare laws. We need to look at compliance laws as well as environmental real estate laws. 'cause we own a lot of homes when we're running some of our programs. So I really lean into that team, but it's also to make sure that everything we bring back to the board is transparent.

Harrison Thomas: And we've really had to try to hone in on what are the things that are deal breakers and what are the things [00:23:00] that are maybe indicative of the culture of the operations that potentially are not things that we can fix. I can fix poor. HR payroll function I can fix. If the accounting is not done well, we can make sure we bill appropriately under the infrastructure we've built as an organization, but a company that fundamentally has bad quality culturally, that's tough to fix.

Harrison Thomas: We spend a lot of time trying to say, who is this organization really? [00:23:30] Who are the people there? Who is it that's gonna be running the business after the transaction? Are we displacing some functions that the owner may be engaged in? And if so, those are the problems. We can set that to the side, but every time we bring in the professional team, they really start unpacking the company and we start looking at all this stuff.

Harrison Thomas: We have to say, what can be fixed, what can't be fixed? And walk a fine gray line as to what blows up a deal.

Kison: I just thinking the whole picture about managing liability, that's [00:24:00] a big factor in your deals. You got whole backs is one tool. You've got Getting a Q of E done is the the now added tool. I like this perspective of just being realistic and bucketing what you can fix and what you can't fix.

Kison: That sort of lends to more of a go versus a no go decision. Are there any other ways or perspective you have around managing liability?

Harrison Thomas: Spending a lot of time saying when we do what the Beacon platform is, when we overlay the Beacon platform, are we [00:24:30] mitigating the historical practices of the organization?

Harrison Thomas: It's hard to set aside just from deal structure, a lot of the liability. We can call out fundamental reps. We can actually, if we identify stuff early on from a deal structure perspective, we can actually place some of those things into the purchase agreement as a special indemnity. So we've done some stuff like that where we find something and we say, look, yes, we'll agree to a 20% escrow.

Harrison Thomas: But this one specific [00:25:00] subject area that's particularly problematic, we're gonna build that into a special indemnity that's not tied just to the standard escrow that we've built for the deal. So that's one way from a deal structuring perspective, we can, but a lot of times it's just spending time figuring out who the people are.

Harrison Thomas: That may be a liability.

Kison: Basically, you're saying, Hey, this is gonna be separate. From the current structure that falls in the holdback and this means we can go see you basically.

Harrison Thomas: Yeah. Or it will actually have a separate escrow tied to [00:25:30] it. A lot of times we'll say, look, this liability burns off at a different pace than the general reps and warranties you may have.

Harrison Thomas: So that is something we try to identify early on. That's also makes a big difference on if it's a broker led deal or non broker led deal. So we're very different than a lot of the deals you'll see in the corporate space. And it's as we've brought people into the umbrella of Beacon who have come from Corp dev or M&A or private equity and seen bigger transactions.

Harrison Thomas: They're used to seeing pretty sims with the sell side Q of [00:26:00] with a term sheet that's very specific and outlined. Ours is brokers that maybe have put together a two page sim with all the detail that they have. We're just trying to get it across the finish line. And broker led deals are helpful for me because I can lean into a broker when we identify an issue that broker can actually walk the seller through why that is impactful.

Harrison Thomas: So there's a trust element between the broker and the seller such that [00:26:30] they can help mitigate the negotiate. I. On certain elements that we find. On the flip side, we can find a lot of favorable deals using a search firm where we're reaching out to providers that meet the qualifying elements that we're looking for in a transaction.

Harrison Thomas: But then that means I've met that seller. They weren't contemplating selling originally. Now I'm mean to sell them on a transaction, but then I'm also almost acting like their broker and I'm explaining why the liabilities or [00:27:00] these issues could actually build deal breakers or what the financial exposure may be.

Harrison Thomas: That makes it a lot more complicated trying to manage those type of issues.

Kison: It does. Don't you likely to get better terms?

Harrison Thomas: Theoretically, you should get better terms, and we do. We usually will get a little better on the purchase multiple, but I would say there's a higher fallout rate on those transactions.

Harrison Thomas: Usually if a broker gets a deal to a letter of intent, we're closing 60, 70% of those deals. Versus we can get to a letter of intent with a deal that we've [00:27:30] sourced and maybe we're closing 25% of those deals.

Kison: Wow. That's why you kind of made that emphasis when you told me about the deals you closed. 'cause there's some real work on deals that you didn't close.

Kison: That's right. Interesting.

Harrison Thomas: Yeah. I think it's the goal of anything where you have a pipeline. It could be a labor pipeline, it could be a referral pipeline, and for us it's an M&A pipeline. How can I get 'em outta the funnel earlier? Because by the time I get 'em down to the late stages of the deal, and I get to the point that I've spent all the money on the Q of E, I've spent all the money with legal building a purchase agreement, and when those [00:28:00] deals fall out, those are the ones that really hurt.

Kison: You know what I find interesting? This conversation is the emphasis you put on the whole risk and liability of these deals. Most of the corp dev people I talk to, it's, you know, the legal guy, this. Been in the trenches and maybe cinched your hands enough times that it's something that I don't, unless it's just you with the finance background thinking about this.

Kison: I don't know.

Harrison Thomas: It's both the moral obligation of trying to figure it out for the company's benefit in the future. 'cause the last thing I wanna do [00:28:30] is you could take on a single transaction that could take the company, and that is something that has happened in our space, in the home and community based service space.

Harrison Thomas: There were hungry larger entities that just played the rollup game. We have fundamentally tried to take a very different perspective. We haven't closed a crazy number of deals. The 15 six, that's not a lot of deals, but it's because we've been very thoughtful that we don't bring on the wrong asset and that it doesn't taint the whole ship [00:29:00] such that we're gonna sink it.

Harrison Thomas: Because that has happened to a lot of big providers in our space. That's why there's not a lot of scale providers in our space because it's a very difficult market to scale. One thing I didn't unpack earlier is just that. Every state in Medicaid ser in the home, community based Medicaid services completely different.

Harrison Thomas: The way they do reimbursement is different. The operations of programs are different. What it's called is different. 'cause each state actually works with the federal government and setting up their waivers and dictating how they're going [00:29:30] to deliver care in the state. And because of that, you can't just overlay the consistent playbook.

Harrison Thomas: We had a lot of fun with our board talking about what's our playbook? The playbook is what is required in the state, and then we can talk to you about how we do it. So had to be real thoughtful about migrating from the standards of what Beacon wants to be versus what the standards of the state require.

Kison: Yeah, that's a whole big nuance of, I can't imagine that, uh, what we already talked to with just the nuances of the business and liabilities itself, and [00:30:00] then adding that all these states operate completely different and you need to. Understand that regulatory environment and figured it out. Yep. Sounds like a lot of fun.

Kison: It can be fun as you progress, you're getting more people involved. You got third parties outside of like Q of E. What other third parties are you leaning on?

Harrison Thomas: We have a really good legal partner that does most of our transaction work for us and has been working with us for over eight years now at Kilpatrick Townsend.

Harrison Thomas: And that team is great. They actually know enough about our business to almost be [00:30:30] my headlights before I ever get there and finding that stuff. That's gonna be the deal breakers. We also have started working on chart reviews, so in healthcare chart reviews are very commonplace practice. That is not as much of an issue in the way we do what we do because our billing is typically with the states under the auspices of their Medicaid program, the HCBS programs.

Harrison Thomas: And if the cash is coming in the door, they'll do audits on the [00:31:00] documentation associated with billing. And because of that. There can sometimes, if when we do spot checks and chart reviews, we can find some stuff that's maybe not right on the billing side. But a lot of times that chart team is gonna do kind of a compliance audit for us to make sure they're addressing the OIG compliance standards and some quality issues.

Harrison Thomas: So there's certain quality metrics that are somewhat standard in our space, and we'll have them look into that as a third party. 'cause inherently I want to get deals done, my team wants to see the business grow, but we need that third party check to really [00:31:30] validate that what we think we're seeing is accurate.

Kison: How are you managing the process, like visibility into diligence, historical conversations, decisions, documentation?

Harrison Thomas: Our process really kicks off, usually it's a, it's that build a relationship first. Mm-hmm. We have to win people over, even though we're closed. A lot less deals that we're sourcing. We're seeing a lot more deals that we're sourcing.

Harrison Thomas: You end up walking into kind of a cold space of building that relationship from the get go of somebody that may not even realize they're wanting to sell at this time. So [00:32:00] that's really the first step, is convincing people to even share their diligence with you to even sign an NDA to get that information shared with you.

Harrison Thomas: So once we've kind of gone through cursory diligence, we try to get people comfortable with what is on the table. So we get to an IOI indication of interest before we ever get to an LOI and that indication of interest at least to say, Hey, what are the dollars we're talking about? What are the general deal terms we're talking about?

Harrison Thomas: If we can get someone through a signed IOI, at that point, we kick off the formal deal room process, we actually will start a room for [00:32:30] transaction. And what we've spent a lot of time on our side is trying to squeeze down the number of questions that we ask people in core diligence. And when we originally built out Dale room, I think we had 474 unique requests.

Harrison Thomas: I think our core request list is now down to 147 requests. I sneak slide in some Excel documents with additional questions in there so that it's not overwhelming to 'em so they can kinda go through a questionnaire. But we put everything into deal room and the beauty of the [00:33:00] platform for me, and again, I'm not selling it for other people, but I'm a huge advocate because combining the data request with the data.

Harrison Thomas: Allows us to frankly just ramp people into our process much more effectively. And I always tell people I want to have the history of all requested information and all the answers from the seller in one spot. So sellers aren't answering the Q of E team, answering the legal team, answering my accounting team.

Harrison Thomas: There's lots of people that ask the same [00:33:30] question. So that's how we use the platform. So your

Kison: third parties are actually putting all their requests through this. I require

Harrison Thomas: all of our third parties to work through Deal Room. If they don't work in deal room, they're not allowed to use an outside data room.

Harrison Thomas: Their request list have to actually reside inside a deal room because I want everyone to be able to reference that. 'cause so much of this is me managing the mom and pop,

Kison: you have full oversight of all the third parties who's doing what.

Harrison Thomas: When people tell me that they haven't had time to get through something, I can go and see very quickly how much time do they spend in D Room?

Harrison Thomas: How many items did they look at? I try not to weaponize that [00:34:00] information, but I also don't let people pull stuff over on me if they're not doing their job.

Kison: Yeah, it's interesting. I've used it like for some of that tracking, but not to that extent.

Harrison Thomas: It's honestly holds my internal team accountable. When we bring new functional leaders in our company into the process, we go, Hey, just so you know, we can see when you're looking at documents or not, we've had people say, oh yeah, we've been in there.

Harrison Thomas: I've been looking at D Room and I can pull up and see person by person. You've spent all of 37 seconds in the platform and since all of the content resides there and I want all of the [00:34:30] communication to be captured there, the back and forth of answering from sellers. If people aren't in the platform, I know they're not engaging in the process,

Kison: so single source of truth or place to run your whole process.

Kison: What about the experience for the seller? Like how does it impact that?

Harrison Thomas: What's interesting about that is the sellers don't know how good they have it. Because

Kison: these are people that own done, own, own company. Yeah.

Harrison Thomas: This is all they've ever done. When they get into a sales process, I don't care how good you make it for 'em, it's a huge burden to 'em.

Kison: Exactly. It's a

Harrison Thomas: [00:35:00] million questions. And very often I've got sellers who, they don't even have an accountant, they don't have an HR person, so they're answering every single question. I know that deal fatigue can run people away from a transaction and I'm always being cognizant of keeping them engaged.

Harrison Thomas: Keeping 'em engaged. And our CEO and I talk about often we try to get people over the valley of selling the business. Once they've signed the IOI, that's the first hurdle that they've committed to it. But once they've gotten to a certain [00:35:30] point in diligence, they've just gotta push through it. They gotta push through it.

Harrison Thomas: They gotta push through it. What I have seen positive feedback, we work with brokers who work with a lot of other people that do deals in our space and all of those brokers. Commend us and give us a lot of credit because they go, your deal process is tight. We know that you're keeping a lot of the burden off of our seller,

Kison: but don't they wanna use their system?

Kison: These makers always wanna use the old school data room.

Harrison Thomas: I tell 'em, no, it's just a point blank. If you're gonna sell the business to [00:36:00] us, you're gonna put the data in our data room. And once we sell them on why, look, all of your requests are gonna be here. They get to answer the question once they get to work through the process.

Harrison Thomas: Once. I've not had any pushback once we've done that. The only time I ever had pushback was that when Beacon, when we actually went to recap the last time and we had big investment bankers representing us out in the market, I took their team through D Room and I actually built a D room for us on the sell side.

Harrison Thomas: I said, here's all the [00:36:30] questions you're gonna want answer, and if the buyers wanna ask us additional stuff. Feel free to, but rather than us just upload data into a data room. And it was funny because the managing partner said, this is so much better than us going and using third party X, but we still have to go do that.

Harrison Thomas: And oh, by the way, you still gotta spend

Kison: stupid amount of money, crazy

Harrison Thomas: amount of money to use that platform as the seller. And it just, it was a very frustrating process. But yeah, they're stuck in their ways 'cause it's just

Kison: one day what they're used to day. We're gonna dismount that. I would [00:37:00] love it.

Kison: This's a warning shot to all the bankers out there coming for you.

Harrison Thomas: Yeah, exactly.

Kison: In that situation, bankers, brokers, you're getting them to use it. But what about is in competitive situation, I was wondering if there's like a point in time when you're like, okay, we're signed and now we're gonna go use it.

Kison: That's right.

Harrison Thomas: So prior to us being able to sign the IOI we're engaged in their

Kison: process. You're, when you say IOI, it is IOI. And then you go to purchase agreement. It's not I-O-I-L-O-I then purchase agreement. I oi is the LOI.

Harrison Thomas: Yeah. Touchy subject here. I'm I smile [00:37:30] because our board. They're very focused on making sure we keep a positive relationship in the marketplace because of that, the LOI is a hurdle that requires additional approvals by people at the board level and our capital partner level.

Harrison Thomas: And I can use an Iowa, but I also get a lot of deals that don't get to the finish line. If I had to get the level of approval, I have to just even negotiate deal terms on the front end. Everybody would hate me. So we use the IOI as a kind of an [00:38:00] in-between to be able to get a deal, the key deal terms, purchase agreement, escrow, non-compete, stuff like that captured.

Harrison Thomas: And then if it's a larger deal, we actually do get to an LOI. But on a smaller deal, I can use the IOI in those deal terms and we've tried to skinny down a purchase agreement with our legal team and work on getting that as refined as possible and just a solid IOI and a solid. Purchase agreement and we can hopefully get one over the finish line.

Kison: I like it. [00:38:30] This is just taking a buyer led process to really having a defined process and keeping it consistent and standardized. How about the integration? What does that look like? You're running through diligence, sounds like a good system set up for that, but then how do you make sure that goes well?

Harrison Thomas: When we spoke last time, I told you that there's kind of Beacon 1.0 and 2.0 in this new world. When I carried a lot of different hats for the organization, oftentimes it was don't break what they do. And when we say [00:39:00] don't break it, it's really, don't break the culture, don't break the delivery of operations, don't break the relationships with the individuals being served.

Harrison Thomas: The don't break it approach was. So operationally focused that a lot of times you didn't change PTO policies, health benefits, the technology being used, the EHR. So what that led to for us, we had a lot of strong individual companies, but even at that time, we [00:39:30] didn't have a strong enough team on our side to standardize our technology platform to standardize certain policies and procedures or benefit structures.

Harrison Thomas: Because of that, we let a lot of people run in silos. Anyone who's in M&A will tell you, they, you can see exactly where the problems were gonna start rear in their head a little bit down the road, which is now, you can't do consistent reporting effectively. You can't use back office support people because every state has a [00:40:00] different policy, procedure, or process that they're engaging in.

Harrison Thomas: As we looked at. Some of these things come in sequence as a company scales, and as we scaled, we had the resources to invest and better people had better insight as to what does a platform look like. We've really evolved in the last two years into a consistent set of processes and technologies and procedures, and some of those are still evolving, but as we have that platform that we migrate towards, now we've gotta bring everyone onto the platform.

Harrison Thomas: That's where with our [00:40:30] M&A committee, we start spending a lot of time saying in a deal, what are the terms or the issues that we would allow to sit outside of the Beacon platform or not? As we've kind of grown and our concept is called One Beacon, we're forcing all elements into one beacon, and that even then gets into the cultural elements.

Harrison Thomas: That's where, from an integration perspective, you've got to start thinking about not just, okay, this is what the new E-R-P-H-R-I-S looks like. That's easy. It's the. [00:41:00] When I tell them these are the policies and procedures, when I tell you this is the data you have to enter into the platform When I tell you what your new title is, because we want to have a consistent titling structure, most of these people are just caregivers by nature.

Harrison Thomas: It's not a white collar workforce. This is a blue collar, hourly workforce, and they are willing to sacrifice their entire lives to support people with challenging needs. They've worked for a mom and pop organization for years. Those people founded the business. They saw 'em every day in the [00:41:30] hallways or come by the home at least once a week, and it had that feel.

Harrison Thomas: So we've got to try to maintain that, feel that high touch, help people be seen, help them feel like they matter. Help them know that what they do is important and say, and I still need you to engage in our process.

Kison: You got a lot of threads on this one. You got this managing this culture shock, I guess as of its own.

Kison: For them to transition as this unsophisticated operator to being part of professional [00:42:00] system, and you got your own initiative of really creating that standardization, which blends me to believe you got a backlog of integration work. You're also tackling while trying to implement this sort of new go forward

Harrison Thomas: build, build the jet while you're flying here.

Harrison Thomas: That's where we are.

Kison: And fix the,

Harrison Thomas: and fix the jet that didn't fly behind

Kison: you. Yeah,

Harrison Thomas: it's a lot of balancing. It's a lot of internal communication to try to make sure we're addressing that. We brought a few of our seasoned team members over to be focused on integration and [00:42:30] just project manage all of the various elements because so many of the people we're not a large scaled corp dev team with people that are solely dedicated to accounting or HR training and therefore they're making sure those integration elements are there.

Harrison Thomas: We have a few generalists. Then we're bringing in all of our functional leaders on top of their day job, on top of changing everything that they're actively doing to say, oh, by the way, learn how this company does it, and then help me write a migration strategy from point A [00:43:00] to point Z. It's a lot of complexity, but what we've gotten good at is being able to say, here are all the steps now.

Harrison Thomas: Here is what the playbook is, and here's what a reasonable timeline is to get through those various elements. So there's a lot happening in real time.

Kison: Has your process changed now where you are doing more integration planning and structuring, like in the diligence phase?

Harrison Thomas: I laugh when people talk about the difference between diligence [00:43:30] integration because it's just one giant gray line for me.

Harrison Thomas: Once I feel that we reach a certain threshold of diligence, that I have certainty that the deal's gonna get through once we get through a quality of earnings. Yeah, that's the first thing that can disrupt the deal. The numbers aren't there. The numbers aren't there. Once we get through the Q of E, and once we get through some core licensing assessments, making sure that the quality issues aren't gonna be problematic, I bring the integration team in immediately.

Harrison Thomas: Again, I'm trying to mitigate the sellers, telling everything [00:44:00] twice. Once they start unpacking how their business operates, what are people's key roles, what are all the pieces of the business doing? Because keep in mind, a lot of times I'm working with sellers who do not want to tell anyone on the team about the deal until the day of close.

Harrison Thomas: You've got one knowledge party who's sharing everything with us, and we're trying to take that person's word for how the business is actually run because they know in their space that if you open up and expose other team members to the [00:44:30] transaction, that it's very likely this is a very tight knit community and the business could fall apart.

Harrison Thomas: So we bring the integration team in early. They're listening to diligence questions upfront. They're helping us write summaries and diligence and integration pretty much run in parallel for the last 60 to 90 days of a deal,

Kison: last 60 to 90 days, you got both diligence and integration running parallel.

Kison: This is all before close. This is I pretty close. How long does your deal timeline take?

Harrison Thomas: 120 days is probably a pretty standard process. Process because this industry

Kison: is so [00:45:00] regulated.

Harrison Thomas: It's a highly regulated, it's things don't happen particularly quick. You've gotta get through the Q of E, you've gotta get through the legal diligence, and then you've really gotta plan for the integration elements.

Harrison Thomas: The deal we just recently closed was a unusual situation because we actually entered a new market. Within a month of the deal closing in that new market. So we got licensed as a provider and we acquired the company. And because of that, I couldn't run into a situation where I was running the Beacon platform here and the provider platform [00:45:30] there in the same geography with the same staff potentially going back and forth between programs.

Harrison Thomas: So we actually had to go through an entire effort to. Do all of the integration elements pre-close. We had to get the seller's buy-in to exposing this to their staff, first of all. But then on top of that, actually training everybody on all of the beacon platforms, all the beacon policy and procedures, everything Beacon before the deal actually happened.

Harrison Thomas: So that was a tenuous situation. But because of things that [00:46:00] we had unpacked in diligence, I wasn't gonna get approval to do the deal. 'cause I needed to mitigate some of the risks that we had identified. The Beacon platform could mitigate some of that risk, some of the historical practices that weren't being done right.

Harrison Thomas: So it was just this hard line and then you kind of walk into the door. A lot of times when you get these deals done and you get to close, the staff are very nervous. When we show up the first day and no one's ever heard a beacon, we'll spend two or three days holding hands with the staff. Giving them [00:46:30] FAQs, really emphasizing the things that are positive that we're bringing to the table.

Harrison Thomas: Hopefully better pay, hopefully better benefits, better PTO, whatever it might be. We can win over a lot of staff in that regard. In this situation, we were having to sell everybody on the deal. We didn't know when the deal was gonna happen and the state actually pushed back the approval so everybody got ramped up and then they had to actually hold on for another two or three weeks waiting for state approval of the deal.

Harrison Thomas: And because of that, it led to a [00:47:00] lot of tension and we almost had to win people afterwards 'cause they had to do all this work, they do all this training and they weren't even sure the deal was gonna go through. That is something I don't wanna do again, integrating pre-close, but we have to do a lot of integration day one because of the amount of exposure we have.

Harrison Thomas: And if people are not baked into our workflows of compliance auditing and quality auditing, certain things may pop up and have popped up in the past that we wouldn't have predicted.

Kison: So I gotta ask you [00:47:30] this. So our moment to be real with each other, you've sort of more recently created this initiative around integration and mm-hmm.

Kison: The Beacon one, the thing I'm seeing is whether you're buyer build or roll up, you are gonna get penalized during your valuation. This is the trending thing I'm seeing. Mm-hmm. You're gonna get penalized during valuation if you have a backlog of integration work.

Harrison Thomas: We spend a lot of time, because we're in the recap cycle ourselves at different points and everything we do is with the lens of what do we look like as a platform in that next cycle.[00:48:00]

Harrison Thomas: And there is a backlog. But what, fortunately, we've gotten a really good team in place. Now we have a great CIO As we've built the platform for Beacon. Those integration elements really start to accelerate. So there are still elements, but we anticipate by the end of this year, Q1 of 26, that everyone that has been historically acquired will be on the Beacon platform.

Harrison Thomas: And at that point it becomes so much easier to integrate another company 'cause it's not a, what's the best practice? We do it this [00:48:30] way in Pennsylvania, we do it that way in Michigan. We do it that way in Minnesota. What does the new acquisition need to do? It? Let's let 'em keep doing their thing. 'cause we don't know which of those three we're gonna end up doing.

Harrison Thomas: Now that we have the platform, it really enables us to be much more thoughtful and expeditious in our integration efforts. 'cause we're very aware and we're absolutely hearing that in the marketplace too, that if people are a disparate set of companies and it's clear to a buyer, that's how they're structured and they can't produce reporting quickly, [00:49:00] that's gonna really impact their future valuation.

Harrison Thomas: I was talking with a banker who, they had a buyer, a large P firm coming in for a company and there was a simple data request. We wanna see X, Y, Z data, core KPI elements. It took the seller two days to produce it and it was very clear that the data was in multiple different systems and they had to scrub it and build it.

Harrison Thomas: And so the buyer of that company walked away immediately. 'cause they said, Nope, we're not doing this transaction. It's clear that you guys are just a disparate set. So that [00:49:30] is probably our number one focus from an M&A perspective. It's the thing

Kison: I've noticed now, it's like people are really waking up to it and there's more emphasis.

Kison: And part of my big picture dream is taking what we learn from these strategics that do integration really well. Bring it to the private equity ecosystem and yeah. Hopefully it improves their model overall.

Harrison Thomas: Hopefully we'll see.

Kison: Let's uh, wrap up with talking about tech. I know we've already talked a little bit about the diligence and your leveraging deal room for that part, but when you think about your whole infrastructure end to end pipeline through [00:50:00] integration, kinda mentioned pipeline, you went through a scrubbing exercise.

Kison: I don't know, just wanna hear a little bit of walking through. How do you think of that, your system and what value it actually adds?

Harrison Thomas: Been happy that you guys have rolled out a formal CRM now? We're taking a lot of advantage there. 'cause to me a deal has a lifecycle. 'cause originally we were using deal room till we reached a certain threshold in our transactions.

Harrison Thomas: And at the same time, my integration team, it was being led by project managers. They wanted to run everything through Smartsheets because that's just where they run [00:50:30] everything and they're used to doing it that way. What I have found over and over again, 'cause when I was involved in deploying new tech within the company, if people have to go to multiple different places for stuff, they're just not gonna do it.

Harrison Thomas: Being able to have it from the beginning of the CRM relationship of what are all the conversations we've had with the seller. So I'm actually using your plugin and outlook to actually send all of my emails related to deals to the deal room CRM. Then when I actually kick off diligence, I've got the history of information sitting in my CRM [00:51:00] that then starts to feed into the actual data room and the request list, and then working my integration team into all of the integration tasks sitting inside of the platform.

Harrison Thomas: I like it to be a one-stop shop because that way anyone that I'm asking that's has a day job as a functional leader for us, they know that if it's related to a transaction, that's the one place they go to find that information.

Kison: So centralizing your process, basically the whole lifecycle from CRM, diligence with the data room, and then integration.

Kison: [00:51:30] And you mentioned before your had stuff separated, use Smartsheets before. You told me a lot of stuff was an email and it was it OneDrive,

Harrison Thomas: email, OneDrive and we were using a platform called Liner as our CRM at time and none of it worked together.

Kison: Part of me is curious because I always get the question that even on our sales team probably gets this question of like, how do you quantify that?

Kison: A lot of this stuff we work on building a business case, it gets rolled up to the CFO and it's very, how do you quantify the ROI here? You've seen it [00:52:00] firsthand. I'm curious in your words, going from the disparate to centralized, like what's the real value unlock

Harrison Thomas: For us, it's just the consistency in the data if it's all sitting there.

Harrison Thomas: Honestly, the C RM piece has been huge for me because. We went through and scrubbed through 4,000 contacts that we had, and we've scrubbed it down to 270 or something that have real data, actual data that we worked on, the transactions. And so if I can find everything related to a transaction there, and most importantly, it's the ability to then pass [00:52:30] off the history.

Harrison Thomas: I may not be here tomorrow. I've got a really good guy working for me. He didn't have all of my historical knowledge, all the conversations that I'd had with these different sellers. To me, having the one stop shop of content allows no person to hold the keys to the castle and prevent the business from continuing to run effectively.

Harrison Thomas: My goal is always to work myself out of a job, and by using the single source, I'm not as important in a good way. And hopefully I can then free myself up with my time to [00:53:00] go be focused on something else. 'cause all of my historical knowledge and the IP that I'm curing sits on top of the platform.

Kison: Programmatic M&A. You got a real system in place. Let's talk about ai. We dabbled in AI last year, built some first gen stuff that was around contract extraction. Now we look into this next year, about a month from now, you're gonna start seeing this next generation roadmap, and it's a whole series of AI features.

Kison: We've talked about this and we're now, we're speaking pretty broadly. Yep. Is that just what we're working on? Obviously a lot of [00:53:30] folks are exploring AI with all different kinds of tools and different use cases. I want to hear from you.

Harrison Thomas: So I've gotten excited here lately because I've been enlightened a little bit.

Harrison Thomas: I'm the generation that bridges the digital divide, such that I know what the analog and digital world look like, separated from one another, and I'm anti-social media, so I didn't want to jump on the AI train for a while, and I was just head in the sand trying to say, oh, we, we'll see what happens. Lately I've had my team engaging in [00:54:00] leveraging AI, and we've literally tackled entire projects, putting together playbooks of information that I had scoped out three to four weeks of work to be done.

Harrison Thomas: And we did a screen share and we knocked it out in two hours better than we would've ever performed it, and that was scary to me. It's happening so much faster than people realize. I know that when your team was rolling out the AI function last year, I was looking at it, we did a scrub of contracts and key.

Harrison Thomas: Still terms and that was [00:54:30] helpful. But so much of what we do is very nuanced, unique. Like we don't have a million contracts to go through. We have a lot of vendor information. It's good to have it summarized. Our lawyers do it. I can see a lot of our lawyer work getting displaced very quickly with some of those functions.

Harrison Thomas: But I was like, it's not where I can see it being overly useful to me today. Where I have started to become enlightened is you start talking about these custom GPTs. So we have an issue around the privacy of our data, PHI, hipaa. [00:55:00] I can't go sending stuff to chat GPT in the cloud because I've gotta be hyper conscientious of that.

Harrison Thomas: But working with our CIO, we're start talking about using Microsoft copilot and building in the studio, custom GPTs, the ability for me to look and create an AI agent. It says, I want you to think like Harrison Thomas. Here are the KPIs that matter to M&A at Beacon. Here are labor ratios to revenue.

Harrison Thomas: Here are what census targets are today. Here's what they look like. Here's the thousand things I look for in diligence. [00:55:30] Here's the reports I need coming outta my diligence. And then for that AI agent to start being a replication of me to do all the diligence work and actually create the reports based on the things that I'm always looking for in a deal.

Harrison Thomas: That's the evolution that's happening very quickly. When that happens, that's the piece that will open up a people's eyes to say, oh, wow. I can actually make a lot of what my intellectual property is irrelevant or replicated by the agent, and thus that output of [00:56:00] data becomes very powerful To me, that becomes a.

Harrison Thomas: What does all that time mean? 'cause now if I freed up myself and I freed up our time, where can we repurpose that? So it's an exciting, scary time. You better really think about what you're doing and what your skillset is and the value of the organization that you bring, because much of that can be disintermediated with AI in a positive way for the organizations.

Harrison Thomas: And I wanna make sure that we're kind of on the front edge of that

Kison: great example, and so true. I'm excited to show you what's [00:56:30] coming up next. It's a lot of similar things. We described building agents, but it's already built in the data room environment and we've been really focused on accuracy. That's the tricky thing.

Kison: Balancing, taking in a lot of information, more information. Your AM model takes in, it just hallucinates and gets, becomes inaccurate. It's really architecting for small batch analysis, right? And be able to put things together in that unique wave to keep the consistency of accuracy.

Harrison Thomas: I'll be excited to see that if you're not engaged in that, it's gonna make so much [00:57:00] irrelevant so quickly.

Harrison Thomas: But I guess as a human, I still have a little bit of relevance for a period of time because it's checking the accuracy. It's not allowing those, assuming the assumptions are accurate, it's actually going back and double checking where the data came from, whether or not that information is accurate or needs to be scrubbed.

Harrison Thomas: And particularly for us, so much of the data we get is inaccurate and needs to be questioned anyways. Those outputs will be helpful. I like it just because then it's stuff I don't enjoy doing. I don't want to have to go pull this data from a thousand different places and put together a little report.

Harrison Thomas: I'd rather it [00:57:30] pull the report, let me go validate it, and then let me be thoughtful and strategic about what does that mean and how do we get the deal done

Kison: there. There is some cases too, it's like, here's analysis that just wouldn't be able to do with people. I had one deal. I looked at GE and Che G BT got a format it just right, but I, I did have it analyze 700 customer contracts, all the financial terms and I'm like, look for the anomalies and these contracts.

Kison: And it came back with a short list of 30 and said, these are decreasing revenue. They're probably the ones you wanna [00:58:00] figure out if the return risk or what they did to keep them going. And I'm just like, wow. Because even looking through it, it was not clear to see that pattern.

Harrison Thomas: And that's where the prompting becomes so important.

Harrison Thomas: The ability is a human to understand how to prompt the agent effectively and actually. Interact with it and find those anomalies. I,

Kison: I'll tell you, the way we look at it is the way it's evolving, it's becoming less important. The prompting. Yeah. The AI knows how to correct your prompts. I used to do that early days.

Kison: It's like, Hey, help me write a prompt to do X, [00:58:30] and you let the AI do that. I still do that. So we do that internally. We'll create a lot of prompt templates. Mm-hmm. And it could be this podcast, like we'll have a prompt template to extract things that relate to my lead M&A. Mm-hmm. As examples, and they'll pull out one of the stories you've told and quotes and things like that.

Kison: We'll use that for different types of content. We may assimilate different things together, but we have a template's pretty elaborate. It's like a couple page template to pull all that data out the way that we want it. So we'll start using AI for that to actually generate the templates so we [00:59:00] have consistent extractions.

Kison: We're seeing it the way it's evolving, it's like it's doing it for you. It'll change your prompt to kind of know and advance it and you don't even see it happening. I think that's what you want to get it to. Things are just so you don't have to think about it.

Harrison Thomas: There's things that I want to do and some things aren't working in the environment, at least in copilot.

Harrison Thomas: We do certain things in Coly. When we go do external research, we might use a chat, GPT, use alaw, whatever, and that can go find something publicly available. But when we're talking about the beacon data, we've gotta keep it inside of our environment, which is a [00:59:30] little bit constraining. But I think that the ability for us to then feed it historical diligence, what were the diligence items that identified, let's feed all the legal, what did legal find on this deal?

Harrison Thomas: What legal looking for in the deal? What did the Q of E look for? What were the things that were questioned in the Q of E? And for it to be able to ingest that information so that it's going, this is the things you're gonna look for already, and then to be able to scrub it and actually put out a summary of that, that's gonna be [01:00:00] scary when you can do that.

Harrison Thomas: I can't take it outside of our constrained environment, so I'm, maybe I'm jealous of the people on the. Listening in, they can actually use the more broad based, you know,

Kison: there's some cool tech coming that figures out how to do this in the data room environment. They're probably gonna come out ahead here.

Kison: I gotta ask you, one of the things that caught my attention from our previous conversation was you mentioned that you're acquiring non-for-profit organizations. Can you walk me through that? I'm really curious because I actually worked on a deal earlier in my [01:00:30] career. Love to just compare notes about how you're approaching it.

Kison: What are you learning from it?

Harrison Thomas: I wouldn't tell you it's my favorite way to do a transaction 'cause there's a lot of complexity that comes with it. But there's a lot of good that's come out of our most recent deal that we did that way. Nonprofits being converted to a for-profit in healthcare. Requires a lot of scrutiny and overview.

Harrison Thomas: The first things first, you've gotta have alignment with management and the board because both of those parties are gonna have to effectively sign off on the deal. Management's not gonna [01:01:00] take it to the board unless they're interested in actually doing it. For us, it was selling to that board. What is the unlock that Beacon can bring that the nonprofit doesn't just inherently, nonprofits are gonna move at a pace that's not the beacon pace.

Harrison Thomas: We're moving very quickly at all times, but what I try to impart on them is that the mission that they're looking to serve, which is broadly to serve as many people as possible 'cause of our pace. We have the ability to do that much quicker than they can. We make the capital investments in getting new [01:01:30] homes or new day programs or new sites, and we also are gonna be an unlock for their staff.

Harrison Thomas: So if you have staff that are kind of stuck, the company's serving maybe a hundred, 150 employees or something like that, that rockstar individual that works for you is not gonna go look for a job somewhere else. They have upward mobility within our platform. So the scale that we bring is really helpful to the employees, hopefully better pay and better benefits.

Harrison Thomas: A lot of times nonprofits have good pay and good benefits, but we give career trajectory opportunities to a lot of [01:02:00] employees. And then the key other piece for us in the selling it to the board is just relevance. So I could go down a whole rabbit hole in healthcare of what does it mean to have scale and more importantly have a seat at the table.

Harrison Thomas: So we're recording this right now. The house just approved a major Medicaid cut and our CEO has been in Washington meeting with various legislative agencies, helping them understand what is the downstream effect. Of a lot of the people that we support. And while they'll [01:02:30] claim the Medicaid cuts are tied to work benefits, frankly, as the state budget gets squeezed, everyone that touches Medicaid is gonna get hit in one way or another.

Harrison Thomas: And what we've tried to impart on these boards is that we as a scaled provider, have an opportunity to not just manage things at the federal level, but really at the state level when they're talking about managed care, they're talking about reimbursement changes or just advocacy for the people being served, or advocacy for direct support workers.

Harrison Thomas: Our voice actually matters. Not that there's doesn't, but we [01:03:00] have a louder voice than they do. So all of those factors really play into, hey, there's maybe a there, there. If there's alignment with the board, there's alignment with the management team, then it goes into a much more rigorous process. They have to have a formal third party valuation done.

Harrison Thomas: We're negotiating deal like we do normally, but they've gotta prove that the offer that we're bringing in. It's actually worth something to someone. There's no private endearment, so no one at the board level or at the management level is actually profiting from the transaction. So a lot of [01:03:30] times people go, transactions are hard enough as it is.

Harrison Thomas: Imagine layering in the fact that no one's really getting money from the transaction makes it a lot harder when they have to go through diligence and all the change management of integrating a company. And then even if you get through negotiating terms, the board, the management and everything gets to the point of actually submitting to the state.

Harrison Thomas: Then you go to formal regulatory review. And the last deal that we did went before the attorney general at the state level. And if you've got the ag looking at it, they're scrutinizing everything. They're [01:04:00] scrutinizing why the deal is happening, what does it mean to the marketplace? Is it good or bad for the individual served?

Harrison Thomas: And if once you get through all of that, we actually, and this was my favorite part of the deal, the transaction proceeds actually went to a charitable trust. So the board created a separate board under a separate entity to manage those charitable funds or those funds into a charitable trust that was intended to then support people in the community that were already being supported by that company.

Harrison Thomas: So not only did we get to take over the company and the existing business [01:04:30] support those people, we've now grown that business in a year and a half's time. It was a 30 year organ year, year old organization. We've grown over 40% in a year and a half because we've unshackled the growth lock that was there.

Harrison Thomas: There's a lot of demand, but they were constrained by the nonprofit bureaucracy. Frankly, we unshackled the growth. Then all those proceeds actually went back into the community supporting people with disabilities. I thought it was a very unique and fun way to do a deal. Two and a half, three year process.

Harrison Thomas: So it was not quick. [01:05:00]

Kison: Wow. We laughed

Harrison Thomas: many times that the deal would never get done. So the fact that we actually got to the closing table, it was a lot of a celebration, but then some real work had to happen after that too. 'cause culturally, that's one piece I didn't touch on is very different culture, nonprofit.

Harrison Thomas: You've gotta win people over. 'cause there's people that just say, Hey, I wanna work in a nonprofit. And trying to help them understand that their mission is still just as important, but they have more opportunity to do more of what they did under our umbrella. That's kind of the win that we have to work on.

Kison: Is [01:05:30] there tax liability or things that come in play when you convert?

Harrison Thomas: Yeah. There are certain things that they don't carry from a liability perspective that we do. So we had to go through all those different elements, little nuance stuff, little state taxes. One of the things that kind of caught us up is they had contracts with no tax and that we then all of a sudden we, so you had to, the taxes, we had to pay the taxes that they didn't previously pay.

Kison: I was curious 'cause the deal I worked on, it was already converted from a non-profit to a for-profit. But the part of me is like, well it, they'd wanna get some equity [01:06:00] to realized from, from what they worked on because I think they operated it for so long. Mm-hmm. As a not-for-profit, but then they converted it.

Kison: That's what I was curious about the whole process of doing it is this, the M&A opportunities converting non-for-profits to for-profit and

Harrison Thomas: we have discussed it, you would be aas us to want to get into that space full-time because that would be a very difficult way to make things happen. It is the nature of the hospital world though.

Harrison Thomas: Majority of your hospitals are. Nonprofit entities and you have some [01:06:30] for-profits. And that's a whole nother rabbit hole of what that means. And there's a lot of scrutiny around some of that at a higher level. But from our side, I have a moral obligation not to do a deal if I don't believe the individual served will be better off on the backend.

Harrison Thomas: And that's part of what's really cool about what we do. We serve people. And our founder, he really imparted on me that we are a servant organization and that's how we should lead. And if we're not able to do that, I don't wanna do a transaction. When we look at the nonprofit [01:07:00] side, I go, can we make the company better or the employees can be better off?

Harrison Thomas: And will the people being served being better off? And if that checks the box, I'm willing to tackle three years of work.

Kison: We'll have to save this for a whole other conversation. Maybe we'll invite our friends at Bayata who've done the other, they operate as an not-for-profit, but have acquired for-profits.

Harrison Thomas: That'd be an interesting discussion. Yeah.

Kison: We have to do a little round table around that. Hey, I gotta ask, what's the craziest thing you've seen in M&A?

Harrison Thomas: The craziest thing, and I've seen it multiple times, are when we've put dollars on a table [01:07:30] to help retire someone and they wanna sell their company and then they just don't answer their phone.

Harrison Thomas: And you'd be shocked how many times in our space people will go down the path. They'll even get engaged in diligence and then they just go completely silent. I've had seven companies and I mean that not from a genuinely not stuff that we had done that tripped up the deal, it'd be mid deal, and they just decide they're not gonna do a transaction.

Harrison Thomas: That one always confuses me. 'cause I [01:08:00] feel like to engage in the process is quite painful and eventually just walk away from it without any communication at all. I think that that's one of the weird things about our space. It'd be a lot easier just to say, Hey, look, I don't wanna do a deal because of X. I want to keep working.

Harrison Thomas: And we have people that do that. But I've had six different transactions in the last year and a half where people just went completely silent and that is the piece that seems a little crazy to me,

Kison: getting engaged and then goes to before the marriage.

Harrison Thomas: Yeah, they completely ghost us.

Kison: That's pretty wild.

Kison: It's been a great [01:08:30] conversation. I appreciate you taking the time. Help me become a better M&A scientist.

Harrison Thomas: I enjoyed it. Thanks for having me.

Kison: Those of you still tuned in and listening, the fellow M&A scientists, thank you and appreciate you. Always welcome the opportunity to hear from you. Reach out to me on LinkedIn, like hearing ideas, feedback on this interview, ideas for other topics I should be covering criticism.

Kison: I get that sometimes, but that's fine. I welcome it until I get better.

Harrison Thomas: There's a podcast I follow and they do a thing where they ask 'em to roast them five star [01:09:00] roasts, so maybe you should ask for the five star roast. They give them five stars and they roast them in the. People have gotten into doing that and they've shot up to the top of the podcast ranks.

Kison: I'll take that. Gimme a five star roast. That'd be nice. Gimme five stars and a good roast. I would take that and welcome it, and I would appreciate it. Till next time. Here's to the deal.[01:09:30]

Kison: Thank you for taking the time to explore the world of M&A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcast. We'd love to hear from you. If you need help standing up an M&A function or optimizing one that you already have. We're here to help, and if we can't help you, we probably know someone that can.

Kison: You can reach out to me by email Kison, K-I-S-O-N, at ma science.com, or you can [01:10:00] text me directly at 3 1 2 8 5 7 3 7 1 1. If you just want to keep learning at your own pace, visit ma science.com for a lot more content and resources. That's where you can also subscribe to our newsletter. Again, that's ma science.com.

Kison: Here's to the deal.[01:10:30]

Kison: Views and opinions expressed on M&A science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.

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