Why Beacon Created an AI Committee for M&A—and What They're Testing Next (Part 2) with Harrison Thomas

0:00This episode is sponsored by Dealroom, the only M &A platform designed for buyer led M &A. Most M &A tools were built for sellers or bankers But if you're in corporate development Doing two or more deals a year You need something built for how you work Dealroom is purpose-built for the buy side From pipeline through diligence It gives you centralized control over every deal Clear visibility into tasks, timelines, and ownership And reduces manual work with bulk updates and templated rooms And when your process lives in one place you're not reacting to the seller, you're driving the deal. And that's buyer led M &A.

0:42Whether you're looking to speed up diligence, keep integration on track, or just cut down on chaotic email threads, Dealroom gives you the structure to scale. Go to dealroom.net or hit the link in the episode description and check it out. Here's to the deal.

1:00I'm Kisan Patel and you're 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.

1:24Hello and welcome to the M &A Science Podcast. This podcast is part of a mission to rethink how M &A is done. The old school seller-led approach, it's dead. Fire-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. We uncover what truly works in M &A by learning directly from the best. I'm your host, Kisan Patel, founder and CEO of Dealroom and chief scientist here at M &A Science. This episode is part two of our conversation from last episode. If you missed part one, I recommend giving that a listen first.

2:04Today's guest is Harrison 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. From acquiring unsophisticated mom-and-pop providers to navigating high-touch integrations across fragmented state systems, Harrison brings a nuanced boots-on-the-ground perspective on what it really takes to scale in this sector. In this interview, we're going to talk about the unique challenges of M &A in a highly regulated Medicaid funded healthcare service and learn how to approach due diligence and mom and pop businesses with hidden liabilities.

2:48Let's pick it up right where we left off. What we already talked to with just the nuances of the business and liabilities itself, and then adding that all these states operate completely different. And yeah, I need to understand that regulatory environment and figured it out. Yep. Sounds like a lot of fun. 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? 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 and that team is great.

3:20They actually know enough about our business to almost be my headlights before I ever get there and finding that stuff that's going to 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. And if the cash is coming in the door, they'll do audits on the documentation associated with billing. And because of that, there can sometimes, when we do spot checks and chart reviews, we can find some stuff that's maybe not right on the billing side.

4:03But a lot of times that chart team is going to do kind of a compliance audit for us to make sure they're addressing the OIG compliance standards and some quality issues. 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 because inherently I want to get deals done. My team wants to see the business grow, but we need that third party check to really validate that what we think we're seeing is accurate. How are you managing the process? Like visibility into diligence, historical conversations, decisions, documentation? Our process really kicks off.

4:37Usually it's that build a relationship first. 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. 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 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. So once we've kind of gone through cursory diligence, we try to get people comfortable with what is on the table.

5:07So 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? 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 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 Dell Room, I think we had 474 unique requests. I think our core request list is now down to 147 requests.

5:44I sneakily slide in some Excel documents with additional questions in there so that it's not overwhelming to them. So they can kind of go through a questionnaire. But we put everything into Dell Room and the beauty of the 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 allows us to, frankly, just ramp people in 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 QOV team, answering the legal team, answering my accounting team.

6:22There's lots of people that ask the same question. So that's how we use the platform. So your third parties are actually putting all their requests. I require 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. Their request lists have to actually reside inside a deal room because I want everyone to be able to reference that. Because so much of this is me managing the mom and pop. You have full oversight of all the third parties. Who's doing what? 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 deal room?

6:51How many items that they look at? I try not to weaponize that information, but I also don't let people pull stuff over on me if they're not doing their job. Yeah, it's interesting. I've used it for some of that tracking, but not to that extent. It 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. I've been looking at deal room and I can pull up and see person by person. You've spent all of 37 seconds in the platform.

7:21And since all of the content resides there and I want all of the 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. So single source of truth or place to run your whole process. What about the experience for the seller? Like how does it impact that? What's interesting about that is the sellers don't know how good they have it because these are people that own their own company. This is all they've ever done. When they get into a sales process, I don't care how good you make it for them.

7:52It's a huge burden to them. It's a 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, keeping them 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 point in diligence, they've just got to push through it.

8:27They got to push through it. They got to 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. But don't they want to use their system? These makers always want to use the old school data room. I tell them, no, it's just a point blank. If you're going to sell the business to us, you're going to put the data in our data room. And once we sell them on why, look, all of your requests are going to be here.

9:01They get to answer the question once. They get to work through the process 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 Dealroom and I actually built a Dealroom for us on the sell side. I said, here's all the questions you're going to want to answer. And if the buyers want to 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.

9:40And oh, by the way, you still got to spend stupid amount of money, crazy 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 because it's just one day. We're going to dismount that. I would love it. A warning shot to all the bankers out there. I'm coming for you. Yeah, exactly. In that situation, bankers, brokers, you're getting them to use it. But what about, is it a 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 going to go use it. That's right.

10:09So prior to us being able to sign the IOI, we're engaged in their process. When you say IOI, it is IOI and then you go to purchase agreement. It's not IOI, LOI, then purchase agreement. IOI is the LOI. Yeah, touchy subject here. I smile 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. And I can use an IOI, 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.

10:51So we use the IOI as a kind of an in-between to be able to get a deal, the key deal terms, purchase agreement, escrow, non-compete, stuff like that captured. 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 and 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. I like it. This is just taking a buyer-led process to really having a defined process and keeping it consistent and standardized.

11:31How 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? When we spoke last time, I told you that there's got a 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 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. 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.

12:17So what that led to for us, we had a lot of strong individual companies, but even at that time, we didn't have a strong enough team on our side to standardize our technology platform, to standardize certain policies and procedures or benefit structures. Because of that, we let a lot of people run in silos. Anyone who's an M &A will tell you that you can see exactly where the problems were going to start wearing 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 different policy procedure or process that they're engaging in.

12:57As we looked at those silos, 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 got to bring everyone onto the platform. That's where with our 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.

13:34As we've kind of grown, our concept is called one beacon. We're forcing all elements into one beacon. And that even then gets into the cultural elements. That's where, from an integration perspective, you've got to start thinking about not just, okay, this is what the new ERP, HRIS looks like. That's easy. It's the, when I tell them these are the policies, 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. It's not a white-collar workforce.

14:09This 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 them every day in the hallways or come by the home at least once a week. And it had that feel. 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. You got a lot of threads on this one. You got this managing this culture shock, I guess, is of its own for them to transition as this unsophisticated operator to being part of professional system.

14:54And you got your own initiative of really creating that standardization, which lends me to believe you got a backlog of integration work you're also tackling while trying to implement this sort of new go forward. Build the jet while you're flying, Eric. That's where we are. And fix the jet that didn't fly behind you. 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 just project manage all of the various elements. Because so many of the people, we're not a large-scale corp dev team with people that are solely dedicated to accounting or HR training.

15:36And therefore, they're making sure those integration elements are there. We have a few generalists, and 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 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. 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.

16:12Is your process changed now where you are doing more integration planning and structuring in the diligence phase? I laugh when people talk about the difference between diligence integration because it's just one giant gray line for me. Once I feel that we reach a certain threshold of diligence that I have certainty that the deal is going to 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. But once we get through the QOV and once we get through some core licensing assessments, making sure that the quality issues aren't going to be problematic, I bring the integration team in immediately.

16:50Again, I'm trying to mitigate the sellers telling everything 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. 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 transaction, that it's very likely this is a very tight-knit community and the business could fall apart.

17:29So we bring the integration team in early. They're listening to diligence questions up front. 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. Last 60 to 90 days, you got both diligence and integration running parallel. This is all before foreclose. How long does your deal timeline take? 120 days is probably a pretty standard process. Because this industry is so regulated. It's a highly regulated. Things don't happen particularly quick. You've got to get through the QOV. You've got to get through the legal diligence.

18:01And then you've really got to plan for the integration elements. The deal we just recently closed was an 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 there in the same geography with the same staff potentially going back and forth between programs. So we actually had to go through an entire effort to do all of the integration elements pre-close.

18:36We had to get the sellers 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. So that was a tenuous situation, but because of things that we had unpacked in diligence, I wasn't going to get approval to do the deal because I needed to mitigate some of the risk that we had identified. The beacon platform could mitigate some of that risk, some of the historical practices that weren't being done right. So it was just this hard line.

19:10And 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 FAQs, really emphasizing the things that are positive that we're bringing to the table, hopefully better pay, hopefully better benefits, better PTO, whatever it might be. and 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 going to happen.

19:43And 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. And because of that, it led to a lot of tension. And we almost had to win people afterwards because they had to do all this work. They do all this training and they weren't even sure the deal was going to go through. That is something I don't want to do again, integrating pre-close. But we have to do a lot of integration day one because of the amount of exposure we have. 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.

20:23So I got to ask you this. It's our moment to be real with each other. You've sort of more recently created this initiative around integration and the beacon one. The thing I'm seeing is whether you're buyer build or roll up, you are going to get penalized during your valuation. This is the trending thing I'm seeing. You're going to get penalized during your valuation if you have a backlog of integration work. 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. And there is a backlog.

20:57But fortunately, we've gotten a really good team in place now. They 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. And at that point, it becomes so much easier to integrate another company because it's not a, what's the best practice? We do it this 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?

21:29Let's let them keep doing their thing because we don't know which of those three we're going to end up doing. Now that we have the platform, it really enables us to be much more thoughtful and expeditious in our integration efforts. Because 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, that's going to really impact their future valuation. 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.

22:06We want to see XYZ data, core KPI elements. It took the seller two days to produce it. And it was very clear that that data was in multiple different systems and they had to scrub it and build it. And so the buyer of that company walked away immediately because they said, nope, we're not doing this transaction. It's clear that you guys are just a disparate set. So that is probably our number one focus from an M &A perspective. It's a thing I've noticed now. It's like people are really waking up to it and there's more emphasis. 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 hopefully it improves their model overall.

22:42Hopefully. We'll see. Let's wrap up with talking about tech. I know we've already talked a little bit about the diligence and you're leveraging deal room for that part. But when you think about your whole infrastructure end to end pipeline through integration, I mentioned pipeline, you went through a scrubbing exercise. I don't know. I just want to hear a little bit of walking through. How do you think of that? Your system and what value it actually adds? Been happy that you guys have rolled out a formal CRM now. We're taking a lot of advantage there because to me, a deal has a lifecycle. Because originally we were using deal room until we reached a certain threshold.

23:15household in our transactions. And at the same time, my integration team, it was being led by project managers. They wanted to run everything through smart sheets because that's just where they run everything and they're used to doing it that way. What I have found over and over again, because 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 going to do it. 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 deals to the deal room CRM.