The benefits of undergoing a business valuation before selling
As the population continues to live longer, the homecare marketplace grows more complex. Yet for homecare practitioners thinking of selling their business, figuring out how such a practice is valued can seem even more confusing. Still, knowing this information can prove vital—not only will understanding the value help the owner of the practice get the best possible price, but it can also mean saving jobs, continuing the business and walking away with the correct amount of retirement capital.
Homecare practices are in high demand, so to achieve the highest value for a company, the owner would do well to allow three to five years to prepare for and complete the process. This span allows for all that needs to be taken care of to ensure the practice is most ready for sale.
Once the owner has determined that he or she wants to sell, he or she should initiate a baseline business valuation to understand at what price the practice is currently valued. Typically, homecare practices are valued at two to three times the seller’s discretionary earnings, but can also be valued at a higher multiple of earnings before interest, taxes and amortization (EBITA). Seller’s discretionary earnings are EBITA plus the salary and benefits of the owner. (For a more detailed description, see sidebar on page 15.) A business broker or intermediary can best determine this number.
One of the benefits of undergoing a business valuation at this point is appreciating what the current sale price of the practice could be, and if it’s not as high as the owner would like, this timeframe gives the owner a chance to implement changes and tweak processes that will add to the overall strength of the practice.
Additionally, this time period gives an owner a chance to review the practice’s financials. Adbacks (owner benefits paid for by the business) are best adjusted in years prior to selling the business, and obviously any financial issues that might not be above-bar should be adjusted as quickly as possible. In general, strong financial records are essential to selling any business, and securing a CPA to produce those records is critical. All of this financial background adds to the base value of the homecare practice.
Other factors determine the desirability of a homecare practice, too. For example, private pay-based practices tend to achieve higher values than those who accept only government payments. Customer concentration is also important. If all the practice’s referrals come from a single source, such as a veterans’ association or rehab center, the practice is seen as a higher risk, and therefore will be valued lower. Practices should strive for multiple referral sources, with none providing more than 15 percent of all patients.
Patients who are cared for 24 hours a day, seven days a week, are often seen as a higher risk than daytime-only patients, mostly because 24/7 patients may have a higher risk of passing away. As a result, if a practice cares for 24/7 patients only, that practice may be perceived as carrying a higher risk, which can consequently impact the value of the practice.
Another value-adding quality is the management structure. Buyers want to see solid people already in place in the operations area of the practice; this too will add to the value. In essence, if you can go on vacation, that says a lot about your management team. A good question is, “Who in the organization knows how to do what you do?”
The best-case scenario for a homecare practice seeking its highest value potential is a practice made up of private-paying patients, being referred to the facility by multiple sources, without a high concentration of 24/7 patients. That said, none of these factors are absolute; practices that only have one or two of these qualities—or even none—can still be considered very sellable. It’s best to speak with a business broker with industry experience to better understand how to add value to your company.
Two to three years out from a sale, an owner should review the current team to see whether a current employee may be interested in taking over the practice. Although not common, there are upsides. In addition to client familiarity, the style and substance of the practice would most likely remain stable. An inside buyer will also know the strengths and stability of the practice better than an outside one. This scenario is also a plus for lending institutions, who often feel more secure with a buyer who is already involved in the management of the organization.
Once the potential time of transition reaches one to two years out, the homecare practice should undergo an updated valuation. The outcome of this valuation will hopefully align with the owner’s expectations. If that’s not the case, the owner should determine whether viable solutions exist that can still be achieved within the timeframe, or if delaying the sale of the practice should be considered. If the sale of the practice is still on schedule based on the updated valuation, a confidential marketing plan should be implemented. Typical marketing time from engagement to closing is six months to a year. An owner may be asked to stay on for a period of time to ensure a smooth transition.
When choosing a broker/intermediary, homecare practitioners should look for firms that offer both business brokerage and valuation services and known party business transition consulting. This should cover all the possible variables. One critical component is a firm’s accreditation—an intermediary firm should have members who are accredited in business valuation (ABV) or accredited by one or both of the major trade organizations: a Merger and Acquisition Master Intermediary (M&AMI) or a Certified Business Intermediary (CBI). In addition, when the time comes for the sale of the practice, the intermediary firm should collect the great majority of its fee as a percentage of the eventual sale, rather than a large upfront fee and a smaller commission on sale. This structure demonstrates that the firm is confident in its ability to perform.
Business valuation is a process that works for a variety of industries, but each does have its own quirks, so it’s best to partner with a business team who understands the intricacies of the home health care industry and can come together to develop a comprehensive strategy.
Seller’s Discretionary Earnings
These may include net operating pretax profit or loss plus/minus verifiable noncash expenses (depreciation/amortization); owner’s salary and benefits; one-time nonrecurring or unusual expenses; and nonessential expenses.
Assume that the business will be sold or transferred to a new owner who may not incur the same discretionary expenses (for example, insurance for owner and family members, interest and insurance on nonessential vehicles, convention trips, travel and entertainment, donations and other nonessential expenses). These would be added back to profit. If the company is growing dynamically, projections may need to be provided. If you or the business own the facilities housing the business, a rent adjustment should be made if the rent will increase or decrease for the new owner. Rent should be comparable to lease rates for similar space and location.
