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Exit Planning & Opinion of Value
Before you commit to buying a homecare agency, it’s important to perform due diligence on the key aspects of valuing the business as well as assessing threats and opportunities to grow. From a Seller’s perspective, we use this checklist to help you develop your exit strategy. The checklist below includes all the items we evaluate before taking a business to market.
Financials
The financials should start with the tax returns. You start with the net income shown on the return and then add back qualified expenses on the P&L to determine the Seller’s Discretionary Earnings (SDE). The P&L reports need to be run on the same basis as the tax return. For example, if the tax return is done on a cash basis, the P&L should also be on a cash basis.
Opinion of Value
We have access to financial metrics and the sales price of more than a hundred homecare agency sales. We also utilize the same software third-party appraisers use to determine valuations for SBA guaranteed loans. When we provide an Opinion of Value, we are confident it will support an SBA 7A acquisition loan.
Operational Efficiency
A well-staffed homecare agency will generally produce 10% to 20% SDE as a percentage of revenue. If the SDE% is on the high end, it may mean that the agency is not properly staffed with admin personnel. So high profitability may not be a good thing.
Key Employees - Office
The larger agencies will generally have a General Manager in place. Smaller agencies may only have key managers for the primary functions: Recruiting & Retention; Scheduling; Quality Assurance/Sales. Another key employee may include a business development person that fosters referral relationships. You should ask the seller about these employees to learn more such as skill sets, experience, compensation, tenure, last pay raise, etc.
Most buyers want to meet some of the key employees prior to the sale of the business. Most sellers are concerned by this if they are keeping the sale of the business confidential. About 50% of the time the buyer is introduced to some or maybe just one key employee once both the seller and buyer are very confident the transaction will go through.
The owner’s job description is also important to understand. You should understand what the owner does on a daily, weekly, monthly, quarterly, and yearly basis. If the owner is working too much “in” the business versus “on” the business, you should think about how you can delegate some of the responsibilities to other employees or outsource them (i.e., bookkeeping and payroll).
Employees - Caregivers
According to Caregiver.org there are almost 40-million Caregivers in the US and this employment sector will continue to grow. Caregivers range from young adults who are just getting started in their careers to retirees that are working to supplement their income. The pay ranges based on geographies but you will see it’s about $2 to $3 higher per hour than the common starting pay for non-skilled jobs. There is a high employee turnover rate in this employment sector and it generally ranges from 60% to 100%. This is why recruiting and retention are such an important part of running a homecare agency. From a due diligence perspective, you should explore both recruiting and retention practices inside the agency.
Worker’s Compensation Modification Rate
Workers’ Compensation Insurance is relatively high for Caregivers. A “1.0” mod rate means the agency represents the average dollar claim if you look at the industry as a whole. If you’re less than 1.0, you are better than the industry average and vice versa. If the agency you’re buying has a mod rate higher than 1.0, then that means the seller has already built in a higher cost structure for workers’ compensation insurance. So you have room to improve.
The most important thing to look for is what the mod rate will be going forward. For example, if an agency had a lot of claims in the past 12-months, your insurance will increase. This increase should affect how you value the business.
Employment Benefits
The most important benefit to evaluate is health insurance because of the Affordable Care Act (ACA). There can be significant penalties an agency has to pay if they do not provide health insurance and there are over 50 Full-Time Equivalents (FTEs) working for the agency. Larger agencies are likely to offer health insurance. This is good for the buyer since the cost is already included in the P&L. If health insurance is not provided, you should evaluate how much they are paying in penalties and how that will grow as the agency grows.
Paid Time Off (PTO) is also something to consider. For asset sales, accrued PTO is considered a liability. The amount of this liability could offset either the valuation or be covered at closing by the seller writing a check for the PTO amount.
If the agency pays bonuses to employees you should understand how that is calculated and when it is paid. This could affect the purchase price if a number of employees have already earned bonuses that will be paid out after the business sale. If only a portion of the bonus has been earned, it’s common for the seller to provide a pro-rata credit for the value of earned, but not yet paid out bonuses.
Client Concentration
Client concentration can be very high for some agencies. For example, if an agency’s revenue is $3M and the agency has three 24x7 clients that pay $250K per year, then its top three customers will represent 25% of the revenue. This is not that uncommon. However, what you will find is that while there may be a high client concentration each year, the specific clients who make up this concentration will be different, especially when you look at this over a three to four-year period.
Business Brokerage
Before we take a business to market, we spend a lot of time understanding and analyzing the business. Our industry focus with homecare agencies is a big plus because we’ve learned what to ask sellers before we ever talk to the buyers. Our initial due diligence will cover all the items included in the Buyer’s Checklist. After we complete our due diligence, we will provide the Seller with our opinion of value to Buyers based on 3rd party valuations. If the Seller approves our recommendations we will then prepare the virtual due diligence room, Confidential Business Review (CBR aka Offering Memorandum), and advertisements. Once that is all completed, we start the sales process.
Interested Buyers will indicate interest from our Buyer database and 3rd party business listings.
After the Buyer signs an NDA, we will schedule a Screening Call
The Screening Call determines if there is potentially a good fit between the Buyer and the Seller. It also helps protect confidentiality.
Once we confirm a Buyer is potentially a good fit, we will schedule the CBR call to review the business. The CBR contains everything a Buyer needs to know to determine if they want to pursue an acquisition or not.
Non-Binding Letter-of-Intents (LOIs). Buyers who want to be considered are sent an LOI template that has been created for this specific business opportunity. Businesses that generate significant interest will generally have a 30-day time period where we accept and evaluate LOIs. In other cases, that timeframe may be extended up to 90-days or more.
After an LOI has been submitted we will ask for the Buyer and Seller to meet for about an hour. Usually, this is done by Zoom or Phone. In some cases, it could be in person.
Franchisor Introduction (if applicable). Unless any red flags are uncovered during the Buyer / Owner Introduction call, we will introduce the Buyer to the Franchisor’s Business Development person.
After the 30-day period, we will meet with the Seller to review the LOIs to determine which Buyer should be selected for the next phase in the sales process.
Once the Buyer has been selected by the Seller, the Due Diligence phase begins. The LOI template typically has a 4-week exclusivity period included before the Earnest Deposit is due. The Earnest Deposit is usually 1% of the purchase price.
Final Acquisition Steps. Assuming Due Diligence checks out for the Buyer, they will pay the Earnest Money and begin work on closing the transaction. These steps will include:
Loan approval by the Bank’s underwriting department and then the SBA.
Complete the franchisor approval process for the new owner if this hasn’t already happened - assuming this is a franchise.
Begin the process of getting the state license to operate the homecare agency under a new legal entity.
Finalize the legal documents for the transaction - the APA and all supporting legal documents.
Pre-transition Preparation. When the Buyer and Seller are confident the transaction will be consummated, they need to prepare for the transition before the actual closing date. Transition preparation work will include:
List of all vendors that need to be set up for the new legal entity. Payroll and Insurance are the most important ones to sort through first
Bill of Sales prepared. If there are liabilities associated with tangible assets, they must be paid off before or at closing. Ideally, the liabilities are paid off way ahead of the closing date.
Franchisor’s Standards of Review is completed. This ensures the Buyer is getting a franchise that’s in good order.
If the Seller allows this, the Buyer may meet with one or more key employees before the close date.
The Buyer and Seller will collaborate on key communication messages for employees, clients, and the community. This should be written down and include the Why? What? When? Vision for the Future?
The Closing Date. There has been so much work done up to this point. You would expect the actual closing date to be a big deal, but it’s not. It is filled with a day where both the Buyer and Seller are simply signing off on all the legal forms necessary to complete the transaction. The exciting event comes afterward. The day the Buyer becomes the new owner and begins leading their new team.
Transaction Documents
There are two key documents for the transaction. The first one is the Non-Binding Letter of Intent (LOI) and the second is the Asset Purchase Agreement (APA).
Non-Binding LOI — The purpose of the Non-Binding LOI is to outline the deal structure (Asset Purchase, Down Payment, Seller Financing is applicable, and SBA Loan) and general terms that will be included in the APA. The document is non-binding, meaning either party can walk away from the purchase.
APA — The APA will reflect the general terms agreed to in the LOI and include all the necessary exhibit schedules required for closing. It’s advisable to have attorneys represent both sides of the transaction. The Buyer’s attorney will prepare the draft APA that will be reviewed by the Seller and their attorney.
Don’t Let the Attorneys Get in the Way
When it comes time to close the deal, it’s crucial for Buyers to retain an attorney who has lots of experience with SBA acquisitions. The good ones understand middle ground terms. In our experience, most disagreements can be ironed out with a candid conversation between the buyer and seller. Multiple iterations of redlines can get expensive for both parties, so we recommend conference calls to iron out the issues with the Buyer and Seller present on the calls.