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.