Home health care agencies are one of the health care industry’s fastest-growing segments. The industry has thrived as a result of an aging population, an increase in chronic diseases, increased physician acceptance of home healthcare, medical advancements, increased demand for home-based care (especially for the elderly or during a pandemic), and a movement toward cost-effective treatment options from public and private payors. Furthermore, the market is expected to expand in the next years, allowing providers to compete effectively with institutional care agencies such as hospitals.
According to the Medicare Payment Advisory Commission’s (“MedPac”) March 2019 report to Congress, the number of home health agencies increased by more than 60% between 2004 and 2016. There are currently over 12,000 active home health agencies in the market, and nearly 98% of Medicare beneficiaries lived in a zip area with a home health service in 2017.
Between 2000 and 2017, total Medicare spending on home health services climbed by 108.2%. MedPac predicted freestanding home health agency operating margins to be around 4.5% for the blended all-payor margin.
The home health sector is highly fragmented, with Medicare spending averaging $1.5 million per agency. According to a LexisNexis 2019 study, the top five home health operators in terms of yearly medical claims and patient volume — Kindred Healthcare, Amedisys, LHC Group, Encompass Health Corp., and AccentCare — account for almost 20% of the entire home health market share. Because of industry fragmentation, consolidators can utilize back-office support operations, economies of scale, and market share increase through acquisitions.
How do I Value my Home Health Care Business?
If you are considering selling your home healthcare business, you should be aware of the following:
- The market is strong now because of the vast amount of money/capital searching for well-performing agencies. It’s unclear how long this will last and when it will inevitably slow down. The market can change quickly, and you may lose your opportunity to sell at a favorable price.
- As acquisitions and consolidations continue, you’ll likely be competing against larger, far-better-capitalized companies. The competitive landscape is changing. Larger competitors are likely to offer a broad range of services, a strong marketing campaign built around an established brand, efficient business processes, and the ability to bid for value-based contracts with large payors.
- Owners of home healthcare companies are aging. One estimate is that 60% of owners are over the age of 55. As such, we expect an increasing number of home healthcare companies seeking buyers during the next few years.
- Many agencies have already found value in merging to create economies of scale and the resources to better compete with larger organizations.
One of the most difficult aspects of selling a home health care business is determining an appropriate, unbiased value. The issue here is that you, as the business owner, will most likely consider factors like hard labor, yet a potential buyer will not consider this when determining the price of your home health care business for sale.
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So, how can you accurately evaluate your home health care business to make things easy for everyone? Which strategies are the most effective? Here are a few tried and proven tactics used by professionals in today’s market.
Liquidation Value Method
The liquidation value is the total amount a person would receive if they sold their business assets on the open market. Unfortunately, items such as secondhand beds and furniture do not provide much value to owners.
Income Capitalization Method
This strategy, which is best suited for larger firms, is essentially the end result of dividing the predicted corporate earnings by the capitalization rate. The premise behind this strategy is that earnings define the value, and the capitalization rate is what connects the two.
“Rule of Thumb” Method
This valuation method is extremely broad. The valuation is based on what the buyer can expect to generate if the business continues to run and generate income as it has in the past. This method is a fine place to start, but it is too broad to be used indefinitely, thus it should be used in conjunction with another strategy.
Discounted Cash Flow Method
This approach is one of the most precise. It employs business value evaluation that is based on both the earning power and risk of the business. It also takes into account a company’s future income stream and is best suited for high-growth companies.
Market Comparison Method
The market comparison valuation approach is commonly employed among experts and individuals since it is thought to be an accurate picture of what a business is genuinely worth. This method generates a relatively accurate value by comparing the sales of one business to the sales of comparable businesses.
Multiple of Discretionary Earnings Method
The MDE technique is best suited for small firms because it uses a company’s earnings as well as 14 operational and financial performance and risk criteria. The strategy is focused on income and informs owners about how various circumstances affect the worth of their firm. It can be used to quantify value and assess business performance.
When determining the worth of your small home health care business, you have several options. The technique that works best for you will be determined by your goals, financial history, assets, and rate of business growth. Some are better for small businesses than others, which should be considered when determining which approach to utilize from those listed above.
Many factors can influence a company’s worth. Understanding where your firm’s value lies and how that translates into a reasonable price is part of the business valuation process, whether you are selling your company or simply want to know its worth. Here are some of the factors that can influence the value of service businesses.
- The type of business (industry/niche)
- Monthly/discretionary cash flow
- EBIDTA (Earnings Before Interest, Depreciation, Taxes, and Amortization)
- Revenue trends
- Profit margins
- Customer concentration
- Market share
- Management team (experience, depth, etc.)
- Reputation and brand recognition
- Competition/competitive advantage
If you require a small business valuation, make sure you have a strong understanding of your benefits and market share.
If you’ve been considering the worth of your company, you’ve probably checked around to see what your possibilities are. When it comes to business valuation, keep in mind that you get what you pay for.
There are, for example, low-cost business valuation software solutions. When compared to hiring a professional appraiser, these pricing are appealing. Although software is inexpensive, can it give you with an actual value for your company?
The truth is that there is no alternative for a professional appraiser’s experience. Software can assist you in crunching figures and evaluating the bottom line, but it will not comprehend the complexities of your organization.
A professional evaluation might cost anywhere from a few hundred dollars to tens of thousands of dollars. The cost is influenced by the size and complexity of your firm, your industry, and other considerations.
If you plan ahead of time, you will have the most pleasant experience during your business valuation. Here are some things to take to ensure you go into your valuation with the necessary information.
- Gather information about the company’s corporate and tax structure, owners, officers, and ownership percentages.
- Create an organizational chart that shows the entire management team and their functions, including information about board members. Also, you should include employment contracts.
- Gather payroll data for all employees, including key salaries and other relevant information.
- Know the information regarding employee benefits, including bonuses, profit sharing, and stock options.
- Create a detailed description of the business and its operations, including which portions of the company are for sale and which, if any, are not. Make sure to include all business assets, such as equipment and inventory, that will be included in the valuation.
- Know the last five years of tax returns for the business, including information on any IRS audits or other investigations.
- Have five years’ worth of financial statements and other relevant financial documents, including cash flow statements, P & L reports, sales reports, and cash flow reports.
- Create a list of your top customers and the percentage of the business they represent.
- Have a payment history for all customers.
- Gather accounts receivable aging reports for the most recent three years.
- Have a vendor/supplier concentration analysis.
- Do a competitive analysis that includes an overview of top competitors and their services.
- Acquire details of any loans or liens.
The more thorough your preparation, the easier it will be to obtain an accurate and beneficial appraisal for your small business.
Tips on Choosing the Best Valuation Approach When Valuing Home Healthcare Businesses
As with other businesses, a distinct set of variables drives the profitability and hazards associated with each of these service lines, making generic assumptions impossible. Appraisers must learn about each home healthcare service line and how they interact if the subject business has two or more service lines. Appraisers must also select the optimal valuation approach for the specific service line they are valuing. Here are some pointers for each strategy.
When assessing profitable functioning enterprises, the income approach, and more particularly, the discounted cash flow method, is the valuation methodology and method that most appraisers choose. If there is insufficient cash flow to offer an acceptable return on the business’s assets, this strategy may be difficult to apply to marginally profitable or unsuccessful firms. Methods based on the market or asset approach may be more applicable in this scenario.
It is critical to establish whether the predicted cash flows are acceptable and achievable when using an income method. If the appraiser has a deep understanding of the business and industry (as previously described), he or she should be able to make this decision and factor it into the establishment of a discount rate appropriate to the subject company’s cash flows.
Market approach methods can be valuable but challenging to apply effectively when valuing home healthcare firms because it is always difficult to discover publicly traded corporations and sales transactions for companies that are actually comparable to the subject company. It is nearly impossible to accurately examine a comparable company’s operating qualities unless the comparable company is publicly traded.
Some similar sales transactions may precede current reimbursement levels, economic developments, or proposed legislation, resulting in an incorrect conclusion regarding a current transaction. Furthermore, a substantial proportion of similar sales deals constitute purchases by existing healthcare organizations that may identify economic synergies, resulting in an investment or synergistic standard of value (rather than fair market value, if that is the preferred standard).
Despite these limitations, a thorough examination of publicly traded companies and comparable sales transactions is extremely beneficial in developing an understanding of the marketplace, value drivers, who the most likely buyers are, and determining a reasonable range (low to high) to test values suggested by other approaches.
Asset approach methods are rarely utilized as the primary technique to value operational enterprises such as home healthcare unless the business is unprofitable or marginally profitable, in which case cash flows do not create an appropriate return on assets. Methods under the asset approach, on the other hand, should be evaluated to guarantee that values created under other techniques (mainly the income approach) exceed values developed under the asset approach, which is typically regarded as the lowest or floor value.
The premise of value is virtually always a going concern in an income or market strategy. When employing an asset approach, determining the premise of value can be more complex, but the valuation methodologies employed must be compatible with the premise chosen.
assessing home healthcare firms is similar to assessing other businesses in that appraisers must have a thorough understanding of their operating characteristics as well as the industry.
Changes in sectors and demographics result in new business prospects and growth. This is exactly what is happening in the home health care market, which is expected to be one of the fastest expanding industries by 2022.
While establishing a new business is an exciting prospect, it can also be intimidating. Perhaps you don’t feel prepared to deal with the stress or financial strain of establishing a new business from scratch. If this is the case, don’t worry; it’s an understandable but manageable concern. You can establish a business without the hassle of starting one from scratch by purchasing an existing home health care firm or franchise.