The hospice mergers and acquisitions environment has never been more robust, with valuations reaching record levels and buyers hungry for assets of all sizes.
Unlike the Patient-Driven Groupings Model (PDGM) uncertainty that the home health industry currently faces, the hospice business landscape has been overwhelmingly favorable. That means buyer interest in hospice agencies will likely remain high over the next several months, — and that there may be no better time for owners and operators to start planning their exits.
Whether you’re looking for an immediate exit or one five years from now, here are seven key ways to maximize the value of your hospice.
Broadly, enterprise value is determined by income and a given multiple — a function of both risk and growth. Because growth rate impacts both parts of the valuation equation, that makes it an extremely important point for prospective sellers to consider and promote.
“An agency that generates $10 million in revenue typically generates more income than one that generates $2 million,” says Cory Mertz, managing partner for M&A advisory firm Mertz Taggart. “On the multiple sides, which company is riskier: one that is generating $1 million in EBITDA (which we use as a proxy for cash flow) and growing 15% per year — or one that is generating $1 million in EBITDA, but did $1.5 million in EBITDA last year?”
The bottom line: hospice buyers want to see that an agency hasn’t already peaked in terms of its growth potential.
Sell at the right time
Closely related to growth is timing, as it’s always best to sell your agency when it’s clearly on its way up. Doing so gives buyers comfort that the company still has some upward momentum they can capitalize on — and that it’s a well-run business.
On the flip side, if your census has dropped noticeably quarter after quarter, that will likely give a buyer pause.
Consider industry timing as well. Currently, hospices are commanding all-time high valuations with little apparent risk of a downturn. At least in part, this is because the industry has not been subject to significant reductions in payment, or to significant regulatory oversight (when compared to, say, home health). However, things can change with very little notice. We call it “stroke of the pen” risk, which could come at any time in the form of a CMS proposed rule or an Office of Inspector General (OIG) announcement — either of which could dampen the current enthusiasm for hospice. Equally uncertain is the impact of CMS’s hospice carve-in for Medicare Advantage plans, which will be tested starting in 2021.
The big takeaway: It’s always better to sell too soon than too late.
As American business magnate and philanthropist Warren Buffett once said: “If you wait for the robins, spring will be over.”
Diversify your referral base
While it’s always nice to have sure-fire, go-to referral sources, individuals looking to sell their hospice businesses need to cover all their bases and take a diversified approach.
Why? Well, for one, having diverse referral sources helps mitigate risk, so a disturbance in one referral stream doesn’t impact the entire operation.
“If you really want to maximize value, you need to diversify as much as possible to capture the highest multiple,” Mertz says. “While that skilled nursing facility that refers you 25% of your business will certainly boost your income, it is seen as a risk in the buyer’s eyes. If that referral source stops referring after the sale, then it’s a big risk.”
If you want to maximize the value of your hospice business, you’ll likely need professional help. Generally speaking, buyers value businesses based on accrual numbers — and if you don’t provide accrual statements, they will provide or create their own.
Accrual statements recognize revenue when it is earned, ideally the day of the visit. Meanwhile, cash-based statements, which most organizations use and pay taxes on, recognize revenue when it comes in the door. But the problem is that the two don’t always correlate.
“There are a number of things that can slow down payments,” Mertz says. “ADRs and other billing issues can have an impact, and it’s common for owners to bill a little slower at the end of the year.”
The problem: If reported on a cash basis, a company is likely to understate income and could be leaving money on the table.
Create a self-operational management team
Ask most private equity buyers, and they’ll tell you that they don’t want to start from scratch in terms of creating an entirely new management team. Strategic buyers will have the corporate overhead and associated synergies in place but likely will not have local management to run the day-to-day operation. Creating a layer of management that can operate the business in the owner’s absence can be a major appeal in any deal.
In many ways, the brains, relationships, and culture of an operation are what buyers are ultimately investing in. Put differently, if the glue of an organization walks out the door along with their referral relationships and management team after a sale, that’s a huge risk for a prospective buyer.
Time and time again, providers are reminded just how valuable a second set of eyes is when it comes to ensuring coding and billing accuracy. That’s true for audits, too, and hospice agencies looking to sell should make sure to do a third-party billing audit.
Recent oversight actions were taken by the U.S. Department of Health and Human Services OIG make this especially relevant.
“If you pass your billing audit with flying colors, great,” Mertz says. “If not, it imposes too much risk in a buyer’s eyes, and they may walk away from the deal.”
Furthermore, it’s important to note that passing a survey is not an indicator of spotless billing. A state survey or accreditation and a billing audit are two very different things.
Coordinate a competitive bid process
After you’ve conducted a third-party billing audit, created a layered management team, diversified your referral sources, and checked all other boxes, it’s vital to foster healthy sale conditions.
Sellers are advised to get multiple credible buyers involved in the process, working to encourage them to make the best offer. This can be done by consistently and subtly reminding them that there are several players with seats at the table. Take baseball, for example, A team trading a star player gets the most blue-chip prospects back when multiple teams are bidding against each other, repeatedly upping their antes. We’ve all seen those charity auctions and fundraisers where one person’s interest drives up the interest of other buyers, and the bidding war starts. The same holds true for quality hospices on the market when the process is run correctly and confidentially.
Whether you’re looking to sell now or in a few years, following these seven steps will help you maximize the value of your hospice. While some of the steps can be carried out quickly, others take time, so be sure to start solidifying your sale plan today.