How Do You Maximize the Value of Your Home Health, Hospice, or Home Care Agency?
- Dec 9, 2022
- 7 min read
Updated: May 7
By Cory Mertz, Managing Partner, Mertz Taggart
At a Glance Maximizing the value of your home health, hospice, or home care agency comes down to two things: building value over time and capturing it through a disciplined sale process. Value is determined by the equation Enterprise Value = Adjusted EBITDA x Multiple, where the multiple reflects buyer-perceived risk. Owners who grow revenue, manage margins to the EBITDA sweet spot, diversify referral sources, and separate themselves from day-to-day operations can significantly increase what their agency commands. Equally important is how you go to market: a confidential competitive bid process with A-list buyers consistently delivers stronger outcomes than negotiating with a single buyer. |
You spend years, sometimes decades, building something valuable. But how you go about selling it can make all the difference between a good outcome and a great one.
I break maximizing value into two distinct phases: building value and capturing value. Most owners are already doing the first part every day. It is the second part, the sale process itself, that does not get talked about nearly enough.
What Is the Valuation Equation for a Home Health or Hospice Agency?
The fundamental valuation equation is straightforward: Enterprise Value = Adjusted EBITDA x Multiple. Adjusted EBITDA is the normalized cash flow your agency produces, as if the buyer already owned it, before any synergies. The multiple is an inverse measure of risk. The lower the perceived risk that cash flow will decline after a sale, the higher the multiple a buyer will pay.
I like to break this down further: Revenue x EBITDA Margin x Multiple. Each of those three levers can be improved independently, and the compounding effect can be significant.
A Real-World Example: From $7.5M to $14M
I met a Medicare Home Health agency owner at a conference in 2018. His magic number was $10 million. When we evaluated the agency, it was doing about $8.5 million in revenue with a 16% EBITDA margin. At a conservative 5.5x multiple (at that time), that put guidance around $7.5 million. Not quite there.
We agreed he had some work to do. He focused on facility referrals, prepared for PDGM, and growing the business. By late 2020, he had taken revenue to $10 million and improved margins to 20%. The market had also strengthened. He ultimately received a 7x multiple and $14 million in enterprise value, 87% more than the original guidance. That happened by moving all three levers: revenue, margin, and multiple.
→ Related: It’s All About the Multiple (…Or Is It?)
Why Does the Type of Financial Consideration Matter?
Not all enterprise value is created equal.
Cash at close is what matters most. Any other form of consideration, whether it is seller financing, an earn-out, or a contingent payment, needs to be discounted. Sometimes significantly.
Most transactions include a holdback, typically held in escrow with the seller's name on it. The buyer has to make a formal indemnification claim and prove damages to access any of that money, which makes it relatively secure. Where sellers run into trouble is with cash-strapped buyers who want to structure holdbacks as seller notes, request seller financing, or rely heavily on earn-outs. An earn-out or contingent payment, in my opinion, should be considered icing on the cake. If the business falls off post-close, you may never see that money.
What Are the Most Common Ways to Build Value?
Grow the Business
Revenue growth directly increases the EBITDA numerator and also drives a higher multiple. Bigger companies command higher multiples because they have the infrastructure to absorb setbacks. Publicly traded home health companies have traded at multiples ranging from the mid-teens to the mid-30s. A smaller agency with concentrated risk will trade for far less. Growing the company addresses both sides of that gap.
Manage Your Margins
Start measuring gross margin and net margin if you are not already. Gross margin is what remains after the cost of care: clinicians, caregivers, mileage, supplies. Net margin is what remains after overhead.
Target margin ranges that buyers find attractive:
Sector | Gross Margin | EBITDA Margin |
Home Health | 45-50% | 15-25% |
Hospice | 45-55% | 15-25% |
Home Care | Lower than HH/hospice* | 10-20% |
Diversify Referral Sources and Clients
A company with a hundred referral sources will typically command a higher multiple than one with ten. On the home care side, an agency with many lower-hour clients is generally more attractive than one relying on a handful of 24/7 cases. Concentration is risk, and buyers price risk into the multiple.
Separate Yourself from Marketing and Day-to-Day Leadership
This is one of the biggest drivers of the multiple. If the owner is the primary marketer and operator, buyers see significant transition risk. Even if they convince you to stay on after the sale, your motivation as a former owner is different. The more the business can run without you, the higher a buyer will pay for it.
Build a Transition-Proof Business
Make sure your key employees and managers are aligned and motivated to stay. Stay bonuses, even modest ones relative to the overall transaction, give buyers comfort that the team will remain intact. Bringing one or two key people into your circle of trust, and giving the buyer the chance to meet them, can go a long way toward de-risking the deal.
Consider an Acquisition
An acquisition can move all three levers at once. Revenue grows when you add patients and clinicians. Margins often improve when you eliminate redundant overhead, especially in your own market or a contiguous one. And a bigger company commands a higher multiple. It is a big undertaking, but it checks all the boxes.
How Do You Capture Maximum Value When Selling?
Building value is what you do over years. Capturing value is what happens in the final five to eight months. This is the part most owners do not spend enough time on, and it is where the process can make a dramatic difference in your outcome.
Who Are the A-List Buyers?
A-list buyers check three boxes: they have cash (or easy access to credit), they operate in your industry or an adjacent one, and they have done deals before. In practice, this means publicly traded companies and financially backed strategic buyers, companies backed by private equity or family offices. There are roughly 50 to 60 A-list buyers across the country in the home-based care space.
Why Does a Competitive Process Matter?
You want to avoid a monopsony, which simply means dealing with only one buyer. When multiple qualified buyers are competing for your agency, you get better pricing, better terms, and more leverage throughout the process.
The process works like this: reach out to all A-list buyers confidentially with a teaser document that includes an executive summary and high-level financials but not enough to identify the agency. Interested buyers sign a non-disclosure agreement. Then you provide a Confidential Information Memorandum, typically a 25- to 60-page deck covering the agency's history, financials, patient metrics, key employees (no names), and referral information (no names). That document also includes a process letter, which tells buyers this is a competitive process, sets an offer deadline (usually four to five weeks), and spells out what the letter of intent needs to include.
What Should You Look for When Meeting Buyers?
Once the serious buyers emerge, meet them face to face if possible. Schedule meetings back to back. This gives them a chance to ask detailed questions and gives you an opportunity to gauge which buyer is truly the best fit. It also reinforces that this is a competitive process.
During these meetings, be upfront about any potential issues. You do not want a buyer discovering something in due diligence that you could have disclosed earlier. Getting everything on the table builds trust and reduces the risk of renegotiation down the road.
Beware the uninformed buyer.
Buyers who are not experts in the industry will find things late in the process that can upset the deal. Buyers who approach sellers directly and make offers based on very little information are especially concerning. You want buyers who know the industry cold.
How Do You Get to the Closing Table Without Renegotiating?
Once you select a buyer and sign a letter of intent, you enter an exclusivity period, typically 60 to 120 days. You are locked in with that buyer. Everything you can do before signing the LOI to eliminate blind spots will pay off during this phase.
Having backup offers from the competitive process keeps the selected buyer honest. You do not need to mention it in an unprofessional way, but a subtle reminder that other conversations took place goes a long way.
Bring one or two key employees into the circle of trust. Due diligence is a lot of work, and you need to keep running the company at the same time. A trusted employee with access to the data you need can take a significant burden off your shoulders. Incentivize them with a stay bonus so they are motivated to stick around through the close and beyond.
Be ready to produce standard diligence information quickly. Time kills all deals. Due diligence checklists can run anywhere from 100 to 300 line items, so it’s important to know where everything is before that checklist arrives.
Most importantly, maintain strong admissions and hours through the process. If the business starts to fall off, even a little, buyers may question the value.
The best deals grow through diligence, and that gives sellers maximum leverage when negotiating the final purchase agreement.
Key Takeaways
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Ready to Talk About Your Exit?
Mertz Taggart has spent over twenty years advising home health, hospice, home care, and behavioral health owners through the sale process. If you are contemplating an eventual sale, or if you just want to understand where your agency stands today, we are happy to have a confidential conversation.
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