By Stephen Tweed
Have you been giving some thought to selling your home care company?
Have you wondered what your company might be worth if it were acquired today?
One of the most significant trends in the home care industry for 2020-21 is the number of home care companies that have been acquired, and the number of home care companies that are looking to acquire other companies. In 2020, four members of our Home Care CEO Mastermind Groups were acquired. One member company of our Top 5% Mastermind Group was sold, two members of or Top 7% Group, and one member of our Strategic Growth Group were sold.
We also heard news of two major franchise companies that were sold recently. Senior Helpers, one of the Top Ten home care franchising companies was recently acquired by Advocate Aurora Enterprises, the investment arm of Advocate Aurora Health System in Illinois and Wisconsin. In the past few weeks, the parent company of Home Helpers Home Care was acquired by a private equity firm. This is the most recent in a series of private equity acquisitions of home care franchise companies.
How are Home Care Companies Valued?
As the owner of an independent home care company, you may be wondering what your company is worth. How do buyers value a company they hope to acquire?
Last October, I was invited by the annual conference planning committee of the Home Care Association of America to present a program for their annual conference on Mergers and Acquisitions in a Post Covid World. I was able to interview a number of industry experts who are buyers of home care companies, and a number of colleagues who have recently sold their home care companies. From that, I put together some insights that may be helpful to you as you ponder your short term or long term exit strategy, and what the options might be to sell your home care business.
We learned that most home care business sale prices are based on a multiple of “Adjusted EBITDA”. EBITDA is Earnings Before Interest, Taxes, Depreciation, and Amortization. It is basically your income from operations before owners’ compensation. The Adjusted EBITDA is calculated by removing from the EBITDA number any expenses that will not be recurring under new ownership. The industry experts explained that multiples of Adjusted EBITDA have expanded in the past few years. We used to say that home care companies would sell for thee to five times Adjusted EBITDA. This past year, that range was expanded to Two to Seven times Adjusted EBITDA.
Three Ways to Exit Your Home Care Business
There are three ways you can exit your home care business when the time is right:
- Pass Your Business on to Family Members
- Sell Your Business to Key Employees
- Sell Your Business to an Outside Buyer
When you are considering selling to an outside buyer, there are thee types of buyers:
- An Owner Operator – This is an individual, a couple, or partners who want to buy your business to operate it as their own business.
- A Strategic Buyer – This is an existing home care company that is looking to expand their business by acquiring another existing home care company.
- A Equity Buyer – This is an organization that is looking to buy a home care company as an investment opportunity. One of the major trends the past few years is Privat Equity Groups who are interested in acquiring existing home care companies as a platform to operate and acquire other home care companies.
Seven Factors Affecting Company Valuation
In my research for the HCAOA conference presentation, I identified seven specific factors that affect the value of your company in the eyes of potential buyers.
- Size – Most strategic and equity buyers are looking for larger home care companies to purchase. The larger your company is above $5 million in annual revenue, the more it will be worth to these buyers. While there is a market for smaller companies, they may be worth a lower multiple of EBITDA.
- Momentum – Most buyers we talked with are looking to buy companies that are growing in annual revenue, numbers of clients, hours per week, and bottom line profitability. If your company has not been growing steadily for the last three years, it will be valued less that a company with growth momentum.
- Revenue Diversification – While most home care companies are narrowly focused on in-home private pay personal care, some buyers are looking for companies with multiple streams of revenue.
- Systems for Client Acquisition– If you as the owner are the primary sales and marketing person, and acquiring new clients depends on your personal activity, your company will be worth less than a company that has proven systems for sales and marketing, and a steady stream of new client referrals.
- Systems for Caregiver Acquisition and Retention – While every home care company in the company is challenged by the caregiver recruiting and retentions crisis, some larger companies have systems in place that make recruiting and retention more effective.
- Office Team Disruption – What will happen to your office team if you sell the business and exit? Are there key team members in place who will stay and work with the new owner to continue growing the business? The less disruption from the sale of the business, the more value it has to the new owner.
- Threats to Profitability – Buyers will look at your business from the perspective of risk, and companies that have a lower threats to future profitability will be more valuable at sale time.
An Opportunity for More Conversation
If you are intrigued by some of the ideas we’ve been discussing, you may want to have more conversation about this. Perhaps you are beginning to think about your own exit strategy. Perhaps you have been getting calls from prospective buyers and you aren’t quite sure how to respond. Perhaps you are looking at retirement and wondering about how you can add value to your company to more valuable when you eventually decide to exit.
If so, please give me a call and I’ll be happy to discuss this further. You can reach us at Leading Home Care at 502-339-0653.
( I didn’t put my email in this blog post because I don’t want to feed the spammers, but if you have my email you can send me a note and we’ll set up a time to talk.)
There’s not obligation, and I’m not trying to sell you anything. I just enjoy having conversations with owners and CEOs of home care companies who want to grow their businesses and get ready for the future.
Thanks in advance for exploring this opportunity.