Valuing a Home Health Care Business Before Selling

The decision to sell your home healthcare business must have been challenging and now the time may have come to hand over the keys to someone else. But before you put your business on the market, it’s important to run proper valuation on it to ensure you don’t get shortchanged.

Factors that affect the valuation of your home healthcare business

There are numerous factors that impact how much your home healthcare business will bring in, once you put it on the market:

• Size of the patient base

The larger the size of your patient base, the higher will the valuation be for your home healthcare business. Buyers will also look at expansion opportunities to see how many more customers could seek the business’ services in the future.

• Location of the business

Prime locations which have access to a wide customer base are always valued high. For example, suppose your service location is a neighborhood where a large percentage of residents are 50 and older. In that case, your business will definitely have high value because of the future business potential it offers. 

• Services offered

Many home healthcare service providers offer both medical home care and custodial care as part of their services. Depending on the mix of services you offer and the specialized nature of your service (for example, you specialize in caring for patients with Alzheimer’s or paralysis), your business will either be valued higher or at-par with the market.

• Exposure to risk

When we talk of risk in a home healthcare company, we refer to multiple types of risks. For example, your business could be a very risky investment for a buyer if you get patients only from a single source (for example, patients of vehicle injuries or rehab facilities only). This will limit your client base considerably.

Your business could be very risky if the type of illness you provide care for, is vulnerable to litigation from the patients’ families. This could incur lawsuits and financial problems. Your business may also be a risky investment if there are many other home healthcare service providers serving your neighborhood, affecting your ability to earn.

• Earnings vs expenses

The amount of income and expenditure from your company also determine its sale price in the market. The buyer will want to look at your EBITDA since that is an excellent indicator of your business’ profitability. 

Usually, home healthcare businesses are valued in multiples of the EBITDA and it helps if your EBITDA is high to begin with.

• Company reputation & goodwill

Even if your company’s earnings are lesser than what the buyer prefers, he/she could still be interested in your company if your reputation is great.

Goodwill and reputation make-up for lack of profitability, because they assure long-term business.

• Staff profile

Your staff play an integral role in the valuation of your property. The more highly-qualified and experienced your staff are, the better their reputation amongst patients, the more-likely that you will get business.

• Validity of licensing & permits

Any home healthcare business which has its licenses and permits renewed before the sale, can demand a higher sale price, because they reduce the buyer’s efforts and monetary obligation to get re-licensed.

Methods of valuing your home healthcare business

Now that you know what factors affect your company’s valuation, let’s look at the three common methods that are used to calculate the sale price of a home healthcare business:

• Discounted cash flow method

In this method, the valuation is done based on the projected cash flows that your business can expect, in a particular duration, after being adjusted for the time value of money. A discounted rate of return is used to find the current price of your business and if the value is more than the cost of investment, it indicates a profitable business.

• Multiple of SDE method

The Seller’s Discretionary Earnings (SDE) refers to the earnings that a business owner can expect from the company in a year, before deducting the year’s expenses and taxes. In this method, the buyer values the business as multiples of the SDE (usually up till 4X). The multiple is determined by comparing the sales of home healthcare businesses in the locality and using the same multiple that they used to evaluate their respective sale prices.

• Market-based valuation method

The final method of company valuation is market-based i.e. pricing the company according to the sale prices of other home healthcare businesses of the same stature, services and expertise.

This method doesn’t have a very scientific or mathematical reasoning, but is subjective to the buyer and the seller.

What happens after valuation of the business?

After you value your business, it’s time to officially list it for sale. Hiring a broker to liaise with prospective buyers will make your job easier. It can take anywhere between 6-10 months for your home healthcare company to be sold. It may take longer if you’re unable to reach consensus with your prospective buyer.

It’s important that you collate all of your business ownership, loans, invoices and taxation documents for perusal by the potential buyer. Also remember to keep a copy of your licenses, permits and Home Healthcare Insurance for the buyer.