How Home Health Agencies Can Demand Higher Valuations in M&A Deals

When it comes to acquiring home health care agencies, buyers can afford to be picky.

There are more than 10,000 home health providers nationwide, but typically, only a few dozen deals close per year. Between 2011 and 2014, the market saw an annual average of 80 transactions, according to data from the investment banking company Lincoln International. That number dropped to about 60 deals per year from 2016 to early 2020.

In other words, buyers looking to purchase a home health provider have thousands of options to choose from. Agencies, on the other hand, have less leeway.


However, there are a few key things home health acquisition targets can do to make themselves more attractive and drive up their valuations, according to Mark Kulik, managing director at the Braff Group. 

“When you look at the number of agencies out there across the country versus the number of closed transactions per year, it’s extremely infinitesimal,” Kulik said. “So it’s critical to know how buyers look at your agency, how they evaluate your agency, and what you can do to make your agency more attractive and more valuable to a buyer.” 

Kulik made those comments during a recent presentation at the National Association for Home Care & Hospice (NAHC) 2020 Financial Management Conference, which was held virtually due to the COVID-19 emergency. 


He explained that buyers typically look at three main areas when evaluating a potential home health acquisition target: the agency’s annual income, its annual growth and any risks it brings to the table.

Generally, more income equates to a higher value, and the same is true for growth.

Meanwhile greater risk — whether real or perceived — lowers the valuation an agency can command.

“So what’s the valuation formula?” Kulik said. “Income and growth [are] combined and multiplied times the buyer’s assessed risks, and that gives you the valuation of your agency.” 

On a more granular level, valuation comes down to an agency’s sales, talent, processes and compliance, according to David Berman, principal of health care M&A at Simione Healthcare Consultants.

Regarding sales, agencies with diversified referral sources are most attractive to buyers. That is, agencies with more referral sources — as opposed to fewer — are generally considered to have a more stable future in store.

“The lower your risk, the higher your value,” Berman said during the presentation. “The more your referral sources are centralized into one, the higher the risk [and] the lower value. The second part is: Who has the relationship with a referral source?”

Like referral sources themselves, those relationships with referral sources should be various and diversified so they don’t disintegrate if and when one employee leaves.

In addition to illustrating that to buyers, it’s also important for an agency to demonstrate future opportunities in the market, showing that the market isn’t too saturated and that they have a proven ability for growth.

“I have a lot of buyers that come up to me and say, ‘Mark, I had a great year last year, we grew 29%,’” Kulik said. “And I said, ‘Well, what happened the years before?’”

If an agency’s past is filled with inconsistencies, there’s no guarantee for the buyer that such growth will continue into the future. Instead, buyers are looking for consistent, sustainable growth.

Consistency is important in other metrics, too, Kulik explained, noting that buyers like to see how acquisition targets compare to national benchmarks. For example, an agency is generally considered very attractive if it’s been able to grow revenue 10% to 15% per year, he said, and its EBITDA should be in the 12% to 16% range. 

Above-average benchmarks aren’t always a guaranteed valuation driver, though.

“If you’re saying ‘Well, gosh, I’m doing better than the market. I get a premium. I’m doing 55% to 60% gross margin.’ Not so fast,” Kulik said. “A borrower’s going to say, ‘Wait a minute: We know that Medicare is a national program, so how can you be outdistancing the national norms by 10 points? What are you not doing that you should be doing?’”

Talent metrics are also important. How long have key leaders been with the company? Does the provider have dedicated sales leadership? What does an agency’s turnover rate look like?

“Something that gets looked over too often is turnover rates,” Berman said. “It is really expensive to keep having to train and rehire … staff. The more you can keep your staff, the more efficient you’ll be able to provide care, and ultimately, the higher the value of your agency.”

Turnover of key leadership is especially important for financial buyers, such as private equity firms or platform companies, he explained. That’s the case because these entities are likely looking for an asset they can use as a starting point into which it can roll additional agencies.

Home health companies targeted by these buyers need to demonstrate strong leadership and processes that can be built upon.

“What they need from you as the seller is a solid management team, a solid revenue cycle, a good EMR, a good use of technology, solid intake and solid administrative functions,” Berman said.

Meanwhile, for strategic buyers already in the space looking to do bolt-on acquisitions usually prioritize gross margin, as they already have their processes in place.

Finally, compliance is important for all acquisition targets, as the buyer doesn’t want to have to worry about Medicare coming after its new asset in the future for its past indiscretions.

As such, home health companies that can show well established compliance programs and detailed, easily accessible electronic records can likely demand a higher value.

Additionally, sellers should be able to present two to three years of past financial statements and future projections, based on metrics and predicted headwinds, for the next three years.

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