When navigating home-based care M&A, it’s important for buyers and sellers to understand the several factors that go into company valuations.
That’s especially true now, with home health and home care dealmaking activity starting to rebound after a relatively slow start to the year.
“Fair-market value is really a principle that’s used by business appraisers, valuation specialists and others, and it’s a way to look at the current value today in a free and open market-based approach,” Mark Sharp, home care and hospice practice leader at FORVIS, said during a recent Home Health Care News webinar sponsored by The Braff Group. “It’s an any-willing-buyer concept. It’s not what anybody brings to the table for the seller. It’s what the seller has and what their business has done, historically, through a certain date.”
Fair value, Sharp clarified, is different from fair-market value. Fair value allows stakeholders to look forward to hypothetical scenarios, such as future payment cuts, that could impact the worth of a given company.
The third type of value category — and the one that sellers should be most interested in — is investment value.
“The investment value answers the question of, ‘What is the value to a specific, unique buyer in the marketplace?’” Sharp said. “That investment value will consider what the buyer potentially brings to the table in terms of synergies and in growth that they know that they can accomplish. The buyer doesn’t want to attribute any value to the organization they’re purchasing in the fair-market-value concept. That’s where they want the seller to be.”
More often than not, the investment value will be higher than a fair value or fair-market value. That’s one reason why sellers will often try to get to the investment value and close on that price.
“Whereas the buyer generally doesn’t want to provide any of the value they bring to the equation in what they’re paying to the seller,” Sharp said.
It’s also important for stakeholders to understand that when multiples are thrown out when deals are being talked about, those multiples are generally based on the fair-market value as opposed to the investment value.
Knowing this dynamic can be beneficial to sellers in the home-based care space, particularly as more providers are trying to layer on services and buy other providers that can be seamlessly folded into their current setup.
“From a seller’s perspective, you’re trying to find that buyer out there that says, ‘I’ve got to buy this company at this time because it’s a perfect fit for my strategy,’” Mark Kulik, the managing director of M&A advisory firm The Braff Group, said. “If a buyer finds that it’s a perfect fit for their company and their growth plans, [usually they will] say, ‘I will pay up. I’ll pay a bit more because it’s a perfect fit.’”
In order to find those buyers, sellers need to have multiple offers on the table.
“You’re trying to find the buyer that has that superlative offer that comes back to you and says, ‘Here’s the multiple and here’s the price I’ll pay for your company,’” Kulik said. “To do that, you’ve really got to go to market and attract numerous buyers, and figure out what the marketplace is like. Because you really don’t know who that superlative offer is until you have two, three, five or six offers in front of you.”
Whether a seller is new to the market or is a veteran in the space, many would be surprised at the gap in valuations, Dexter Braff, president of The Braff Group, said.
“When we’re presenting a company to qualified buyers and to people that understand the marketplace, the variation in those valuations can be easily 50% to 75% differential,” Braff said. “That might surprise some people. And that’s from the high, to the mid, to the low [sides of the market]. That’s where you start to uncover these differences: the negative investment values and the fair-market value. I think people out there think everyone pretty much pays the same – and that’s not the way it is.”