Home Health Business Valuation
If you are transferring ownership in a home health agency to a living trust, an investor, or any other type of buyer, there are a few reasons you might need a home health business valuation.
- Taxes: If you are selling to a living trust, you might need a valuation to share with the IRS. The valuation should be done before the transfer occurs.
- Financing: If the buyer is using financing, the financial lender might want a valuation. Bank credit departments may not be comfortable valuing a wholly- intangible business.
- Anti-Kickback Statute: If the buyer or seller is a referral source that refers Medicare patients, like a hospital, you might need a valuation to protect them from violating the Anti-Kickback Statute.
Home health and hospice agencies are very special because they are ENTIRELY service-focused businesses. They have little or no physical facilities or major equipment. Banks, lenders, and even the IRS can really struggle with businesses like these, because almost all the business value of a home health agency is INTANGIBLE.
Since home health business value is usually 99% intangible, the professional performing your valuation really has to know what they are doing. You want someone who can defend their work vigorously with hard data to the IRS, a court, or the Department of Justice.
Below are three things you should know when getting a home health business valuation.
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#1: ASK your valuator to pull all Medicare cost reports for your market
Before you hire a business valuator, ask if they will pull the last three to five years of Medicare cost report data for all the agencies in your market.
By pulling market volumes and revenues for every home health agency that files annual Medicare cost reports, we can identify exactly how fast your market is growing, and your competitive position in the market. We call that market share.
There is a really big important assumption in business valuation called the long-term growth rate. It is a lot easier to select the long-term growth rate, and defend it, when we can clearly document your local market trends in terms of total market revenues, Medicare episodes, and visit volumes for all the agencies in the market.
The chart below shows four home health agencies inside the city limits of Kansas City, Missouri that experienced overall combined growth greater than or equal to 6% every year for the last four years.
The 17% pop in 2021 was clearly a bounce back from the COVID-19 pandemic, but the data still supports a 6% long-term growth rate for the home health market in Kansas City, Missouri.
Do not let your appraiser just stick an arbitrary 2% long-term growth rate in their model. This can impact your valuation a lot. Tell your appraiser up front that they are required to identify the real growth rate of your market.
#2 Financial ratios drive value adjustments. Find dozens of comparables.
It is absolutely critical to have access to directly comparable financial ratios for at least a few dozen other home health agencies just like yours. Ideally, these will be home health agencies that are the same size and have similar payor mixes as yours. These market comparable home health agencies can be in your market or other similar markets.
Because there are few physical assets, home health business valuations rely heavily on financial ratio analysis and benchmarks. Your business valuation can have massive adjustments that increase or decrease your business value based on your financial ratios.
Example ratios include your days of expenses held in cash on hand, accounts receivable ratios like days of sales outstanding, debt and liability ratios, and various expense ratios, including staffing and labor ratios.
Below are just a few types of market benchmarking ratios Coker would pull if we were valuing a home health agency in Missouri with $5 million to $7 million in annual net patient revenues.
Example Financial Ratios Comparable Data
Days of cash on hand, days of sales outstanding, and direct labor costs per visit are the types of financial ratios that can determine whether or not normalizing adjustments will be made, how much to adjust value, and whether those adjustments will increase or decrease your business value.
Using Medicare cost report filings, we can identify the very best comparable agencies for benchmarking. We can search over 9,000 U.S. home health agencies to find those that are the same size, in the same or similar markets, and with a similar payor mix.
#3: Get value for CONs, moratoriums, state licenses, & Medicare certification
Home health agencies are subject to many different reimbursement and regulatory factors. If your state has a moratorium, a Certificate of Need program, or other special startup requirements like a minimum level of cash on hand, all those are high barriers to entry for competition.
At a minimum, high barriers to entry for competition should be factored in the company-specific risk premium (CSRP) of your business valuation’s discount rate build-up to increase your business value.
In some markets, just the empty shell of a home health agency with a Certificate of Need, state license, and Medicare certification could be worth anywhere from a quarter million dollars to one million dollars, or more.
We have been preparing home health valuations since 2005
Home health has been near and dear to my heart since 2005, when I valued the home health agency of Rush Memorial Hospital in Rushville, Indiana. Since 2005, I have worked with hundreds of hospitals and surgery centers, as well as thousands of physicians. My whole healthcare career started with one small rural home health agency valuation.
-Nicholas Newsad, MHSA
