Many home care agency (HCA) and home health agency (HHA) owners want to know how their agencies are valued in the market. Knowing the value of your agency can help you with your Exit Plan. There are two levels of valuation. The first level is a certified business valuation. Similar to a certified real estate appraisal, a certified business valuation is performed by a state-licensed or nationally accredited business valuation professional. Large transactions or bank finance transactions usually require a certified business valuation. The second level and more often used method is determining the most probable selling price (MPSP) of an agency. Business intermediaries use this method to determine the price to list an agency.
MPSP is the price (not value) a ready, willing, and able buyer offers to a like-minded seller. While three approaches can be used to determine MPSP (i.e., Market Approach, Income Approach, Asset Approach), many business intermediaries use the Market Approach. Under the Market Approach, market-based pricing ratios are used to determine MPSP. The standard approach to determining MPSP of an HCA or HHA includes these steps:
Gather 3 to 5 years of financial returns for the agency.
Gather the past 5 years of the agency's profit and loss statements and the most recent balance sheet. Tax returns are preferred.
Review the profit and loss statements.
Examine the profit and loss statements for ordinary and usual gross receipts and expenses. Exclude items that are not related to the operation or out of the ordinary.
Determine the SDE or EBITDA for each year.
Use seller's discretionary earnings (SDE) or earnings before interest, taxes, depreciation, and amortization (EBITDA) as the basis for valuation. Typically, SDE is used in small agency valuations while EBITDA is used for larger ones.
Weight each year's results based on reasonableness.
Most business intermediaries give more weight to recent financial statements rather than older financial results. Some omit years with unusual events (e.g., COVID-19). Select the years that better reflect normal operating results.
Get direct market data for similar agencies that have sold.
Contact a business intermediary that can give you data on what agencies have sold for. Some national data sites offer subscriptions to such information.
Apply the market multiple to determine the range of MPSP.
Use the best market multiple information you can get. Apply these market multiples to your agency's information to get a range of MPSPs. Where your agency fits in the range of MPSPs depends upon many factors, such as:
Are gross receipts growing, flat, or declining?
What mix of revenue to you have - private pay, government-subsidized, out-of-pocket?
Is your client base concentrated?
What is your client retention rate?
How much revenue per employee do you generate?
How do your expense ratios compare to industry averages?
Is your net profit margin at, above, or below the industry average?
What other listing are in your market?
Are market conditions ripe for selling your agency?
Many business intermediaries can perform this analysis for you at a reasonable price.
Comments