We have put together some great information this month to help you grow and solidify the future of your agency. As always, our commitment is to provide educational content surrounding the fundamentals of the business life cycle including building value, planning for an eventual exit, and recent Merger and Acquisition trends effecting the home health industry.
Building Value for Your Agency
1. Stabilizing Cash Flow – One of the most difficult areas to manage in many home health agencies is stable and predictable cash flow. In order to successfully navigate this ongoing challenge you must have a pulse on competition, changing reimbursement rates, your operational cost and all factors that impact both the top and bottom line. If you have a good plan in place you will be able to offset any reductions or increases that effect your cash flow.
We recommend a Quarterly meeting to review any state and federal legislation proposals and actions that will impact your reimbursement rates, employee benefits and federal and state wage mandates that effect any of your employees. In addition, you will need forecast the impact vendor supply and service cost increases will effect cash flow and plan how to mitigate these increases. In addition, if there is new competition for referrals and clients in your service areas you should account for some impact to new business.
As the home health industry moves forward, demand for services will increase, however unlike typical markets, it is anticipated we will continue to experience stagnating reimbursement rates for both Medicare and many state Medicaid programs. This coupled with increasing cost for labor, supplies and other services will have a direct impact on margins and cash flow. Developing a solid plan and understanding areas of the business that can afford cuts prior to having to make them will be essential to maintain and build value in the coming years.
Exit Planning Strategies
“Exit strategies may allow you to get out before the bottom falls out of your industry. Well-planned exits allow you to get a better price for your business.”
From: Selling Your Business by Russ Robb, published by Adams Media Corporation
Whether you plan to sell out in one year, five years, or never, you need an exit strategy. As the term suggests, an exit strategy is a plan for leaving your business, and every business should have one, if not two. The first is useful as a guide to a smooth exit from your business. The second is for emergencies that could come about due to poor health or partnership problems. You may never plan to sell, but you never know!
The first step in creating an exit plan is to develop what is basically an exit policy and procedure manual. It may end up being only on a few sheets of paper, but it should outline your thoughts on how to exit the business when the time comes. There are some important questions to wrestle with in creating a basic plan and procedures.
The plan should start with outlining the circumstances under which a sale or merger might occur, other than the obvious financial difficulties or other economic pressures. The reason for selling or merging might then be the obvious one – retirement – or another non-emergency situation. Competition issues might be a reason – or perhaps there is a merger under consideration to grow the company. No matter what the circumstance, an exit plan or procedure is something that should be developed even if a reason is not immediately on the horizon.
Next, any existing agreements with other partners or shareholders that could influence any exit plans should be reviewed. If there are partners or shareholders, there should be buy-sell agreements in place. If not, these should be prepared. Any subsequent acquisition of the company will most likely be for the entire business. Everyone involved in the decision to sell, legally or otherwise, should be involved in the exit procedures. This group can then determine under what circumstances the company might be offered for sale.
The next step to consider is which, if any, of the partners, shareholders or key managers will play an actual part in any exit strategy and who will handle what. A legal advisor can be called upon to answer any of the legal issues, and the company’s financial officer or outside accounting firm can develop and resolve any financial issues. Obviously, no one can predict the future, but basic legal and accounting “what-ifs” can be anticipated and answered in advance.
A similar issue to consider is who will be responsible for representing the company in negotiations. It is generally best if one key manager or owner represents the company in the sale process and is accountable for the execution of the procedures in place in the exit plan. This might also be a good time to talk to an M&A intermediary firm for advice about the process itself. Your M&A advisor can provide samples of the documents that will most likely be executed as part of the sale process; e.g., confidentiality agreements, term sheets, letters of intent, and typical closing documents. The M&A advisor can also answer questions relating to fees and charges.
One of the most important tasks is determining how to value the company. Certainly, an appraisal done today will not reflect the value of the company in the future. However, a plan of how the company will be valued for sale purposes should be outlined. For example, tax implications can be considered: Who should do the valuation? Are any synergistic benefits outlined that might impact the value? How would a potential buyer look at the value of the company?
An integral part of the plan is to address the due diligence issues that will be a critical part of any sale. The time to address the due diligence process and possible contentious issues is before a sale plan is formalized. The best way to address the potential “skeletons in the closet” is to shake them at this point and resolve the problems. What are the key problems or issues that could cause concern to a potential acquirer? Are agreements with large customers and suppliers in writing? Are there contracts with key employees? Are the leases, if any, on equipment and real estate current and long enough to meet an acquirer’s requirements?
The time to address selling the company is now. Creating the basic procedures that will be followed makes good business sense and, although they may not be put into action for a long time, they should be in place and updated periodically.
At United we have an industry leading exclusive service to assist in the value portion of Exit Planning. CLICK HERE to learn how we can help!
Home Health Merger and Acquisition Activity
With the more rules and regulations being discussed and the impact it will have on Small to Mid Market Medicare HHA’s many astute owners have determined now may be the best time for an exit. In other areas of Home Health there is high demand for private pay agencies throughout the country as many HHA’a and Medicaid Agencies are looking to diversify payor sources. This coupled with demand from Hospitals and some Long Term Care Insurance providers has created a broad pool of qualified buyers for the private pay market.
Here is a look at what is currently available through out the country:
|Price||# For Sale||Percentage|
|Under 1 million||169||56%|
|1 million to 2.5 million||27||9%|
|2.5 million to 5 million||6||2%|
|5 million to 7.5 million||1||1%|
|7.5 million to 10 million||0||0%|
|10 million to 15 million||0||0%|
|15 million to 20 million||0||0%|
|Region||# For Sale||Percentage|
|Mountain and Plains||14||5%|
If you have an interest in exploring the sale of your agency, and you generate gross revenues in excess of $3 million, United can guarantee an offer to purchase your agency.
Please Click Here and fill out the Complimentary Consultation form and we will be in touch immediately. Or, if you prefer call us at 1.800.581.5290 Ext 1.