Selling Home Health Agencies
It is no secret that South Florida has a very large percentage of seniors over age 65. Indeed, 25 percent of the population in Palm Beach County consists of individuals aged 65 years or older. This compares to about 17% of the general population in the United States. The warm climate, lack of state income tax, and inviting South Florida scenery attract many retirees from all over the world. The generally rising life span will only enhance this trend moving forward. These inherent advantages make home health agencies an inviting acquisition target for a wide range of buyers in South Florida. Selling a home health agency involves valuing the business based on its annual adjusted owner benefit and payor mix, obtaining an accurate set of historical financial records so the valuation may be performed accurately, and hiring a business broker experienced in confidentially selling health care businesses to targeted strategic buyers.
What is a Home Health Agency?
A home health agency is a specific type of healthcare entity that is licensed and regulated by the Agency for Healthcare Administration (AHCA). According to AHCA, a home health agency is an agency that provides skilled services (such as physical therapy, nursing, social work, and occupational therapy) and/or non-skilled services (by home health aides, certified nursing assistants, and homemakers or companions) to patients in their homes. Additionally, a home health agency may provide staffing services on a temporary or long-term basis to healthcare facilities (such as in-home physical therapy providers, nursing homes, and assistant living facilities). Often times, the home health agency charges the healthcare facility about double what it pays the caregivers under a staffing arrangement. The healthcare facility then bills the patient directly, Medicare/Medicaid, or the patients’ other insurance providers.
Regulatory Requirements of Home Health Agencies
- Because home health agencies are licensed to provide skilled services, AHCA has many regulatory requirements pertaining to the supervision and management of patient care.
- This compares to another home healthcare entity called a nurse registry, which only may provide non-skilled services (and with a much lower regulatory burden).
- A home health agency must provide the patient with supervisory visits by a Registered Nurse, employ a Director of Nursing, have an on-call nurse on duty, and directly manage and supervise all their caregivers.
- A nurse registry has no such regulatory requirements.
- The caregivers (both skilled and non-skilled) working for a home health agency must be W2 employees, with the agency covering all insurance, payroll costs, and training expenses.
- The caregivers (only non-skilled) working for a nurse registry may be 1099 independent contractors.
- Because the home health agency has strict accountability for their caregivers, there are many record keeping, quality assurance, and supervisory tasks required and enforced by AHCA via periodic visits and inspections.
Value of Home Health Agency License
It may be surprising to learn that a home health agency may sell for as high as $250,000 even with no active patients. This is because the value of a Medicare certified HHA license allowing an agency to bill for skilled and non-skilled care within specific geographic districts regulated by AHCA has immense value to many buyers. These buyers would rather purchase an existing agency (even with no patients) in order to avoid the very costly and very time-consuming process of obtaining a new agency license in South Florida. The ordeal of obtaining a new home health agency can take at least a year and many buyers do not wish to wait so long. The costs vary but typically include legal, consultancy, and staffing fees necessary to pass AHCA inspections and regulatory hurdles.
How to Value Home Health Agencies
The first step to properly value a home health agency is determining the adjusted owner benefit of the agency. The owner benefit refers to the actual economic profit that an owner derives from a business. To determine the adjusted owner benefit, one must start by calculating the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) from the seller’s financial statement such as a tax return. Then one ‘adds back’ the owner’s salary and any of the owner’s personal expenses which flow through the business. Home health agencies typically sell for 2.5-4.5 times its owner benefit. This multiple is higher than the average business sale, and reflects the value of the license and the strong healthcare industry dynamics in South Florida.
Factors Affecting Valuation of Home Health Agencies
- Perhaps the most important factor when valuing a home health agency is the ability of the agency to collect payment from insurance companies on a timely basis.
- Without a firm grasp on the accounts receivable, a home health agency will be viewed as suspect by potential buyers.
- An agency must pay its caregivers prior to actually receiving payment for services rendered (anywhere from two weeks to many months).
- A smooth running agency with timely billing practices and quality controls is less likely to have accounts receivable problems, and thus will receive a higher valuation.
- Another factor determining an agency’s valuation is the growth rate of the business, and whether the agency has been adding referral sources (and patients) over time.
- The reliability and quality of the staff is also of paramount importance.
- The patient referral sources (such as physicians, hospitals, nursing homes, and assisted living facilities) and whether they are transferable to the buyer (absent the seller’s future involvement) will also greatly affect the valuation of a home health agency.
- Lastly, the valuation of a HHA may be affected by any perceived changes in future Medicare pricing and reimbursements.
Transfer of Home Health Agency License
When purchasing a home health agency, a buyer will usually transfer the AHCA certified license via a CHOW (Change of Ownership Application). This saves the buyer enormous time and costs of applying for and receiving approval for a brand new AHCA certified license under a new corporate entity. It will also help the buyer greatly by facilitating an easier transition for the seller’s insurance contracts. A deal done via a CHOW transfer means that the buyer retains the seller’s corporate entity while only having to receive approval by AHCA (involving various background checks and financial qualifications) in order to take over the agency.
‘Stock-Purchase’ Deals
A ‘stock-purchase’ deal (necessary to transfer the AHCA license via CHOW) means the buyer purchases the shares (or membership interests) of the seller’s corporate entity. This is in contrast to a more typical ‘asset-purchase’ deal where the buyer creates their own corporate entity and purchases the assets of the seller’s corporate entity. Every buyer should consult an attorney as they will incur legal risks when employing a stock purchase deal.
Home health agencies may serve as wonderful investment opportunities in South Florida for a very long time. Please be sure you are informed of all relevant issues when buying or selling a South Florida home health agency.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.