The following is an interview with Don Cummins, a senior associate with Stoneridge Partners.
Q Your company brochure says that you are business intermediaries. What does that mean?
A Intermediary is an industry term that defines those people or firms that specialize in arranging the Merger and Acquisition of mid to large size companies. It is our way of saying that we work very differently from what you might expect from a business broker.
Q I note that you specialize in brokering only home health agencies and hospices. Why is that?
A There is a current ad campaign by a company that states “Do one thing and do it well”. By specializing in home health agencies and hospices we have become quite knowledgeable about this market. We subscribe to the many industry journals, attend and speak at the conferences, and exhibit at the various trade shows.
Clear, concise communication is one of the keys to success in our industry, and, with our specialized knowledge, we are able to communicate clearly and intelligently with both owners and buyers.
There are many buyers out there, and the industry is consolidating. We have learned what the market wants, and can therefore best present a company’s assets, both tangible and intangible, for maximum value.
Q What size of agencies do you broker?
A We normally don’t work with the smaller agencies. We specialize in brokering companies with revenues of over one million dollars.
Q What is the market like for home health agencies?
A The market can really be separated into three segments: Those agencies that do Medicare, those that do state funded programs such as Medicaid and Med Waiver, and true private duty agencies, whose payor sources can be self-pay, insurance, workers compensation, etc.
At this time the market for Medicare agencies seems to be the strongest, and, with the tight budget that many states are facing, the market for agencies with state funded payor sources seems to be the worst. But any good agency on the market today will receive a favorable audience.
Q What is the cost of your service?
A We get paid a percentage of the selling price when the business actually sells. This “success fee” is very competitive. There are no up front fees of any kind, and the owner has absolute discretion as to whether or not to take any offer.
Q Who do you represent when you are retained?
A Most typically we represent the owners of the agency. Our job is to put together the best deal we can for those owners. Of course any deal, if it is to close, will have to work for the buyer too. It is our job to get the top price for the owner while showing to the buyer how they are receiving full value for their dollar. That is “win-win”.
Q Do you ever represent Buyers?
A Yes. Under specific parameters we will conduct searches to assist buyers in identifying and completing acquisitions of good agencies. In those cases we typically represent the buyer
Q Is there any one mistake you see business owners make over and over again?
A Yes. They enter the market unprepared. Agency owners should ask themselves, if they were the buyer, what they would want to see.
From our perspective the number one item would be the quality of the books and records. That means financial statements, prepared monthly by an accountant, based upon the accrual method of accounting.
I know…many owners file taxes based upon the cash method of accounting, but they should also have operating statements prepared for them that use accrual accounting. This is more accurate in portraying the business and is what buyers are looking for.
It’s the first impression that counts. In real estate it is called curb appeal. In the sale of an agency it is the financial statements that are typically the first items a potential buyer will see of an agency. The quality of those statements is a direct reflection of the business.
On the income statement we want to see all field clinical costs broken out under costs of services. This should include W-2 payroll, 1099 independent contactors, payroll taxes and worker’s compensation costs. This is what buyers are looking for. Most buyers have specific parameters that they look for in terms of gross profit percentage, depending upon the payor source i.e. Medicare, private duty, etc.
In the sale of an agency it is the financial statements that are typically the first items a potential buyer will see of an agency. The quality of those statements is a direct reflection of the business.
We also like to see good management reports such as accounts receivable aging, a report of admissions and discharges on a monthly basis, and revenue by both level of care and payor sources. For private pay we like to see hours of service per week.
Another key ingredient is a solid management team. Keep in mind that most of what a buyer is purchasing in an agency is intangible, therefore one of the primary worries of a buyer is whether or not that intangible goodwill will be transferred with the sale. The more risk they see…..the lower the price that they are willing to pay. A good management team helps to assuage some of those fears.
There are many other risk factors to a buyer in the purchase of an agency. If an offer to purchase is accepted, the agency will have to stand up to a complete due diligence process, which will include clinical, financial and legal. This can be a huge expense to the buyer. Items such as quality financial records, good clinical surveys, and up to date management reports will give the buyer confidence that the money they spend on due diligence will not be wasted.
Q What about taxes on the sale?
A Tax issues on a sale are certainly important. The worst tax structure for selling a business is the C-Corp. For a number of good reasons, most buyers do not want to buy the corporation; they prefer to buy the assets of the corporation.
In that case a C-Corp must pay taxes at two levels; first at the corporate level on profits, and then, when the money is disbursed out of the corporation, they will have to pay taxes on that income either as dividends or capital gains.
S-Corp and LLCs also have troublesome tax issues, but creative deal structures are available for all. It is important for owners to receive tax advice from a CPA experienced in this specialized area.
We have a complete article on taxes in the sale of an agency on our web site. www.stoneridgeonline.com.
Q Any other common mistakes you see?
A Yes. Owners of mid-size agencies will sometimes use general business brokers. The sale of a home health agency is much more complex that the sale of other smaller businesses. It requires the knowledge, skill and experience of a professional intermediary that specializes in this industry.
Q Is it best then for the owners to retain an intermediary to assist them?
A Absolutely. If an owner is going to maximize the selling price of their business, that business must be presented properly and confidentially to a wide variety of targeted, qualified buyers. It is therefore critical for the owner to implement a professional and well-managed sales process.
As self-serving as it sounds (it is)….the best decision an agency owner can make is to retain a seasoned intermediary that specializes in this industry to manage the entire process for them. The intermediary can then take over the complex task of selling the agency, while the owner continues to do what they do best ….and that is to continue running the business.
Q What other services does your firm provide?
A We also provide a complete valuation service. For those agencies considering a sale we will do a complete market analysis. Based upon comparable sales and our years of experience we are able to give an owner a very realistic idea of what we term “the most probable selling price”. There is no charge for his service.
We also provide a service for those in need of a more formal written valuation report for buy-sell agreements between partners, or for estate-tax purposes, reorganization, divorce, etc.
All of these formal valuations are tailored to the individual agency and to the purpose of the valuation. We use only certified business appraisers and do not use generic software valuation programs that are currently in vogue with other firms.
Our prices for these valuations are very competitive; please call for a quote.
Q Your brochure says that you are a member of the M&A Source. What is that?
A M&A Source is the largest organization of intermediaries in the world for the sale of the mid-size business. They have regular educational meetings around the country and at those meetings a large number of buying firms know as “Private Equity Groups” show up to see what is for sale.
A recent poll of owners that sold their businesses through members of M&A showed that 95.7% felt that the intermediary increased the offering price of their business by 10% or more, and 90% said that the confidentiality of the transaction had been better protected.
Increased confidentiality and more money in the owners pockets…certainly a value-added service.
95.7% felt that the intermediary increased the offering price of their business by 10% or more, and 90% said that the confidentiality of the transaction had been better protected.