FAQ: Selling A Healthcare Agency

Stoneridge Partners | FAQ: Selling A Healthcare Agency: Our Founder Don Cummins has been in the healthcare brokering business for over 20 years. He knows that selling a healthcare agency – home care, hospice or behavioral health – can be intimidating. He also knows it doesn’t have to be when you have experts to educate and guide you through the process.

This page highlights common questions Don has heard during his time in the industry. If you have a question that isn’t answered here, please contact us at (800) 218-3944 or partners@stoneridgepartners.com.

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 general business broker.

Q I note that you specialize in brokering only healthcare companies. Why is that?

A There is an ad campaign by a company that says it best: “Do one thing and do it well.” Through specialization we have become expertly knowledgeable about this marketplace. We subscribe to the many industry journals, attend and speak at the conferences, and exhibit at the various trade shows.

Clear, concise communication is key to success in our industry; with our specialized knowledge, we are able to communicate clearly and intelligently with all parties, including attorneys and accountants.

As the home care, hospice and behavioral health industries consolidate, there are many buyers. Through our industry experience and long-held relationships, we have learned what the market wants and can best present a company’s assets, both tangible and intangible, for maximum value.

Q What size of agencies do you broker?

A We specialize in brokering companies with revenue of over one million dollars.

96% 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.

Q What is the market like for home care agencies?

A The companies we represent can be separated into five segments: (1) agencies that provide Medicare services; (2) agencies that provide state funded programs, such as Medicaid and Med Waiver; (3) true private duty agencies; (4) hospice agencies; and, (5) behavioral health companies.

At this time, the market for Medicare agencies is going through a massive consolidation as reimbursement continues to decrease and issues, such as Face-to-Face documentation, become increasingly onerous. The market for Medicaid agencies continues to be very strong; the market for private duty agencies has been consistently good, year after year. One of the strongest markets right now is hospice as consolidation continues at a rapid pace.

Behavioral health is another area with a strong market. We work with agencies that provide services to people with intellectual or developmental disabilities, often referred to as MR/DD or ID/DD. Prices for these companies continue to be strong.

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 upfront fees of any kind; the owner has absolute discretion accepting or rejecting 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 transaction, 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 the buyer how they are receiving full value for their dollar. That is “win-win”.

Q Do you ever represent buyers?

A Yes. We work with a very select group of buyers working within specific parameters. These buyers are pre-qualified both as to financial ability and industry knowledge.

We then conduct searches to assist these buyers in identifying and completing acquisitions of good agencies. In these cases we 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 (minimum quarterly) by an accountant, based upon the accrual method of accounting.

I know that 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. Accrual accounting is more accurate in portraying the business, which is what buyers are looking for.

The Value of Using a Business Intermediary

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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 contractors, 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.

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; rather, 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-Corps 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 website.

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 than 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, 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 – continue running the business. (For additional information, see The Value of Using a Business Intermediary.)

Stoneridge Partners | FAQ

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Another mistake owners often make is to respond to an unsolicited inquiry into the sale of their business. This may come from either a broker or a buyer. If it is a broker, they are often simply “fishing” for a listing agreement under the guise of “I have a buyer.”

If it is the buyer, the number one concern of the seller should be “is the buyer qualified to buy?” More often than not they are trying to get an owner involved in a sale, and then offer a low price…maybe with seller financing. (I’m willing to buy your business if you will loan me the money.)

The buyers that we represent are large companies with cash, and an understanding of industry pricing parameters.

Q What other services does your firm provide?

A For those agencies considering a sale, we will do a complete market analysis. Based upon comparable sales data 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 this service.

For those requiring a formal appraisal for buy-sell agreements between partners, or for estate-tax purposes, reorganization, divorce, etc. we have several professional firms that we refer clients to.

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 known 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 96% 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 owner’s pockets – certainly a value-added service.

Stoneridge Partners | FAQ: Selling A Healthcare Agency

Don Cummins

After working in general business brokering and mergers and acquisitions for almost 20 years, Don founded Stoneridge Partners in 2001. Active in many local, regional and national associations, he received the highest designation, Master Mergers and Acquisitions Intermediary (MMAI) in 2003 while a member of Merger & Acquisition Source, a professional association of mid-market intermediaries. Today, Don continues to be a frequent speaker and expert witness on matters involving business sales. He is also a popular “go-to” at industry conferences.

Stoneridge Partners | FAQ: Selling A Healthcare Agency