Beyond Dollars & Cents: Maximizing Sellers’ Returns in Hospice M&A

Hospices considering a sale should not underestimate their value proposition by limiting their focus to revenues and margins.

With hospice M&A staying hot, a host of operational and financial pressures — coupled with record-high valuations in the space — has driven a range of providers to consider selling. While a healthy balance sheet is critical to those negotiations, that’s not where a hospices’ financial value begins and ends.

Compared to starting a hospice from scratch, an acquisition can give buyers some advantages, according to Mark Sharp, partner at accounting and advisory firm FORVIS.

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“If hospices are looking for the exit because they’re struggling and they’re ready to close their doors, do not negate the value of being Medicare-certified,” Sharp told Hospice News at the National Association of Home Care & Hospice (NAHC) Financial Management Conference in Las Vegas. “It can take around $200,000 to $400,000 just to get a hospice agency up and running. So, there’s a lot of value just in having that Medicare provider number. It’s saving that investor or buyer a huge cost.”

Some hospices have decided to sell under the strain of pandemic-related headwinds and workforce shortages. A number of providers have had to sell or even shut down because they could not fill their ranks sufficiently to meet demand or absorb the costs of rising wages.

When purchasing a company rather than starting one, buyers also can hit the ground running with the seller’s existing staff and patient population. Having this foothold is perhaps more critical than geographic scale and patient census, according to Sharp.

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These factors can be particularly important for private equity firms and other investors that see the financial opportunity, but lack a health care background. Beyond the initial start-up costs, it can be expensive, time-consuming, and complicated for investors to get up to speed on the intricacies of regulatory compliance and Medicare reimbursement, he added.

Interest in hospice from private equity and other financial stakeholders has been growing for several years running, stirring the mix of investors in the space. In the last decade, the proportion of deals completed in home health and hospice by private equity ballooned from 30% to 50%, according to a recent report from The Braff Group.

This trend is showing no signs of slowing down.

“Values may come down if a hospice is showing a huge payment meltdown,” Sharp said. “But the interest in the marketplace is still going to be very active. Hospice is probably the hottest type of private equity health care acquisition right now.”

When it comes to selling, how a hospice tracks their financial performance can uncover risk factors that signal red flags for buyers, according to Amber Popek, partner at FORVIS.

For example, the ways a provider reflects revenue versus loss in their balance sheets, accounting practices and financial statements paints a picture of their assets’ historical and future sustainability, said Popek.

“If you’re thinking about selling, the first thing a buyer looks at as you prepare is your financial statements,” said Popek during the NAHC conference. “Balance sheets and income statements are going to be a snapshot in time of what the financial position of an organization is, and where a lot of larger details could be hiding.”

For instance, a hospice may report income on an accrual basis rather than a true case-value basis, according to Popek. This means the company reports income at the time a transaction is recorded as opposed to when they actually receive the funds. Discrepancies may also exist between actual income versus cash flow and expenses, she explained.

Financial statements also can reveal “clues” about missing links in a hospice’s bottom line, Dexter Braff, president of M&A firm The Braff Group said at the conference.

The ways a hospice illustrates their profit margins in its reports, for example, could indicate breaking points, as well as giving investors a sense of how expenses, reimbursement and patient volume work into overall revenue.

Careful documentation that supports reported revenue and profit margins can help hospices show their economic worth at the negotiating table, Braff continued.

“Value estimates are what buyers and sellers argue about most,” said Braff at the conference. “When you don’t have these financial details, you give the power to the buyer to make their own estimates and skew your earnings results. Getting an idea of your financials is very, very significant to proving your valuation over time.”

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