Hospices considering a sale should not underestimate their value proposition by limiting their focus on revenue and margins.
With hospice M&A staying hot, a number of operational and financial pressures, along with record valuations in the space, have led several providers to consider selling. While a healthy balance sheet is central to these negotiations, it is not where a hospice’s financial value begins and ends.
Compared to starting a hospice from scratch, an acquisition can offer buyers some advantages, according to Mark Sharp, a partner at accountancy and advisory firm FORVIS.
“If hospices are looking for an exit because they are struggling and are ready to close their doors, don’t deny the value of being Medicare certified,” Sharp told Hospice News at the National Hospice and Home Care Association (NAHC ). ) Financial Management Conference in Las Vegas. “It can take $200,000 to $400,000 just to get a hospice agency up and running. So there’s a lot of value in just 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 labor shortages. Some suppliers have had to sell or even close because they couldn’t fill their ranks enough to meet demand or absorb the costs of rising wages.
By buying a business rather than starting one, buyers can also hit the ground running with the seller’s existing staff and patient population. Having that foothold is perhaps more critical than geographic scale and patient census, according to Sharp.
These factors can be especially important to private equity firms and other investors who see the financial opportunity, but do not have a medical background. Beyond the initial upfront costs, it can be expensive, time-consuming and complicated for investors to get up to speed on the intricacies of Medicare reimbursement and compliance, he added.
Interest in hospice from private equity and other financial stakeholders has been growing for several consecutive years, causing a mix of investors in the space. In the past decade, the share of deals made in home health and hospice by private equity increased from 30% to 50%, according to a recent report by The Braff Group.
This trend shows no signs of slowing down.
“Values can go down if a hospice shows a big payment crisis,” Sharp said. “But interest in the market will continue to be very active. Hospice is probably the most popular type of private equity healthcare acquisition right now.”
When it comes to selling, how a hospice tracks its financial performance can uncover risk factors that indicate red flags for buyers, according to Amber Popek, partner at FORVIS.
For example, the way a supplier reflects income versus losses on its balance sheets, accounting practices and financial statements paint a picture of the historical and future sustainability of its assets, Popek said.
“If you’re thinking about selling, the first thing a buyer looks at as you prepare is your financial statements,” Popek said during the NAHC conference. “Balance sheets and income statements will be a snapshot in time of what an organization’s financial position is and where a lot of the bigger details might be hiding.”
For example, according to Popek, a hospice may report revenue based on accrual rather than a true case value basis. This means that the business reports revenue at the time a transaction is recorded rather than when the funds are actually received. There can also be discrepancies between actual income and cash flow and expenses, he explained.
Financial statements can also reveal “clues” about missing links in a hospice’s bottom line, Dexter Braff, president of mergers and acquisitions firm The Braff Group, said at the conference.
The way a hospice illustrates its profit margins in its reports, for example, could indicate break-even points as well as give investors a sense of how expenses, reimbursement and patient volume work into revenue generals
Careful documentation that supports reported revenue and profit margins can help hospices show their financial worth at the negotiating table, Braff continued.
“Value estimates are what buyers and sellers argue about the most,” Braff told the conference. “When you don’t have these financial details, you empower the buyer to make their own estimates and skew your earnings results. Having a sense of your financials is very, very important to proving your value over time “.
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