Home Healthcare

Despite these significant tailwinds, businesses in this sector face a myriad of challenges. Increased demand is drawing new competitors into this sector, some offering novel home care solutions. For example, DispatchHealth provides on-demand urgent care services at home, dispatching its clinicians and technicians via a fully-equipped vehicle.

Meanwhile, reimbursement pressures—including those stemming from the new Patient-Driven Groupings Model (PDGM)—can hamper cash flow and increase documentation burdens. Though the Centers for Medicare and Medicaid Services (CMS) estimates Medicare payments to home healthcare agencies will increase in the aggregate by 0.8 percent in 2024 (per its final rule issued November 1), evolving reimbursement rules make it challenging to maintain a profitable, cash flow-positive agency. Persistent labor shortages have hit the home healthcare industry especially hard, particularly given the prospect of relatively low wages and limited advancement opportunities for home caregivers, while staff departures post-COVID only add to the imbalance between supply and demand. High inflation continues to drag down margins. Complex regulatory requirements can impact patient eligibility for home care and the associated reimbursement, as well as care quality requirements and accreditations. And keeping up with the technology and other infrastructure required to coordinate, monitor, and evaluate home care delivery can prove extremely difficult.

Yet, these challenges have not dampened investor interest in home healthcare businesses. They see too many opportunities to capitalize on skyrocketing demand, provide value-add services that meet evolving patient and payer needs, expand into new markets, and achieve economies of scale and efficiencies through consolidation. As a result, M&A activity in this sector is projected to remain strong for some time.

Though economic uncertainty, high interest rates, and market volatility can all weigh on M&A activity, the home healthcare M&A market remains fairly active for high quality companies. If you’re considering selling your company in this environment, you will likely have questions about what kind of deal outcome you can expect. 

The deal outcome is primarily a function of your company’s valuation (known as your enterprise value) and the deal multiple. 

• • Company valuations in this sector depend on factors like revenue (including how it’s trending), EBITDA (earnings before interest, taxes, depreciation, and amortization), the quality of your services, the mix of services and payers (which impact reimbursement rates and margins), and the potential for sustained growth.   
  • Deal multiples for home healthcare businesses vary based on similar factors, such as the company’s size, service quality, service mix, and payers involved, as well as its current market position and growth potential. While every deal is unique, with no hard-and-fast rules for the deal multiple you will achieve, recent analysis by GF Data reveals the following average multiples based on a home healthcare company’s valuation. 

It’s worth noting that multiples in this sector don’t necessarily correlate with the size of the deal, as recent transactions illustrate. The CVS Health acquisition of Signify Health for $8 billion had a multiple of 10.5x, while Addus HomeCare’s acquisition of Tennessee Quality Care for $106 million had a much higher multiple of 16.5x.  

While this sector as a whole is appealing to investors for the reasons cited, buyers gravitate toward home healthcare businesses that display certain desirable characteristics. The following are of particular interest to buyers evaluating a target business in this industry.

1. Profitability.

Though strong revenue and top-line growth are essential, buyers lean toward home healthcare companies with better profitability. Those with higher EBITDA will find it easier to attract an investor’s attention. 

2. Service quality and mix.

The higher the quality of your services, and the better they match the needs and preferences of today’s patients, the more appealing your business will be. Buyers also consider your mix of services, since that impacts reimbursement rates and margins.  

3. Payer mix.

Strategic acquirers and PE groups that specialize in this sector recognize that some payers prove more profitable than others. They’ll review the percentage of revenue derived from commercial insurers vs Medicare/Medicaid vs self-pay patients, the associated reimbursement policies of each payer type, and how each segment is trending when it comes to payments.  

4. Current market position.

Home healthcare businesses that are leaders in their geographic areas or market segments, with strong brand recognition and a solid reputation for delivering quality services, will prove more desirable targets. 

5. Growth potential.

Demand for services in the geographic areas and market segments you serve, along with your ability to scale efficiently and grow organically by adding locations or diversifying your offerings, all attest to your growth potential.

Depending on your company’s size and lifecycle stage, along with your personal and professional goals, you might look to accelerate your growth by capitalizing on the consolidation trend and acquiring another home healthcare business.

Before you take that step, carefully examine your goals in pursuing an acquisition. Are you primarily looking to expand into new geographic areas? Do you view an acquisition as an effective way to broaden your offerings? Do you see it as a means to combat labor challenges, strengthen your technology infrastructure, or keep up with changing regulatory requirements?

Your goals will guide you as you begin to identify, evaluate, and select the best-fit business to acquire. At the same time, the criteria that strategic and financial acquirers consider when evaluating target businesses in this sector will be very similar to the considerations you should weigh as you embark on this process.

For home healthcare businesses looking to grow through acquisition, the following tend to be critical considerations to evaluate:

• • Financial and operational feasibility. Of course, you’ll need to ensure you have the capital to acquire a good-fit target company and can service any associated debt. And you’ll need to scrutinize the target business’s financials to gain confidence the newly acquired entity has strong potential to drive new revenue while maintaining profitability. On the operational side, consider whether there are natural synergies along with opportunities to improve operational efficiency by integrating the companies.  
  • Quality and fit. Look for a home healthcare company with a diverse and loyal customer base, a strong reputation for delivering high-quality services or products, a highly qualified and skilled workforce, and a culture that is compatible with your own. If expanding your offering is a key goal, seek a target company that can provide innovative solutions that complement your offerings or fill gaps.   
  • Legal and regulatory implications. Your due diligence should include verification that the target company complies with the many laws and regulations that govern home healthcare, such as licensing, accreditation, reimbursement, privacy, and quality standards. It’s also important to identify risks or liabilities which the deal could trigger, like antitrust claims or other litigation.