Home Health Agency Valuation: Methods and Standards

One question we are often asked, either through our consulting or in connection with a transaction, is how a home health agency is evaluated for purchase.

What Is My Home Health Agency Worth?

The key to home health agency (and home care agency) valuation, as with most businesses, is financial performance.

A home health agency that earns a sizeable amount of Medicare revenue is most desirable to a purchaser. Medicare revenue is deemed to be reliable and suitably generous. As such, Medicare revenue serves as a great starting point for evaluation by a purchaser. And, because Medicare payments are standardized, purchasers will value a home health agency by applying a multiple of Medicare revenue. Profitability is less important in a Medicare environment because each purchaser will bring their own delivery model once they complete an acquisition. Typically, we see valuations that are in the range of 1.1 to 1.5 times Medicare revenue.

Other Valuation Factors

There are, of course, supplemental factors that can nudge a valuation upwards or downwards. One important factor is if the agency is within a jurisdiction governed by certificate of need (CON) restrictions. A certificate of need is a state-granted authority to operate a home health facility. CON states, because they restrict the number of home health agencies, generally cause an increase in demand for existing home health agencies. A CON market creates artificial demand for an agency’s services. As such, the value of such agencies tends to be higher. To learn if you are in a CON state, please visit our CON State Reference.

The converse is also true. An agency in a crowded market will generally fetch a lower multiple even if that agency is performing well.

Another factor is the revenue and profit trending. If an agency’s financial performance is trending upwards, then a potential buyer may “look ahead” and accept a price that takes into account a reasonable expectation that financial performance will continue to improve in coming years.

Rural agencies tend to fetch discounted valuations; such agencies tend to be less in demand. Rural areas tend to grow in population more slowly, and as a consequence rural agencies tend to grow more slowly.

If you would like to discuss your agency’s valuation with a broker, please reach out to us.

This article by Michael David of Medical Website Design.