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Are Home Healthcare Businesses Good Investments? Future Growth?



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   A business buyer asks about the viability and purchase of a home health care service and about the future of this industry - Peter Siegel, MBA takes on this question with other ProIntermediaries & Advisors on BizBen regarding the home health care industry and it's future for potential buyers.

At one point in time, everyone has been reminded how important it is to respect our elders. From minding our p's and q's in our youth, to eventually giving back and taking care of loved ones who supported us in our upbringing, there are many different ways to show appreciation for our elders. There comes a point in life when many will depend on others to meet their every day needs, and rely on support for tasks that once came easily to them. A booming industry that values quality service to others, while enjoying healthy profits is the home healthcare industry.

The home healthcare industry is rapidly expanding and will continue to see vast growth into the 3rd decade of the 21st century. By 2020, there will be 5 million people in the United States ages 65 and older. When members of the baby boomer generation look to retire and seek home healthcare, professionals in the field will look to cash in. When looking for a business to buy in this industry, there are a few factors that a buyer should be aware of that can influence the rest of the buying process. As mentioned before, the market is booming so there will be plenty of competition to look out for. Additionally, most business in the home healthcare industry are sold as asset sales to help minimize the exposure to litigation during the seller's era of ownership. In a field that may have added risk due to the clientele that is served, research into past incidents during the due diligence period are crucial to minimize the risk of walking into a bad business deal with hidden problems. Lastly, a potential buyer needs to be prepared for the constant need to hire new employees, as this industry sees a high turnover rate of employees. While it is incredibly rewarding work, it can also take its toll on the very people who are tasked with helping those in need.

When buying a home healthcare business, the value of the business goes far beyond the price tag. An appropriate price to pay for your new business can be found in the range of 4-7 times the current owner's earnings before interest, taxes, depreciation, and amortization (EBITDA), or 2-4 times the seller's adjusted net income.

After finding a price that you are willing to pay, you should know that SBA financing is commonly available for 75% of the total cost, by way of a 10-year loan. If you don't have a lot of money to spend on the remaining cost, seller financing in this industry in popular in the range of 10-25%. This means that you aren't necessarily required to have the full sum in your pocket, and can pay off your financial loans while you are enjoying healthy profit in the ballpark of 20 percent, which is an industry standard. Financing and having the costs covered by second and third parties is one of the many perks of purchasing a business in the home healthcare industry.

I think one place to start would be to differentiate a skilled home health agency versus a non-skilled home care business. Both are excellent niche-based business models that are postured to work with our ever-growing older population. In the skilled setting, the agencies are primarily looking at working with Medicare insured patients. These business models for the most part consist of intermittent visits rendered by "skilled" healthcare professionals such as Registered Nurses (RNs). This model is healthcare driven with the mainstay being the medical well-being of the patient. Medicare just went through a big overhaul with the Patient Driven Groupings Model (PDGM). The last time Medicare made such as drastic change was 20 years ago. The new model has its pros and cons but since it is now less therapy driven and more diagnoses -- discharge setting driven -- many of our agency owners are looking a positive cash flow. The non-skilled home care market is also thriving. This non-skilled setting requires less obstacles and less initial capital requirements to enter. We are seeing a lot of older adults who are able to stay in their homes and are requiring companionship like services. Normally, these services are paid directly by the clients with some insurance companies such as Medicare Advantage, providing some relief in this area.

The key success factors for both business models would be as following:

1. Creating a definitive competitive advantage

2. Creating a solid well trained skilled or non-skilled office/field staff

3. Creating a consistent referral mechanism for patients/clients

4. Understanding the respective business model and working within the compliance or regulatory provisions of each

5. Creating a network of go-to professionals such as working with a consultant knowledgeable in healthcare, an accountant that is entrenched in the healthcare marketplace, a lawyer who understands corporate structure and healthcare law and so forth

6. Understanding your strengths and your limitations

The healthcare business models are very alluring due to need for healthcare services, regardless of the economic climate. It however behooves you to do your homework to ensure that the chosen healthcare business model fits you. A consultant or broker well versed in healthcare should be one of your first points of contact.

To answer the call of the question, home health businesses are a good business investment when you as a buyer understand the dynamics of the business model. Insofar as future growth, it comes without saying that our aging population is increasing incrementally and that they will require home health services.

I think one place to start would be to differentiate a skilled home health agency versus a non-skilled home care business. Both are excellent niche-based business models that are postured to work with our ever-growing older population. In the skilled setting, the agencies are primarily looking at working with Medicare insured patients. These business models for the most part consist of intermittent visits rendered by "skilled" healthcare professionals such as Registered Nurses (RNs). This model is healthcare driven with the mainstay being the medical well-being of the patient. Medicare just went through a big overhaul with the Patient Driven Groupings Model (PDGM). The last time Medicare made such as drastic change was 20 years ago. The new model has its pros and cons but since it is now less therapy driven and more diagnoses -- discharge setting driven -- many of our agency owners are looking a positive cash flow. The non-skilled home care market is also thriving. This non-skilled setting requires less obstacles and less initial capital requirements to enter. We are seeing a lot of older adults who are able to stay in their homes and are requiring companionship like services. Normally, these services are paid directly by the clients with some insurance companies such as Medicare Advantage, providing some relief in this area.

The key success factors for both business models would be as following:

1. Creating a definitive competitive advantage

2. Creating a solid well trained skilled or non-skilled office/field staff

3. Creating a consistent referral mechanism for patients/clients

4. Understanding the respective business model and working within the compliance or regulatory provisions of each

5. Creating a network of go-to professionals such as working with a consultant knowledgeable in healthcare, an accountant that is entrenched in the healthcare marketplace, a lawyer who understands corporate structure and healthcare law and so forth

6. Understanding your strengths and your limitations

The healthcare business models are very alluring due to need for healthcare services, regardless of the economic climate. It however behooves you to do your homework to ensure that the chosen healthcare business model fits you. A consultant or broker well versed in healthcare should be one of your first points of contact.

To answer the call of the question, home health businesses are a good business investment when you as a buyer understand the dynamics of the business model. Insofar as future growth, it comes without saying that our aging population is increasing incrementally and that they will require home health services.

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