Home Care U - What You Need to Know If You've Ever Considered Selling Your Agency (Doni Perl)
Episode Date: January 29, 2024Whether it's on the horizon or a vague future hope in the moments when you have time to step back and take a breath, you probably intend to sell your agency at some point. In this class, we'...re teaming up with a private equity advisor specializing in home care transactions to go through all the questions that will help you make educated decisions to work toward this goal.Enjoying the show? Send me a text and let me know!Learn more about Careswitch at: careswitch.comConnect with the host on LinkedIn: Miriam Allred This episode was produced by parkerkane.co
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Hey, welcome to HomeCareU, a podcast made by the team at CareSwitch.
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HomeCareU is hosted by myself, Miriam Allred, and Connor Koons of CareSwitch.
Enjoy the session.
Okay, welcome to this week's episode of Home Care U.
I'm excited to get into a topic that's pretty technical, pretty important, and I think will
be pretty useful to a lot of our listeners.
This is one of those topics that might feel like it's kind of far off in the distance
in terms of its relevance to some of you, but I think it's, as we will get into, it is something that is important to think about sooner than
you think you need to.
So today's topic is what you need to understand if you've ever thought about selling your
home care agency.
There will be some listening who might be in the process of this as we speak.
There will be some who might be thinking about this soon.
There are some who have just launched your agency and this seems like a distant dream
at best. Regardless of that, if this is something you could ever see happening, or I mean, frankly,
if you own an agency, there's always the potential that your circumstances could change and you may
need to sell. This is a good episode to listen to and understand what the
landscape of that decision looks like, what goes into that, and what you can do even years earlier
to be preparing if necessary. So to help facilitate this conversation and to give us a really good
in-depth take into the topic, we have an expert, a principal from Charter Oak Equity
here to talk to us today about home care transactions, what you need to
understand with this topic. So welcome to the show, Donnie.
Thank you very much for having me. It's really a pleasure to be on.
Thanks for being here. I'm really excited. So I guess to get started, if you just want to
introduce yourself, your organization,
and whatever of your background would be useful to help understand your credentials and expertise
as it relates to this topic.
Sure.
Charter Oak Equity, my firm, we are a lower middle market private equity firm. We work primarily with entrepreneurs, with families,
trying to help them accelerate the growth trajectories of their business. We want to
work with companies that are clearly doing something right. They've understood the end
markets that they serve and who their customers are. But they also might recognize that whether
it is capital, whether it is frameworks and strategic
thinking, whether it is an appetite for investing in a sales force or marketing, that there
are ways the growth of their particular company could accelerate.
And that's what we look to try to help them do.
We got into the home care space coming up on two years ago.
Formally, we were looking in and around the space earlier than that, when two of my partners
actually were going through home health care episodes with regards to their respective
parents and in-laws.
And we were shown a couple of businesses and the light bulb, proverbial light bulb, clicked
on and said,
you know, this is probably a really interesting business. We'd like to learn more about it. And
frankly, at the time, I couldn't have told you the difference between skilled or unskilled care.
I couldn't have, I could barely keep track of Medicare versus Medicaid. But that's what we do.
We educate ourselves. We get up to speed as quickly as possible. We leverage all the resources
that we have to play catch up and to get up to a point where we can develop a thesis that says,
this is not only a good business to invest in, but we in particular are well positioned to help
accelerate the growth trajectory of these businesses that we're going to be investing in. And so in February of 2022,
we launched Caregivers of America, which is a home care rollout really in South Florida.
It now consists of nine constituent companies, six that do really primarily home care, custodial care, private duty, and three that do skilled
nursing and therapies that are Medicare reimbursed.
Awesome.
Thanks for the intro.
And I think one thing that is probably important to mention here, we'll talk more about the
specifics of this, but it's important to recognize that there are various types of buyers.
One of them that is increasingly
popular in home care is private equity. And although that is kind of the main perspective
you're bringing here, you understand the full landscape as it would pertain to various types
of transactions, types of buyers, sellers, things like that. And so we'll get a pretty 360 degree view of what the experience of
selling an agency looks like. So let's jump in. I guess my first question, this is kind of a two
part thing. Who are the right set of advisors to surround yourselves with at the outset of either
discussing a potential transaction or even contemplating the thought that you might sell. And I guess like
a part two to that is what does the timeline look like for getting a deal done from start to finish?
Sure. I think some of the advisors are intuitive. You want to review your financials with an
accountant and have them help you present those financials in
a way that's easily digestible and accurate. You don't want any surprises. It's probably intuitive
that you want to talk to a sell-side advisor, whether that's an investment banker or a broker,
somebody who has been through a myriad of transactions, will understand certain terms,
will understand what's market and what's not market, will be able to explain to you if you don't understand some piece of the transaction.
What I think surprises some people is that I think there are really three different types of lawyers you might want to get involved in.
And I know some people get the hives just thinking about that. You're obviously going to need an M&A,
a mergers and acquisitions attorney to help you paper the documents and get the transaction
formally completed. I would also recommend in states where there is a regulatory regime and
there are licenses involved to engage somebody who has specifically gone through multiple iterations of transferring
licenses from one owner to another, knows how to navigate that system and can get it
done on an efficient path.
And then the third lawyer that I would recommend people check in with, at the very least, would
be a labor lawyer of some sort. Depending on the state that
you're operating in, there are requirements of an agency, a home care company to engage with
the caregivers in a certain way. And while you might have, as an entrepreneur, gotten used to
doing things one way, it's always helpful to check in with a labor
attorney, have them review your practices from recruiting and hiring to minimum wage and overtime
and all the things in between to make sure that everything is in order, that there aren't going
to be any surprises, that there aren't going to be any things that the buyer finds that surprise you. And it also may surprise people to hear me on the buyer side saying that
we like it when sellers have advisors. Often there's a perception that a buyer wants to take
advantage of a seller or wants to catch somebody who doesn't know what they're doing, but that's really not the case. We would much rather speak with a seller who is well buttoned up, who has checked out all
these things before we get in there, who can give us what we're looking for and say, yep,
I've reviewed that.
Here are the results of the review.
That makes both the process and the timeline much more efficient.
So transitioning over to the second part of your question, when you talked about timeline,
there are really three stages to selling your business.
One is preparing, collecting various documents that you're going to need, whether that's
your financials, whether that's your documents of incorporation, your insurance policies, etc.
You're then going to have that can be one to two months.
You're then going to have preliminary conversations with one or more buyers.
What do you do?
How do you do it?
What's your unique positioning in your market?
How do you see the future playing out, etc.
That can take another month or two, depending on the number of parties that you're talking
to as a seller.
And then once you've selected a single party to move forward with and you've given them
exclusivity, it's typically the way it works.
That's when they're going to hire, they being the seller, the buyers, I'm sorry, is going to hire professional vendors, accountants,
lawyers, their own insurance people, etc. to really go through your underwear drawer and
do a deep dive, make sure that everything that you've told them to date is accurate, is correct. And hiring the lawyers, of course, to do the document negotiation on their end.
That can take three to four months, 60 to 120 days.
Oftentimes that period of time and that timeline is driven by the regulatory environment in
which you operate. If it takes a minimum of 60 days for the state regulator to transfer a license, well, then,
you know, that only starts from when you press go on that process.
And oftentimes you may finish up everything else and just be waiting for that letter to
come in from the regulator.
If you don't have that sort of regulatory agency in
your state, or if they say that there's up to 90 days, but typically they turn these around in two
weeks, then it may not be the long pole in your tent and you can get to the finish line faster
than that. So it sounds like, to kind of recap here, if it's an inbound offer, we're looking at typically like
three to four months, I think you said. And then if not, then we're looking at typically like around
six to eight months. Is that pretty accurate? I think that's accurate. And there is a little
bit of a misconception that if I take an inbound offer, I can skip through phases one and most of
phase two. The flip side of that is you get to phase three and you don't have
things organized, right? You don't have your financials away that a buyer wants to look at
them. You don't have all of your documents and your policies, et cetera, collected,
uploaded into a data room so that it can be securely shared. So that last piece,
when they start doing real diligence then takes, it can take significantly
longer. You don't save that much time if you're jumping in in stage two. Stage one comes back to
haunt you later. Gotcha. Going back to the first part of the question, it is my job to ask the dumb
questions here. So a couple of dumb questions really quick. First of all, you mentioned one
of the types of advisors that someone should consider having around themselves when they're going into
sale, being a sell-side advisor. What is a sell-side advisor in this context?
So that can be an investment banker, that can be a business broker. Business brokers in general
tend to deal with smaller sized businesses, investment bankers,
larger businesses. It's a continuum, it's a range, and there's no fine line between those two
categories. The more diligence that the advisor you hire performs on you. The more questions they ask of you, the more they challenge you,
the more prepared you will be when the buyer comes around. And so the processes of the sell
side advisors really range from, give me your last three years of tax returns. I'll put up a listing
on my website and a hundred people will come inquire about you.
I'll also blast out an email to my contact list to somebody who says, I'm going to spend
two or three months really diving into your business the way a buyer would.
We're going to put together a really comprehensive book about what makes you different than your
competitors and why somebody should want to invest in you.
And that's going to get you the highest price for your business.
Now, the fee that advisors with different styles charge for the work
and the amount of engagement that they have with you varies.
And I would encourage people,
if they don't have an existing
relationship with somebody like this, then to interview two or three or four people and,
you know, hear what they what they say and try to understand how their approaches to,
quote unquote, bringing you to market might differ very much the same way. If you didn't
have a real estate agent, you might speak to two or
three or four when considering selling your home because they might have different ideas about how
to get you the most value and of course, different ideas about what to charge you as well.
So if I'm wanting to sell my agency and I'm talking to several different brokers and investment
bankers trying to see who I should go with as an advisor, what should I be looking for? Have they done something in this space before?
Have they done something in this space in your state before? Do they know the best buyers out
there? Are they talking to a general audience or are they talking to a specific audience?
What's their strategy? Does that align with your strategy? Maybe you want them to have one conversation at a time and be
much more discreet about the fact that you are for sale. Maybe you want to run a broad auction
process and they will share your information with 300 of their closest friends and family.
You want somebody who you work well with.
You want somebody who's going to tell you the truth,
even if that truth is hard.
If somebody's telling you,
I can get your business sold for top dollar in three weeks,
that's just not the truth.
And you should be prepared to ask questions
that challenge them to give you the truth because the process is stressful.
The process inevitably brings up challenging situations and you want somebody who you trust
to have your best interest at heart. When we talked about lawyers, you talked about the
importance of making sure that your hiring practices have been buttoned up, that you're legit and everything.
To use an example that's an easy one relevant to home care, let's say that you've somehow persisted to the point of wanting to sell your agency.
And maybe you have some employees that you've incorrectly classified as contractors when they should be W-2 employees or something like that.
What does that do to the selling process if you get up to this point and you have some major hiring practices that should have been corrected but haven't been?
It sets you up for a long pause late in the stages of your selling process because those aren't going to come to
light until the buyer is doing real diligence with their lawyers, reviewing your paperwork,
reviewing your tax filings, etc. And so you will have gotten to the point where you've selected a
buyer, they've put forward a price, and then
they're going to say, wait a second, we can't buy you with this hanging over your head. You have to
clean this up before we can consummate this transaction. And that's either going to blow
up the deal because you are or aren't willing to do what they want you to do and to correct
the situation. Or at best, you're going to have a pause where you're going to do what needs to
be done to clean up the situation at that point. That pause rarely works well for anybody.
To the extent that some of your employees know that this is going on,
it creates lingering doubts. What's going on? Is it happening? Is it not?
That ambiguity, that uncertainty doesn't bode well for anybody. Momentum is your ally in getting a
transaction done. To the extent that you can remove foreseeable hurdles
and foreseeable stumbling blocks before you go down this path, that's absolutely what you want
to do. Makes sense. The phrase we use in sales and marketing is time kills all deals. And it
sounds like that is very much what would be at play here. Let's talk a little bit about buyers. Who are the range of buyers out there for a home care agency? And what do different types of these potential buyers care about? What do they like to work with? And how can you tell if they're a legit potential buyer and worth the time to engage with? I think there are three categories, broad categories of buyers. I'm sure people could
come up with subcategories or things in between, but I would broadly categorize them as follows.
You have somebody who's going to be an owner operator. They don't necessarily own anything
today in the space. Maybe they own one and you're
going to be their second location. They are less likely to be concerned about what you as the seller
are walking away with what you do and the relationships that you have because they tend
to believe that they can step into your shoes. Whatever role you're playing today, they will play going forward.
You'll come up with an agreement for a transition plan
to transition those relationships, transition those responsibilities.
But at the end of the day, they are going to replace you.
And that might be the best outcome for smoothly transitioning without much changing
in your business. The downside of selling to an individual like this is that they tend to be,
and I don't want to make gross generalizations, but they tend to be less sophisticated about what it takes to get a deal done.
They probably have not been through a transaction themselves. They may not know how to transfer a
license. They may not have the financing lined up in advance. So you might get to the finish line
or approaching the finish line, and then they're scrambling to raise the money that you actually expect to see. Oftentimes, that may result in some sort of deferred payments,
and I'll pay you the amount we agreed on, but it's going to be over the next three years,
because that's what I can round up. And so there are pros and cons of working with
an individual owner operator of that sort. I will say for many franchises out there,
this is the only type of buyer that you are permitted to sell to
because otherwise the franchise company actually has the right to buy it back from you
rather than you finding your own buyer.
The next category of buyer that I think is out there is what we call
a strategic acquirer or strategic buyer. All that means is it's another company in the home care
space. They've already got operations, whether they're adjacent to you or overlapping with you
or on the other side of the country, it really doesn't matter. if they are a home care company that is coming to buy yours
uh to be a new division um then they are a strategic acquirer they probably have a couple of
hot button diligence items that they focus on they want to make sure that you know you're a strategic
fit and that you that buying you accomplishes what it is that they're setting out to do. They probably have their way of doing things
from an operating perspective. So they are likely to swap out your insurance broker or your
outsourced IT manager, probably bring in whatever form of software, scheduling software, billing
software they're using throughout the
rest of their enterprise to bring on everything onto a common platform. You may be comfortable
with that. You may not be comfortable with that. Your people may be comfortable with that,
or they may not be. And they may have a range of potential roles in mind for you. Maybe it's
just handing over the keys and they're going to bring in their regional manager to do your job. Thank you very much. Or they may want you to stay on in that
role and continue to run that business, reporting up into a more corporate structure. We can talk
about that a little bit more later on, but there's no one method for doing that. The third category of buyers would be a private equity firm.
And I differentiate between a private equity firm that does not have a portfolio company in the space and one that does.
If they do already have a portfolio company in the space like us, we fall more into the camp of a strategic acquirer because we'd be acquiring a company to
bolt it on to our existing portfolio company. And we look a lot like a strategic acquirer in that
regard. When I talk about a private equity firm being a buyer, it's really a private equity firm
who's looking to establish a new platform. Maybe they do have other holdings if they're keeping
them separate and this is going to be a standalone company, then that would qualify in this regard. But a private equity firm
looking to establish a new platform, there are a couple of things that are important to them.
One, they're going to have the most in-depth diligence of all the buyers. They simply have
to as fiduciaries to their investors. They can't leave any stone
unturned. They're probably going to want you to stay on and run the business. When we get into
a new platform, we don't come at it with an approach that we're going to run this company.
We want to back a management team. We want to back a CEO who's going to run the company for us. We're looking for partners. We recognize that the CEOs we partner with know their sector, know their
business better than we ever will. The best we can do is ask dumb questions, as you put it earlier.
And so the ideal seller for a private equity firm looking to establish a new platform is a CEO who's really excited to
bring on that type of partner to accelerate their growth trajectory. The last piece, though,
that's important for understanding what private equity firms are looking for, we have a phrase
that we use around the office called return on brain damage. It takes a lot of work to get a
deal done. In order to generate a return on brain damage, the deal has to be large enough. And so a small home care company, census of 30, even up to 100, is just not going to be large enough for the amount of money, time and effort that we would spend getting this deal done.
So we're typically looking for companies with north of $10 million of revenue, maybe even 15 or 20,
because that tells us that we can put enough money to work here to generate a return on our effort,
on the time that we're spending, and frankly, on the cost that it takes to get a deal
done. Now, as it happens, larger companies tend to have other characteristics that we look for,
things like infrastructure, software, management teams that are capable of scaling.
So setting certain size parameters serves other purposes as well.
But if you are in that $1 to $5 million of revenue range as a home care company, you're
not likely to be a good candidate for a private equity buyer.
And so that may shape how you go to market, what your expectations are in terms of your transition
period after selling, and all the other things that we're going to talk about, you're more likely
to be selling either to an owner operator or to a strategic home care company.
So that brings up a great point that I wanted to ask about, which is of these
three types, and just for the sake of
listeners, I'll kind of recap them and tell me if I get this wrong. So the first one is basically,
you know, like a random person, I'll say, you know, who would like to run the business and
just wants to kind of replace you as the owner and the operator of the business.
Second one being a strategic acquisition, typically by someone who's already in the
space, a home care company that's already in the space, maybe a competitor, maybe not around you.
And then the third one would be a private equity firm. Of those three different types,
how do their expectations as far as the size of agency that they would consider acquiring differ?
At the lower end, size-wise, you're definitely talking to owner-operator buyers, right?
If you are large,
a single individual just can't afford to buy a large company.
And if it's the type of thing
where they're looking to acquire their next job,
and I don't mean that in a derogatory sense at all,
these are entrepreneurs
and they're very skilled at what they do.
That's just not going, you know, they're going to be more attracted to smaller companies.
They'll be able to afford smaller companies.
They're not scrounging together 20, 30 million dollars to buy a much larger company.
On the other end is a private equity firm launching a new platform, which, as I said,
just has to be of a certain size in order to be worth the private equity firm's attention.
And you do have private equity firms that focus on small companies.
But even that, you're typically looking at two to three million dollars of net income
before you're catching anybody's attention.
A strategic acquirer and run the range from
as small as the smallest to as large as the largest. A general rule of thumb is that
when a strategic company is doing an acquisition, they don't usually want to buy a company that is
more than half of their own size. So adding a company that is 50% of their existing size is generally, as a rule of thumb, a good indicator of what is digestible.
But that's certainly not set in stone.
You have companies all the time who are expanding into an adjacent space and they want to buy something that has a large footprint because they want that immediate scale. So they may go out and buy something that's exactly the
same size as they are, but just doing something different than they are. And so strategic
acquirers can really be all over the place in terms of what interests them. And frankly,
ourselves, we've had a lot of internal dialogue. Do we want to go after companies that are larger
and immediately bring very chunky scale? Do we want to go after smaller companies where the
entrepreneur might still be hungry, might want to stay on with us, help build that brand and that
business unit over the next five years with us and under our umbrella.
And so we've been a little bit, frankly, schizophrenic ourselves in terms of what
we're looking after. So that just proves the point that it really can be quite a wide range.
You mentioned that selling to private equity will result in a more in-depth diligence process and
that there are things that PE buyers would look for that
probably wouldn't be relevant to these other types of transactions. What are some of those things?
A strategic acquirer who's going to bring in their own way of doing things just isn't going
to care all that much how you're doing things today. Obviously, they don't want to buy something and break it,
but they're not relying on you continuing to do what you're doing going forward.
And on the other hand, an owner operator, a random individual who's coming along to buy your business, frankly, these things probably should be important to them, but they may just may not
know to ask the right questions. So for example, that the case you raised earlier of hiring practices and going through every single
caregiver on the roster to make sure that everything is in order as it should be,
they just may not know to do that. A private equity firm who's done transactions before
absolutely knows to look
through those things. And they're hiring lawyers who are going to tell them all the things to look
for. They're going to provide a very long checklist of things they're going to want to see,
things they're going to want to verify. Similarly, they're going to do a lot of tax
diligence and financial diligence. And the last three years of what you've been doing really matters a lot to them,
as opposed to an owner operator who just wants to know that their expectation in terms of the
salary they're going to be able to draw out of the business is going to be there in the end.
And as I alluded to earlier, it's not because we are jerks. It's not because we think we're smarter than
anybody else. It's because we have investors who we have to answer to and have fiduciary duties
to represent. And if we're going to be handing over 10, 20, $30 million, we can't have an oopsie
on the back end of something we forgot to look at. That's not
very good for us and our business model. So as a result of that, we tend to be
a little bit more difficult. And for that, I apologize.
One other thing I wanted to ask about before we continue, you mentioned that when you as a PE firm are acquiring an agency,
you typically want the owner to stay on. My experience is that when people sell,
even if it is to a PE firm, they sort of typically tend to phase out fairly fast.
Is there kind of a general or like minimum length of time that you would hope and expect
the owner to stay on?
Is there like some type of agreement attached to that?
How does that part of it work?
What we want and what is important to us is transparency and honesty.
And frankly, a precursor and a prerequisite to that is self-reflection.
What does the seller want?
What do they want to do over the next one, three, five years? If somebody is looking to hand over the keys and transition out, then they are not going to be a good CEO for us going forward because we need a CEO going forward to be just
as excited and just as energized about the growth of the business the day after we bought it as the
day before we bought it. And if that's not you because your heart's just not in it anymore,
then be honest about that. Be honest with yourself and be honest with your transaction partner. I've definitely seen situations. We've bought companies where the
CEO tells us, I've got three years in me. And my commitment to you is during those three years to
recruit and train a successor. That successor may come from inside the business. It may come
from outside the business. And that's okay. We can work around that as well. We can go into a deal and a new platform knowing that
part of our early plan is to find that successor. If somebody's looking at this from the perspective
of, I'll give you six months, that's where things get difficult because that means that we have to have the successor
identified and in place as of the day of the transaction. Because frankly, it takes six
months to transition a CEO role. And we may know that person, we may have an idea who that person
could be, we may not. But you're immediately eliminating from
contention as a potential buyer, any and all private equity firms who don't have that person
in their network or available at that given time. And so I think there's a buyer for every seller. As long as you're honest and upfront about what you want to do and what you are committed
to doing, what you don't want to get into is a situation where there's a mismatch of
expectations, where the seller thought they could transition out within six months because
the private equity firm was going to come in and run it, but there's no individual identified who's going to be the CEO of the company.
And the private equity firm thought you were good for at least three years while you went out and found that right person.
Or you tell them, I'm excited, I'm ready to do this.
But then it turns out that you just, you know, there are other things you'd rather be doing.
That's really challenging.
It's really challenging to work out of those situations in a way that is amicable and satisfactory to all the parties involved.
It's much more important to have those discussions up front and to be on the same page going into a
situation than trying to untangle it afterwards. That makes sense. Thanks for that. Let's go to
what I think will be really interesting for a lot of people, which is how home care agencies are
valued. How are they valued? How do buyers look at them? And what can someone who might be thinking about trying to sell
sometime in the not too distant future do to increase their valuation as much as possible?
So before I answer that, I'm going to just shrink down the parameters a little bit,
right? We're not talking about publicly listed companies. We're not talking about companies of
$100 million of revenue. I'm assuming that for most of the people listening, we're
talking $5, $10, maybe $15 million of revenue, maybe slightly larger, maybe slightly smaller.
And I'm also going to assume that we're talking not so much about the Medicare space, but about
the custodial care, private duty that I think is more relevant for most of
the audience. I would say in very broad terms, a home care company of that size trades for
four to six times net income. I use net income. It's not exactly what we would be looking at. We'd be looking at
what we call EBITDA, which is earnings before interest, tax, depreciation, and amortization.
But given that home care companies don't have a lot of equipment, there's no depreciation.
Given that most of these companies don't have a lot of debt, there's not much interest.
And given that most of these companies are S-corps or LLCs, there's not much in terms of taxes.
So roughly speaking, we're talking about
net income and talk about net income, but I mean it on a fully adjusted basis, meaning if you're
paying yourself a salary that is way above market, you can add some of that back because that's not
going to continue post-transaction. If you are not paying yourself any salary
and you're taking everything out
in terms of distributions and dividends,
then you'd have to add back in an appropriate salary
for somebody to lead the business.
But again, sort of zooming back out,
four to six times net income plus or minus.
What I think it's important to think about is what drives the
range between four and six, because that's a 50% range that's not a small range. And then
what drives the plus or minus on either end of that? I think the way to think about it is
identifying the risk factors in your business. And what do I mean by risk factors?
It can really be a wide range. It can be your referral network. How concentrated is it in
one or two or three referral sources versus being quite broad? How dependent is your business on you? And that's called key man risk, right? If
all the operations flow through you and the business would be in trouble should anything,
God forbid, happen to you, that is a risk factor in the business. If you take Medicaid as a payer
source, there is a risk that Medicaid will reduce the rates they're paying
or will mandate a higher minimum wage to caregivers and compressing your margins.
That is a risk factor. How good are your systems? If something happened to your scheduler,
would somebody be able to step in?
It's slightly different than key man risk because it sort of applies broadly to your employee base, your office team, as opposed to any one individual.
But the more you're reliant on processes inside people's heads, the more risk your business has.
And then competitive risk right are there other groups in your geography that are picking up market share that might be squeezing you
that is a risk factor and what we do is we sort of take all of those factors into consideration and tip the scale towards the lower end of that valuation range
or the upper end of the valuation range. Sometimes they'll offset each other. You've got this
risky thing. You've got this really valuable thing because you've taken out that risk and they
offset each other. One of the reasons it's important to think about things in
this way is because some of these risks are addressable. You can eliminate these before
bringing your company to market and then they become non-factors. Whether that is
decentralizing certain processes and functions, implementing software to take care of things, thinking about your daily
marketing activities of do I want to draw three more patients from my steady old time
referral source or do I want to take a few more patients from a new referral source to
diversify my referral base?
Those are all things that an entrepreneur, that a seller can think about before they even
become a seller in terms of de-risking their operation and then coming to market with a
business that has many more pluses than it does minuses. I would be remiss if I didn't mention
one last factor, and that is interest rates. It's not something that entrepreneurs necessarily think about
if they don't have debt on their balance sheet.
But a private equity firm that is going out and buying a home care company
is more than likely to be using some amount of debt.
It doesn't have to be over leveraged.
Nobody needs to push the envelope.
We are very careful not to.
But the cost of capital is higher today than it has been at any point since the financial crisis.
And so what that simply means is that we can afford to pay slightly less today than we maybe could have five years ago for the same business. And I know that sellers don't like to hear that because
their buddy who sold their business five years ago got a certain price and they expect to get
the same price. But the facts are what they are, that we think about valuation in terms of
what is the most we can pay and still generate an attractive return to our investors.
If more of the cash flows of the business need to be used to service debt, then we can afford
to pay less to generate the same returns for our shareholders and for our investors.
This is good. You mind if I ask about a few specific factors to see if and how they would affect the valuation?
Sure. get clients is to differentiate based on are they from consumer marketing you know so this is like
they look you up on google and find you directly you know or something like that from the community
or like referral sources like you said kind of using those two as the very broad
buckets here is if an agency is mostly reliant on consumer marketing versus referral marketing or vice versa,
is one of those going to result in a higher valuation than the other?
Yeah, we think a lot about the differences and the pros and cons of what we call B2B
referral sources and B2C referral sources, business to business, business to consumer.
And the answer is,
there's no definitive answer. Business to business, if you're getting your referrals
from physicians, let's say, or discharge planners, institutional referrers who can refer multiple clients to you over the course of a year. That is great.
But are those relationships dependent on you or on a particular salesperson within your organization
that carry risk that that person is going to leave or you're going to transition out and
therefore the relationship is at risk
versus consumer marketing, consumer referral sources, which don't usually have that type of
risk. On the other hand, consumer referral sources may be comprised of you hanging out around the
pool in a 55 plus community and people are used to seeing your face
and you're super friendly and you have this way about you that attracts potential clients. Well,
that's a B2C market channel, but it's still dependent on you as an individual or if it's
not you, it's a particular salesperson. The right question to be asking is
not B2B versus B2C. The right question to be asking is how institutionalized is this channel?
How decentralized is it so that if this particular person or that particular person left the
organization, the channel and the referral source would continue to flow, would not be impacted in
the least. Somebody else could step right in versus this is a channel that is dependent on a
particular individual within my organization. And therefore it is as loyal as that person may be,
or if it's even myself, it is still at risk should
that person no longer work for the company for whatever reason.
That makes sense.
You talked about payer sources.
So I would assume that generally speaking, private pay is going to be the most desirable
payer source.
First of all, is that correct?
But second, are there other nuances as far as the different payer source mix
and some being more desirable than others besides Medicaid, which you mentioned?
We do prefer private pay to government programs. It doesn't mean that we don't take and happily
serve some Medicaid clients, some VA clients as well. And we try to grow and
nurture those channels to the extent possible. We do have a preference for private pay because
as wage rates tend to increase over time, we can increase bill rates over time. And we're not
subject to what we call stroke of the pen risk
where somebody can decide one day that they should get 50 cents less uh you know for the same
services or have to pay the caregivers a certain percentage more within private pay though there
are still different uh sub buckets there's out of pocket pay, and there's long term care
insurance pay. And it's well known in the industry that in the 80s, 90s, early 2000s,
a lot of long term care policies were sold. Those individuals who bought those policies are the clientele that we're serving today
to a large extent.
And we love dealing with long-term care insurance companies and those policies because, frankly,
we don't like telling patients that, you know what, this care costs something to the extent
that they have already paid for it in
the form of premiums and now they can cash in on those benefits and and and use what they've already
paid for that is always our preference it's always an easier conversation to have
too often with out-of-pocket payers the clients who are paying for themselves
they wake up feeling really good one day,
they turn off care because they can save themselves some money. And then there's an incident in the home, a slip and fall, a tweak. They tried to do something by themselves that
they probably shouldn't have. We would much rather for the sake of our clients,
have them in a position where they're not paying out of pocket. They're not waking up, you know, trying to find the right day to cancel service. They want to
step down service and have fewer hours by all means. But we want to make sure that everybody
stays healthy, stays safe, and to be able to work with clients for whom what is this costing me today is less of a
factor is really much preferable to us in the long run and aggregated over hundreds of clients that
we're providing service to. Last factor that I wanted to ask about here is so a huge topic in
the industry, as you probably know,
is caregiver turnover. Does that influence valuation? And if so, how?
Good question. I would say maybe. I feel like that's an answer that I'm giving a lot.
Caregiver turnover itself may not matter much. It's more of what the driving forces behind it are. If you have a deep
bench of caregivers and you can, you know, you never miss a beat when one person calls off or,
you know, takes a job elsewhere and you can plug right in with another good fit for the client, then turnover doesn't necessarily in
itself scare me. Is turnover indicative of a culture, of an environment where people don't
feel taken care of, don't feel like it's a career and a calling more than it is a job, that's more indicative to me of other things
that are likely to creep up or come to the front over the course of our involvement together.
So for me, it's more of an orange flag that says, look at this, try to understand it,
try to understand what's driving it rather than it
being something where it in itself tells me that this company is worthless or is or isn't
a company that I would want to get involved.
Gotcha.
That makes sense.
Thanks for that.
Well, let's go on here.
And I'll say to those listening, this will probably be a much longer than usual episode,
but my guess is if you're listening to it and you've gotten this far, you're probably thinking somewhat seriously about selling.
So probably a small price to pay for learning those things.
You know what? That's why they invented 1.5 speed.
Exactly.
So what are the key differences between how a buyer and a seller view a company? And are these just about
how they negotiate or are there fundamental differences that need to be addressed and
mutually understood, if that makes sense? Yeah, it's an important question because,
as I said earlier, I'm not trying to come across as a jerk when I point to something and say,
this is an issue that needs to be addressed. I think it stems from the root of the fact that
most sellers are really good entrepreneurs. And good entrepreneurs are by their nature,
risk takers, right? They didn't take a corporate job or they left a corporate job to build something. Having a tolerance for risk is not just about the company you're building.
It probably manifests itself in other ways as well. You have to make decisions as you're
building your company. And those decisions that you make may well reflect your higher risk appetite.
So, you know, some, a caregiver comes to you and you're in desperate need of a caregiver.
They can't find their CPR certification. You say, don't worry about it. We'll get to,
we'll fill it in later. And you staff them on a job,
right? That is, that is a small risk that you are taking as an entrepreneur that is then built
into your business. And I could go on and on about different examples. Insurance,
you start your company, you have a certain level of insurance, premiums, deductibles, etc.
And you're comfortable operating with a certain amount of exposure.
Your company grows, you may or may not upsize that exposure.
You may or may not recalibrate it you may or may not take the time to implement hipa protocols uh to
make sure and train your people about what should or shouldn't be emailed you know workstations that
log off automatically things like that you may say i'm not, I don't want to slow down my momentum in building
this business. Full steam ahead. And that is your right as an entrepreneur. And frankly,
that's what makes a lot of entrepreneurs very successful is their risk appetite. However,
when a private equity firm or possibly even a strategic acquirer comes in and has stakeholders that they are beholden to, in a private equity firm's case, it's our investors, a strategic acquirer, it might be shareholders, etc.
They may not be able to take on those same risks. They may look at your setup and start to tick down a list
of things that even though you are fully comfortable operating your business in certain
ways, they would not be comfortable buying a business with those risks. And so when I have conversations with sellers and I say,
we really need to upgrade your IT and your antivirus, anti-spamware protection.
We really need to upgrade this or reconfigure that. For example, you gave W2 employees versus
1099 independent contractors. We really need to sort all that out, get everything on the right side that it should be.
That's not a negotiating stance.
That's not me coming in and saying, well, now that I know this, I'm going to pay you X dollars less for your business.
It's me giving you an opportunity to correct and eliminate that risk, correct the
wrong word, to eliminate that risk and bring the business into a position where I can buy it,
where I can turn around and say to my stakeholders, I have de-risked this for you versus you leaving it for me to de-risk post-transaction,
in which case I have to make certain assumptions about the cost that it's going to take to de-risk
this. So thinking about that IT situation, right? I may have my IT specialists evaluate this and say, it's going to cost $10,000 per year to upgrade the systems
that are in place here. And to me, that looks like, okay, well, then your net income is really
$10,000 less to me than it would be to you, than it has been to you. The future profitability that I'm purchasing is just
less to me going forward than it has been to you. Or you may turn around and say to me, you know
what, Donnie, don't worry about it. I'm going to take care. I'm going to upgrade those systems and
I can do it for, I have a guy who can do it for $2,000 a year. By all means, let's have that
conversation. If you have an opportunity to do it for $2,000 a year, whereas it would cost me $10,000 a year to do it, you've just saved
yourself $8,000. And I'm not going to deduct that from my evaluation of your company. When I come to
a seller and say, here are the things we've identified that would have to change if we were to purchase
this company. It's not a negotiating, you know, lines in the sand. This is what happens to your
price as a result. It's a conversation starter of here's what I'm concerned about. Here's what I
need to address either prior to an acquisition or
immediately thereafter. Let's have a conversation together about the best ways to address them.
One of the things that is probably glaringly obvious, but I think handled in the wrong way
more often than not, is the risk of transitioning leadership. So a seller will bring their company to market,
and this happens across all different sectors.
They say, I know that I want to transition out,
but I think that the buyer should have a say
and the buyer should be part of the process
of training up my replacement
versus them going ahead,
training up a replacement before coming to market. Entrepreneurs should understand that that leadership transition carries a lot of risk.
Things can go wrong. Balls can get dropped. Things can be miscommunicated.
Something that the entrepreneur took care of in their sleep they never even thought to mention to the person that
that's taking over for them um and therefore it doesn't happen for several months until somebody
realizes that something's going terribly awry uh and and you know that ball needs to be picked
back up off the floor that is a risk that i as a buyer look at and say, okay, I kind of have to make worst case scenario assumptions
going forward. Whereas a savvy entrepreneur who knows they want to sell, knows they want to
transition out, can just take that off the table a year, six months before coming to market and
come to market with a company that has a CEO in place who's energetic and excited and, you know, fully on board with this type of transaction. for how I see the world and how I have to protect myself if I'm going to lay 10, 15,
$20 million out on the table to buy your company. Let's solve these problems together
so that I don't have to make the worst case scenario assumptions.
That makes sense. Are there any more examples of those types of risks that typically occur
with home care agencies, maybe more often than
they'd occur with another type of business that they should be mindful of? It definitely happens
in the IT space, you know, and IT as it closely relates to HIPAA. It definitely happens in the
employment function and making sure that everybody has all their certifications, that everybody
is classified as the right type of employee or contractor.
It definitely implies in the insurance space.
I think within those broad categories, you have a lot of ways that it can play out, particularly
on the employment side.
But that's why I started off by saying, you know,
do a comprehensive review of your practices. Make sure that you have legal support for everything that you're doing. From soup to nuts, don't assume. Don't rely on things that evolved over
time. Don't rely on your own judgment as to the way things should be.
Because if there's one thing I've learned about labor law and taxes, et cetera, it's that logic is your worst enemy and trying to figure out what the proper practice actually is.
But the other important takeaway is please don't get insulted when we come to the table and say, here are things we probably need to change.
Sometimes we're wrong and you can explain that to us. We don't know everything. As I said,
we're really good at asking dumb questions, but also don't feel like it's a personal attack.
You've been doing it this way for 20 years and you're fully entitled to. This is not an attack on your business practices or the way that you've been doing things. It's simply a statement of how we would have to do things
going forward. And now let's work together to bridge that divide. That makes sense. My last,
I think, big question. So we've talked kind of here and there about the role of the owner and
how that can look different after the sale. I think for those who would consider staying on,
there's also like lots of apprehension around what does the relationship look like between,
you know, the former owner and the buyer. I think just kind of broadly in general, what are the range of
potential roles for the seller post-transaction and how can they and the buyer work together
to ensure a successful transition to whatever that role is going to be?
Before I answer that question, I want to say something that I probably should have brought
up earlier in terms of selecting your buyer, but I'll bring it
up now because it has direct relevance in setting the stage for the answer to the question you just
asked. One of the really important and frankly underrated elements in choosing a buyer for your
company is choosing somebody that you feel you can trust. It's not just who's going to
give you the highest price. It's not just who has the highest certainty to close. It's somebody
you feel is not going to try to pull a fast one on you. It's somebody who you feel you could have
open dialogue should certain concerns come up.
And the reason that's important is because things will come up. It is impossible to predict and anticipate every single scenario that's going to come up during the course of the transaction and even more so in over the course of the post-transaction
situation whatever situation you're trying to set up so as part of vetting a buyer vetting
a range of buyers up front who do you feel you can have an open communication with
because that's going to be important now what might your role be after the transaction?
As I said before, the seller drives that so much more than the buyer, right? A buyer cannot tell
you you're going to work for me for the next five years if your heart's not into it, all the leverage is with the employee at that point or with the seller.
And the best scenario is where everybody is open and honest. And the earlier you have that
conversation, the better. So what can the range of outcomes look like? It can be a six-month
transition. The first week really looks nothing different than before the transaction.
You lay out a schedule of transitioning certain functions, certain roles and responsibilities
over time to the various people or individual who is going to be taking over those specific
roles and responsibilities. And you could probably hand over the keys in
four to six months, depending on the strength of your team underneath you, depending on the
strength of your systems. Again, the less that's going on inside your head, the easier it is to
transition. Another role, range of roles that we talked about is I'm going to stay on for one, two, or three years, and I'm going to help you find and train my successor.
That is going to be my primary objective during this time.
So it's not an immediate transition out.
It's recognizing that you want to leave, but the business needs a leader and that the buyer themselves is not going to step in and lead that business.
And that can be a mutually agreed upon sort of transition schedule.
And then it can be, you know, an indefinite arrangement or, you know, an open ended arrangement where you're going to stay and run this business. And whether that's as the platform,
and at this point, I want to give a shout out to our CEO, Lisa Kaufman, who sold us her business
because she wanted to run a platform. She wanted to execute a roll-up. So she's gone from running
her $15 million business to running a $50 million home care business because she
wanted to bring on a partner.
And she is as energized and excited about the possibilities with this much larger platform
and the ways we can invest in growth that she simply didn't have at her disposal as
an entrepreneur running a much smaller
home care company. Or it can be as a division within a larger company. If your company is in
California and you're bought by a home care company in New York, they need you to run that
California business the same way you were before. You may not be the boss with a capital B anymore. You may have people that you now report
to and there may be a little bit more of a corporate structure, but depending on your
relationship with the buyer, you may be very independent and very little may change from
pre-transaction to post-transaction. Again, it comes back to understanding and knowing yourself,
right? Are you an entrepreneur because you just can't have a boss and there's just no way that's
going to work out well. And frankly, that means even having a board of directors or investors
behind you that you have to report to, it's just not going to work. Then, you know, that should lead you in
one direction or another. If you're excited to bring on partners because it's lonely at the top,
you want people to talk strategy with, you want the resources to run a marketing campaign that
you never could afford beforehand. That's another reason to sell your company, but it leads a very
different path in terms of what your role is going to be post-transaction. So there's a very wide
range from handing over the keys in four to six months to staying on in a leadership role
indefinitely. But it's only going to work as to the extent that you are honest
with yourself and honest with your partner about what you want. And frankly, if those feelings
change, that's okay. We're all human. It happens. You may think you have five years in you and
at the end of the day, you don't. That's OK. Just, you know, I would say communicate that with your deal partner before it becomes a
source of tension and a source of frustration for either one of you.
But, you know, along similar lines, and again, rewinding the clock a little bit in terms
of the timeline of a transaction and this conversation, there are going to be
surprises that come up in the transaction as well. And no matter how good your advisors are,
no matter how prepared you think you are, selling your business is taking on a second full-time job.
It's stressful. There are going to be points of contention. There are going to
be points of disagreement. There is negotiation. Even if you agree on everything, you're going to
disagree about the wording in the purchase agreement. Take a deep breath. Talk about it.
Approach it calmly. Everybody is there to get a deal done. Everybody is there for an outcome that
everybody feels successful
and everybody feels really happy about at the end of the day. I try as hard as I can not to let
emotions get in the way. Even as frustrated as I am, I try to take a step back and say, you know
what, you know, you feel more passionately about this than I do. Let's do it your way. Or as quickly as I can say, let's meet in the middle on this and call it a day and move
forward.
Selling your business is really tough, but hopefully you start that journey with a purpose
in mind.
And obviously wish anybody who's thinking about it the best of luck in terms of getting
through to the other side and achieving those objectives. Thanks. I think that's a really good note to end on for this conversation.
This is the part where I kind of just let you, you know, if there's any kind of self-promotion
you want to do just overtly, you know, here's your chance. Is there anything you want to say
about you or the firm you represent or how we can get in contact with you if interested or
anything else? Listen, obviously we do own a home care company. We are acquisitive. If you happen to be listening
to this and happen to be in Florida, where Caregivers of America is located, happy to
start up a relationship and see if it can lead somewhere. But generally speaking, I'm happy to take questions
or any follow-ups,
anything that somebody's curious
about what I said.
You can reach me.
My email address is dperl,
D-P-E-R-L at charteroak-equity.
You can find our website
with my information,
my partner's information. It's
charteroak-equity.com and happy to take that conversation wherever it goes.
Okay. Well, thanks again. Thanks for sharing your experience and your wisdom. I hope this
is useful to a few people and have a great rest of your day. Thanks.
That's a wrap. This podcast was made by the team at CareSwitch,
the first AI-powered management software
for home care agencies.
If you want to automate away the menial
of your day-to-day with AI
so that you and your team can focus on giving great care,
check us out at careswitch.com.