Home Health & Hospice Acquisition Trends From Large Cap to Lower Middle Market
The most notable challenge with valuing private, lower middle market, deals is the lack of accessibility to transaction analysis. As a firm, we do roughly 25 deals a year in Healthcare (two-thirds (2/3) are in the Home Health & Hospice category), which gives us a wealth of comparative data to analyze. This internal data yields an average valuation range based on exit values in the market. There are other valuation methodologies but at the end of the day, a company is worth what investors are willing to pay for it.
That is the foundation of our valuation method. We focused our analysis on Multiple of EBITDA and Percentage of Revenue. The scope of this article is to assess transaction data for Home Health (including Medicare Certified Agencies, Private Duty and Medicaid/Unskilled Home Care) and Hospice from public, larger cap, companies to private lower middle market deals. The result should be an answer to the timeless question:
“What is my company worth?”
2018 saw a significant uptick in large cap transaction volume in the Home Health (“HH”) & Hospice (“HP”) segment.
There were 82 transactions announced in HH&HP; an increase of 30% from 2017. We have seen a correlation with this trend on smaller deals. Even with the regulatory headwinds of PDGM and the shrinking spread between reimbursement to direct labor costs (especially in HH), investors, top to bottom, continue to believe that HH&HP is a necessary low-cost alternative to post-acute care. Hence, HH&HP are becoming more, not less, prevalent in the healthcare continuum. We believe high transaction activity volume will persist. The evidence to support this is consistent across all deal sizes.
Large cap deal activity suggests that the market is healthy for sellside M&A, but the actual dollars invested are concentrated in a few deals. Of the $1.85 Billion in acquisition dollars, $1.4 Billion was transacted for the purchase of Curo Health Services by a consortium headed by Humana, and $340 million for the purchase of Compassion Care Hospice by Amedysis. Both deals were focused on gaining Hospice patients and represented premium pricing per census patient (approximately 100K a patient!). This is where the distinctions exist as compared to smaller deals, all the way down the deal strata to the lower middle market.
In 2018, our firm closed a transaction with Amedysis, who acquired a Northeastern Home Health operation. The pricing was slightly above the mean we see in our other Home Health deals, but nowhere near the multiples cited above. Moreover, the smaller sized HH&HP segment remains fragmented, unlike the larger deal world. This is highlighted by the consistent buyout and/or merging of competitors. We will get into specific metrics below, but keep in mind that the valuations tend to increase as market size increases…most likely due to scale and efficiencies in vertical integration.
Given the continued growth in Large Cap M&A, we remain confident that healthcare as an industry is in a sustained growth trajectory. America (unfortunately) is not getting healthier and national demographics continue growing older. These factors put an investment bullseye on the entire healthcare continuum. Even with a systemic impact to the economy (which we don’t see on the horizon) or a revolution in healthcare services billing (which is imminent), we believe the investment dollars will continue rolling in…top to lower market.
A look at Lower Middle Market HH&HP M&A
Let’s start at the beginning. First, there was light then larger companies started acquiring smaller companies to grow more quickly. Companies augment their market share and profit either organically or through acquisition (or both). Fortunately, as shown above, there are plenty of acquirers making the M&A universe very active.
Investors think of markets or industries as “consolidated” or “fragmented.” Healthcare services, especially Lower Middle Market HH&HP, remain HIGHLY fragmented. This makes it difficult for bankers (like us) to identify the buyer given there are a multitude of acquirers. With no clear acquirer as agencies get smaller in size. We have done numerous deals with strategic buyers, such as Kindred and Amedysis, but most of our deals are with regional buyers who are either independent operators or financial firms.
Of note in the large cap M&A growth trend: the average revenue of the seller, or the smaller of the two companies in a merger, has risen by nearly 14% since 2008. This may be a caveat of the aforementioned, indicating that larger investors are steadily moving towards larger deals because the market is more consolidated than it has been. As companies get larger, or funds get bigger, they can’t waste their time and resources on smaller deals. We believe the lower middle market is becoming more fragmented, not less. After 2009 (Great Recession) we saw many investors, specifically the ones deploying capital, dipping well below their historic target size criteria. This is not the case anymore, unless it is an ideal bolt-on company for the investor. This could mean that as the economy improves and cost of capital stays low, we will see less mid-to-large acquirers hunting in the lower market arena. This will translate to lower valuations, due to the absence of large strategic or platform buyers purchasing companies based on their revenue. Fortunately, as we stated above, the absence of larger cap buyers should NOT stunt the deal flow. Active deal flow should offset lower valuations…we shall see soon enough.
What is your company worth?
We have 30 years of data with close to 1000 deals in all healthcare services segments. Our team is committed to the highest standards of representation to our clients. With our deal flow, we can provide our clients with market intelligence that is second to none. We reviewed almost 50 transactions from the past 18 months, extracted non-HH&HP deals, and removed companies without revenue (ie start-ups). What we were left with was 15 HH&HP transactions.
- Average EBITDA Multiple is slightly above 3.5X. An EBITDA around 2MM or more will increase the multiple. Multiples are also increased by 1) Type of census patient; 2) Geography; and 3) Payor mix. If Hospice comprises the majority of the revenue than valuations are over 4X.
- Average percentage (%) of Revenue valuation is 56%. The use case for this valuation metric is when selling to strategic buyer. It is also helpful when valuing based on a per patient value. We see Hospice selling between $40K – $60K per census patient. In Spring of 2019, we sold a Home Health, which was perfect “bolt-on” for a Private Equity platform. This sold for 1X Revenue.
- The mean EBITDA and Revenue is $906K and $5.834MM, respectively. The EBITDA margin is roughly 16.6%. There were no agencies in the analysis with less than $1MM Revenue. If you remove the largest company revenue ($16,543,000), we have an average revenue of $5.070MM. Removing that that company’s EBITDA decreases the average EBITDA margin by 40bps to 16.2%. Operations in the HH&HP space, which generate over $4MM in revenue, you should be above 15% in net adjusted profit. EBITDA margins will drop as revenue gets lower (dropping “incremental revenue”). There were no companies in our analysis that had lower than 10% Net Adjusted Profit. Which could indicate that companies running at lower margins, with either lower reimbursement or higher labor costs, are not selling.
- NOTE: If we get more granular and separate the Hospice from the HH, we see higher valuations. EBITDA multiples between 4X – 5X and % of revenue around 60%. Simply put, Hospice drives higher value than HH.
There are a multitude of factors, beyond Revenue and EBITDA, which drive valuation in the Lower Middle Market HH&H. This analysis can define lower middle market valuation ranges in Home Health, Private Duty, and Hospice. Ultimately, the only way to truly define value is through a broad auction. Fortunately, we can conduct such an auction with confidentiality (non-disclosure to company personnel or competitors). The choice is yours if you want to sell.
Finding out more about Our Team
For more information, or to receive your free business valuation today, please contact us at www.healthcaredealteam.com.
 “Senior Housing and Healthcare Mergers & Acquisitions in the 21st Century.” Irving Levin Associates, 2019,
 In late 2018 we closed a deal with Amedysis. Our preference is to find strategic buyers who have institutional resources…the deal runs much smoother.
 Florida and Texas are responsible for producing the most transacted public company revenue in 2018. It has been our experience that these states see disproportionately heavier deal flow in healthcare transactions. However, our internal data set for the past year of HH&A transactions shows only one (1) Floridan and no Texas deals.
 Strategic, in this context, is defined as a buyer operating in the same vertical who will buy the company based on a per patient, or revenue basis—Top Line. They already have a business in place to scale with the target acquisition.
 An independent buyer is a term we use internally at our firm. It means an investor who purchases the business with an operational mindset, but not enough infrastructure to eliminate the fixed costs. Also, Hospital networks have been acquiring ancillary (post-acute) service companies. Over the past few years some of the most prominent and large-scale healthcare organizations have joined forces for large acquisitions. We have not represented deals with hospital buyers. They don’t seem to be interested in lower middle market, at least not our deals.
 See our blog on financial vs. strategic for more clarification, https://www.healthcaredealteam.com/infusion-pharmacy-market/
 Kauffman Hall “The Year in Numbers.” M&A Review, Kaufman Hall, 2018, https://mnareview.kaufmanhall.com/the-year-in-numbers
 Hospice is a stand-out in this segment. The valuations are stable thanks to better reimbursement from CMS.