Capital Commentary
by Bradley Smith
August 16, 2016

As the world of homecare, home health, hospice and DME has evolved, so has the sophistication of today’s investors and buyers. They understand the impact of numerous health care trends: value and pay-for-performance reimbursement, the rise of managed care organizations (MCOs), the new age of technological innovation and the increased emphasis on non-facility-based intervention. They ultimately favor homecare models as our aging and disabled population grows. Also, as the CMS Independence At Home project has demonstrated, major sources of public funding are supporting the integration of homecare and primary care. The table is set for the continued growth of homecare type service models.

Of course, there are challenges. The homecare service market typically has few barriers for start-ups, there is intense competition in many areas and recent Department of Labor (DOL) initiatives have made it more difficult to operate a profitable company. Nonetheless, investors remain interested and there are many opportunities for expansion. Thus, the issue is how to build and increase sustainable value that attracts investors and buyers.

Based on my experience as an M+A advisor in the homecare, home health, hospice and DME markets, I have found that the most successful companies have embraced most, if not all, of the following value building approaches.

1. Maintain Consistent Financial Performance

The very best homecare companies operate with a focus on sustainable performance rather than quick results that can be destabilizing to operations. In addition to this lack of volatility, they understand the key metrics that drive success, employ transparency with managers so they can help make the company profitable with good quality services and provide rewards for great outcomes.

2. Deliver High-Quality Financial and Operations Reports

There is a not-so-subtle psychological upside to having regular financial reports that are timely, easy to understand and that present accurate information about company performance. Investors will increase their estimation of company value when the financial reporting is of high quality.

3. Constantly Improve Cash Flow

Every executive knows that a homecare company can have a positive bottom line, yet be struggling to meet payroll. Highly-valued companies focus on this fact when diversifying their reimbursement mix and looking for new opportunities, especially when cash flow is suffering. In addition, entrepreneurial homecare executives may convert assets with low return (e.g. real estate) that can be better used to improve cash flows and returns.

4. Always Look for New Opportunities

Though they may be constrained by talent and financial limitations, good homecare companies are always looking at new opportunities, including parallel markets, where their operational expertise can provide improved strategic positioning, whether horizontal or vertical. A buyer will see the upside of the investment of additional capital that the current owner may not choose to deploy.

5. Retain Management Talent

The maxim that talent will get you through tough times that money may not definitely applies to prosperous homecare entities. The retention of talent has a powerful internal (e.g., subordinates) and external (e.g., referral services) impact that directly influences the bottom line performance. Executives shoud keep this in mind with compensation and other incentives.

6. Create and Update a Plan

Strong homecare providers have a strategic plan in place with basic metrics that are relevant to everyone in the organization. It can be as simple as a single page with a few additional expectations of employees, but the results can be tremendous because employees understand and are aligned with expectations. Investors see this as an indication of leadership competence in their marketplace and it positively impacts valuation.

7. Keep a Customer Focus

Services are best conceptualized and rolled out with a lean, customer-centric view in mind. Effective homecare companies encourage an internal culture that constantly asks, “Are we giving our clients what they need and want?” Unsuccessful companies, by comparison, are focused on what makes their operations easiest for them, with only modest concern for the impact on their customers.

8. Build Strong Operational Technology

Great homecare companies emphasize the use of technology to solve the concerns of customers, MCOs and payers. They also use technology to simplify internal operations while also building the competence of their own employees, especially older workers who may struggle to move away from paper reporting. Investors see the application of technology as the owner’s belief in the future of the business.

9. Clean Up Regulatory and Legal Concerns

Good operators stay abreast of regulatory requirements, and make sure to remove their egos from minor legal disputes that can drain the financial and emotional resources of the organization. Investors and buyers look at this area carefully in the due diligence process, especially private equity groups (PEGs) that are considering retention of exiting management in their offer.

10. Market to Millennials

Progressive homecare leaders create websites that have all the critical information in a responsive design format (the site shows up differently on various digital devices) without the trappings of content that must be constantly updated. The millenial generation is increasingly attracted to this type of marketing, especially when making decisions regarding the care of family members.

There are other factors that can make a difference to an investor or buyer (e.g. local demographics), but the above points are worth the time and investment of today’s homecare entrepreneur. While attending to these approaches will increase the value of your business, you will also find that your homecare company culture will improve, as well.