Do You Know the Valuation of a Homecare Business?
What is the valuation of a homecare business? So you have worked hard to build a business from nothing, sacrificed weekends and family time, dealt with bureaucratic Local Authorities, overzealous regulators, unreliable staff and challenging clients. You established yourself as a Good provider and now have a good income. You want to retire, sell the business and spend quality time with the family. So how much will you get for it? The answer is, probably not as much as you think.
Homecare operators regularly overvalue their business. I have seen peoples faces drop when I tell them that their seemingly profitable business is, in fact, worthless.
A business is worth only what someone will pay for it. Its might be hard to hear, but what you think it is worth or what you want for your business is irrelevant. I regularly see homecare providers overestimating what their business is worth. People equate the valuation of their homecare business with the amount of blood, sweat and tears they have put into it. In reality, it has nothing to do with that. So how can you value your business and is there anything you can do to improve its value? The simple answer is yes. An established domiciliary care provider can do quite a bit to significantly increase the value of their business and prepare it for sale.
Buyers want a well run, stable and profitable business with minimal risks and a good history that can slot easily into their existing operation with minimum fuss.
While there is no set formula for working out the valuation of a homecare business, most valuers use a multiple of profit or more commonly a multiple of EBITDA (Earnings Before Interest, Depreciation and Amortisation).
What is EBITDA?
EBITDA is a figure commonly used to calculate the valuation of a business. It stands for Earnings Before Interest, Depreciation and Amortisation. It’s basically the net profit with some add-backs. For a typical homecare business, it is often a couple of percentage points higher than the net profit. For example, if your homecare agency has a nett profit of 10% of revenue, then EBITDA could be at about 12% to 15% of revenue.
EBITDA (Earnings Before Interest, Depreciation and Amortisation) should be one of your financial KPIs
If you are planning to sell your business at any point, then your EBITDA is a figure you need to monitor as one of your financial Key Performance Indicators. Your accountant will be able to help you with that.
Valuation As a Multiple of EBITDA
There is no overall single set formula for obtaining the valuation of a homecare business (remember that a homecare company is only really worth what someone else is prepared to pay, not what you think it should be). Valuations fluctuate depending on the prevailing market. At the moment, a basic valuation of a single branch, well run domiciliary care operation seems to be around 3 – 3.5 x EBITDA (Earnings Before Interest, Depreciation and Amortisation).
The valuation multiples can increase to around 4 or 5 x EBITDA if there are other factors; the key ones being multiple branches contracting with numerous local authorities and covering a wider geographical area, specialist high end or niche services, highly profitable, a good mix of private/local authority clients, Good reputation/CQC reports, robust contracts with local authorities with time left to run, and several more.
Valuation of a Homecare Business can range from 3 to 5 times the EBITDA
Example of Valuation of a Homecare Business
Let’s say you have a homecare business that does 1,000 per week at £16 per hour. That gives you an annual turnover of £832,000 per year.
If your homecare business has a net profit of 10%, then you could put EBITDA at roughly about 12%- 15% of revenue. For this example, we will use an EBITDA figure of 13% of turnover. (Your accountant should be able to work out your EBITDA and provide it with you regular management accounts)
So for this example turnover is £832,000 per year so EBITDA will be 13% of that, i.e. £108,160 per year.
Therefore valuation will be 3 x £108,160 = £324,000
Will I Get This Amount For My Business?
So we have worked out that for a 1,000 hr per week business charing £16 per hour and a profit of 10% and EBITDA of 13%, it might achieve a sale price of £324,000.
Will you actually get this? The short answer is, it depends. Even with this level of profitability, your business may be worthless. A purchaser will only buy a business if it fits with their strategy and price points. In domiciliary care, typically, a buyer will want a well-run business that can operate WITHOUT YOU. The ability of the business to run without you is crucial. If you have a profitable business, but you are running around doing visits all the time, firefighting, always short-staffed, cramming visits, have a less than Good CQC rating in any of the KLOE, high turnover of staff, i.e. if your business will fail without you there to ensure it runs smoothly; then your business may be worthless, irrespective of how profitable it is.
If your business can’t operate without you, then it may not be worth anything, even if it is very profitable.
Ironically investing in more management, IT, systems, etc. may reduce the overall profit/EBITDA, but it may make your business more valuable.
Increasing the Valuation
The valuation multiples can increase from 3 x EBITDA to around 4 or 5 x EBITDA if there are other factors, the key ones being; multiple branches which contract with several local authorities and covering a wider area.
Let’s look at the above example of the single-site provider doing 1,000hrs per week. They decide they want to exit the market and retire, but they want more than the £324,000. So they create a 3-year plan to increase the value of their business and prepare it for sale. The current valuation is 3 x £108,160 = £324,000
If they opened another branch or two and over the next couple of years they got to say £500k t/o at one branch and £200k t/o at the next one, both at the same EBITDA of 13% then the multiple could be up at 4.5 – 5 x EBITDA
Branch 1 EBITDA £109k
Branch 2 EBITDA £65k
Branch 3 EBITDA £26k
Total EBITDA £200k
Multiple now is 4.5 x EBITDA
£200,000 x 4.5 = £900,000
So with a couple of years more as a provider with a short term plan to increase valuation and a bit of effort to open to new branches you can look to increase the sale price dramatically from £324,000 to £900,000.
Planning for Sale
All this is a rough guide. What determines the multiple is what a purchaser is willing to pay. However, there are factors which drive up the multiple. Typically the big national providers want a fully managed multi-branch operation that covers several local authorities. It must have a good CQC rating and the ability to slot into their existing operation. They don’t want to spend time and resources trying to deal with problems as integration is hard enough. Hence why they pay a premium for more substantial, fully managed businesses.
If you have a homecare business that is a well run single branch with good staff and management systems, then opening two more branches shouldn’t be too much of an issue for you, yet the resulting price that can be achieved is hugely improved.
If you do want to get out of the sector, then I would strongly advise you to look at what you can achieve in a relatively short space of time. Then plan for the exit now and go for it, with a clear goal of building the business to sell within the next 2 to 3 years.
Better Care for Your Service Users
Even if you are not planning on selling, running your business with an exit mindset will ensure better care for your service users and less stress for you; as only well run, stable business with good CQC ratings get the best prices.
If you would like to know more about how Care Skilled can help you get more for your business, then contact us for a no-obligation initial chat.