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Hospice valuation

On Behalf of | May 19, 2023 | Healthcare Business

Texas hospice valuations rely on a mix of subjective and objective factors, and understanding these intricacies can provide an edge in maximizing the return on investment (ROI). Hospice valuations have continued to command high multiples due to increased investor interest and the growing demand for end-of-life care.

However, determining the actual worth of a hospice depends on adjusting the value up and down to compensate for various factors, which can present challenges for both buyers and sellers. The following points can help navigate some of the complexity.

The art and science of valuation

While valuing a hospice business involves mathematical aspects such as determining valuation multiples and cash flow, the subjective factors hold just as much weight. External economic factors, or an owner or executive’s optimism about their company’s prospects, can influence the valuation outcome. The most accurate valuation will involve a balance of the objective data and subjective factors that affect the business.

A baseline for assessment

The valuation requires a starting point, which usually consists of historical hospice valuations and the entity’s financial statements. The subsequent financial modeling estimates the buyer’s potential ROI and the seller’s maximum earnings potential from selling the business.

Historical transaction multiples and financial margins provide insight. Still, they should not serve as the sole determinants when making adjustments to the valuation because the analysis has yet to consider adjustments based on subjective factors.

Outside influences

External factors can influence valuation assumptions, such as interest rates, inflation and changes in hospice law. Even global market conditions or financial issues in other countries can indirectly affect hospice mergers and acquisitions in the U.S. Buyers and sellers must be aware of these influences and account for them in the valuation.

Internal factors

Internal factors of the hospice operations, such as staffing, patient volume, patient referral sources and the effectiveness of the company’s overall operations, contribute to the risk and potential for post-acquisition growth. It is vital to show how these factors contribute to sustainable growth for a buyer and reflect that accurately in the valuation.

Communicating the value to potential buyers

When considering selling the business, a hospice must effectively communicate its value to potential buyers. Not all hospice multiples are the same due to differences based on the size and other characteristics of the business, such as operating margins and cash flows.

Sellers need to have a solid understanding of accounting principles and understand terminology such as working capital and how it plays into the transaction. Being knowledgeable and transparent with all relevant financial data and operational strengths can help build buyer confidence and maximize the company’s value.

Understanding the balance between objective financial data and subjective valuation factors helps buyers and sellers work toward maximizing the value in a hospice merger or acquisition transaction.