Valuation of a business in the home health care service sector

The numbers of the baby boomers reaching retirement age keep growing. And there is one skilled services sector that is sure to flourish – home health care.

Indeed, home health care services, classified under SIC code 8082, have been experiencing rapid growth recently. As a result, there are excellent opportunities for differentiation since a business can specialize in providing services to a targeted demographic.

Home health care businesses enjoy excellent earnings upside, low capital asset investment requirements, and net profit margins that can exceed 20% of revenue. So mid-market home healthcare businesses are in high demand. Importantly, smaller companies need to focus on growth to reach the critical mass. And this helps them establish themselves as the dominant presence in their market.

Risk factors that affect business value

The industry prospects are good. But there are some challenges that impact what a home health care business is worth:

• Intensity of competition from new market entrants.
• Exposure to litigation.
• Difficulty in attracting and retaining qualified staff.

In addition, as the industry matures, consolidation pressures may force smaller operators to merge or be acquired by larger firms.

Business valuation methods for home health care companies

As many service businesses, the typical home health care firm has a relatively low asset base. Consequently, business valuation focuses on assessment of the business earning capacity and risk.  As a result, you can choose a number of income-based business valuation methods to value your company.

For smaller, owner-operator managed businesses, Multiple of Discretionary Earnings method provides a great way to appraise a business based on its earnings and 14 key financial and operational performance and risk factors.

For businesses looking to expand rapidly, Discounted Cash Flow is a proven way to determine the business value based directly on the projected income stream.

Don’t forget to check the market place for actual selling prices and valuation multiples – especially if you plan to sell or buy a home health care business.

Typical valuation multiples for the companies in this service sector are:

1. Based on gross revenues.
2. Based on discretionary cash flow.

The value of inventory is added to the estimate you get using either valuation multiple. Since home health care businesses sell often, there is plenty of  market data to compare against – and make a fact-based decision on your asking price or purchase offer terms.

Calculate business value by direct market comparison

One way to do such market-based business valuation is to use ValuAdder Market Comps. ValuAdder provides coverage for 425 industries, including home health care businesses.

You can calculate your business value based on the actual sales of similar businesses in this service sector. All you need to provide is the business revenues and inventory – ValuAdder calculates the business value range, average and median values instantly!

See Valuation Tour