Ep:37: 3 Ways to Prepare Your Home Care Agency to Sell
Ep:37: 3 Ways to Prepare Your Home Care Agency to Sell
Steve "The Hurricane" unpacks the three most important things your agency can do today to prepare to sell. Whether you've been in business for a year, three-years or twenty years, it's never too early or too late to have this conversation.
Welcome to Vision | The Home Care Leaders Podcast. I’m Miriam Allred from Home Care Pulse. Today, we’ve got Steve “The Hurricane” President/CEO of Hurricane Marketing Enterprises is on with us today. Steve, how’s it going?
I’m so good. So excited to talk to you. It’s always a pleasure. Same over here. There’s a lot going on, but you know, you’ve reached out to me. There’s a lot of buzz around selling your agency. So really, I just want to open it up. What are you hearing from owners right now? Is the pandemic just pushing people to their limits and people want out, you know, what’s happening around this topic?
Well, you know, it’s interesting that you bring this up Miriam, and again, it’s an honor always to be here and serve. And the, the timing of this is so important because I feel that the pandemic helped to push a lot of folks over. Yes, but I feel that this was something that was coming before the pandemic from my experience, what I’ve been finding over the years is that home care, as you all know, I mean, heck I owned a home care business. It’s a high stress business. It’s 24 hours a day, seven days a week. You’re always on call when there’s something that happens at four o’clock in the morning, even though you may have staff and people on call, ultimately who’s liable, it’s you as the business owner. And so I I’ve, I’ve been noticing a trend around that 10 year in business.
Mark is when business owners go from, I’m not always, but in general, if they go from, I love serving and helping other people too, I have put up the good fight I have served and I’m ready for something else. Whether that’s something else is retirement getting into a different industry altogether, starting another business, spending more time with their grandkids, whatever it is. I feel that the 10 year Mark is a special window for a lot of business owners. And that’s when they want to start to exit. Now you add the pandemic from last year and all of the folks who were thinking, you know, in the next five or six years or so, I’m going to start to plan my exit quickly escalated for many folks where it’s like, you know what I, I made it through last year, heck last year might’ve been my best year ever in business financially because how home care is where people want it to be.
It was the safest place to go. And with assisted livings and adult daycare is on the decline because of the pandemic home care was a hot commodity, but the challenges with getting caregivers at $15 minimum wage, the PPP, the the PPE on top of the PPP and then the the government giving extra money for people to stay home and just all the challenges that we all every day they got exponentially multiplied. And so, as a result, a lot of folks who were thinking about exiting sometime in the, in the, you know, three to five years are now like, you know what I’m done I just time to move on. And, and the reason why I’ve gotten so involved in it, because I have 16 of my own clients around the country right now, who I’m actually in the process of helping them exit their business, because they’re, they’re ready to go. And they’ve, they’ve been building it up and working with me over the last couple of years to get it to this point. And now they’re ready to pull the trigger and they’re going to get their maximum return on invest.
Yeah. I love what you said about home care, being a hot commodity. And I think that’s kind of flipped a switch for larger agencies or even franchises, you know, they’re in acquisition mode now more than maybe ever before, is that what you’re seeing as well? You know, these larger agencies are like, Hey, we’re ready to play. We’re ready to grow. You know, let us help you.
So yes and no. So as I’m looking through the experience of walking through my 16 clients right now through this exit period, I’m seeing that there is somewhat of a trend to what you’re saying, where there are larger agencies that are looking to acquire smaller agencies and kind of roll them up into this whole merger and acquisition model. I’m actually one of my clients in North Carolina, I’m speaking to a big corporate entity that is looking to acquire them right now as we speak. So there are folks who are doing that, you know, and, and that is starting to happen more and more frequently. I also have some clients that I’ve seen people who are part of franchise systems and when people are part of a franchise system, there’s there, the franchises are very interesting to taking a look as to how they’re working with their franchisees that are looking to exit it from what I’m hearing and what I’m gathering is it’s kind of like a potential conflict of interest. So they have to be very cautious with what they’re doing and how they go about it. But something that I am starting to see is if somebody is looking to leave a franchise and they’ve reached out to their franchise or the franchise, or might help find a buyer within the system already to acquire their neighbors around them so that they can then have somebody who’s, who’s looking to scale and exponentially get larger. So that is also happening as well.
Yeah. Thanks for the context. It’ll just be really interesting the next couple of years to see if consolidation really becomes the thing or not. You know, there’s a lot of buzz around that, but I think really time will tell and moving through this pandemic and seeing, you know, how we’ve adapted and how we’ve grown. That’ll really tell, tell all depending on what happens. So
Yeah. May I say one more thing on this too, because even before we changed to a different subject I will tell you that the other thing that I’m starting to see in this industry is because of the pandemic last year. You know, when you look, when you just look at just straight statistics, the board economics, I’m a big fan of, of, of, of macro economics, global economics, and then national economics and finances and money and stuff. And every single year, statistically, there is a certain percentage of folks who invest in a business, whether it’s a restaurant, a dry cleaners, a bakery, an accounting firm every year, there’s always a certain number or a certain percentage of the population that starts a new business. 2020 was very unique in that all the folks who normally would have started say a McDonald’s or a Dunkin donuts, you know, these are large franchises that, you know, it costs a million dollars, $2 million to get a McDonald’s plus you got to go to school and all this other stuff, right?
A lot of folks last year, because of the pandemic who had the resources, who would have started a business said, Whoa, Whoa, Whoa, I can’t start a business in, you know, I can’t open up a gym this year. I can’t open up a restaurant right now. This pandemic is I got to see this through. And so the people who would have started a business last year started to look at what are businesses that are thriving in this pandemic, what are businesses that are pandemic proof. And, and it’s very interesting because this is kind of what I experienced back when 2008 through 12, we’ll say, or actually 2007, when the economy, the great recession, the great recession happened, and all these businesses closed down and unemployment went through the roof and all this bad stuff happened over a decade ago. My business care choice continued to thrive and grow because home care is not a, it’s not a warrant service, it’s a need-based service.
So the, the, these diseases and diagnosis, they don’t care if somebody is if it’s a good economic time for somebody it’s gonna happen regardless, and people get services based on need. So people last year who had these resources realize that other people besides individual owners, small private equity firms realize that. And so now there are these large equity firms that are looking to acquire 5 million, $8 million, maybe $4 million a year, private pay home care businesses, mostly independence, so that they can use it as a hub and then eventually become and grow it out to become a regional player. And that’s opening up a plethora of opportunities for folks who have businesses that size and how they can sell their business, how they can bring on an equity partner and scale and grow it. And so many more opportunities. It is, it is so fascinating to be working with all of these different people going through these different processes right now.
Yeah. Really, really good points. And it’ll be so interesting to see how that plays out over the next few years. You know, it’s only been 12 months, like you said, since these players have come into the industry. And I think, you know, the next couple of years will just be really interesting to watch as we continue adapt and adjust as new players have entered the market. So yeah. Time will tell. So yeah, let, let’s jump in. You know, like you’ve said, you’ve got a number of clients that are setting up to sell here in the short term, you know, and all of those businesses are varying in size. Our listeners are as well, a very in size, very inexperienced, but I’d love to hear you talk to some of the most important things that an agency owner can do now to prepare themselves to sell. So, you know, if you’ve got it kind of mapped out, let’s talk about maybe three of the most important things you are recommending that these agencies do to, to set themselves up for sell. So, so what’s the first thing you you’d recommend.
First thing we’re recommending is making sure that you are showing significant revenue growth year over year by far, that’s the most important thing, because you got to show that your business is on the growth side, not stagnant, not declining. Now, if the business is stagnant or declining, it doesn’t mean you’re not going to be able to sell. It just means you’re not going to get your maximum return on investment versus one that’s on an upward trajectory. So what does a significant improvement in revenue look like? Really? You gotta be growing your business like 25% revenue or greater year over year. If you can show that for three years straight, you show that there is no sign of this business slowing down. And the sky truly is the limit. That’s going to help you to get your maximum return on investment. So that’s the first thing.
Yeah. And we’re probably seeing that, you know, for most of these businesses, what w maybe some of your clients have come to you and what if they’re not seeing that year over year growth? What are some recommendations? I know this is kind of a loaded topic, but what are some recommendations that you would say, Hey, you’re not quite there. This is what you need to do. X, Y, and Z to get there.
And so it was perfect that you use that as a, as, as the segue into the second tip, because it really, and they got to go hand in hand. So somebody was not getting the year over year growth. Then I’m going to say, invest in some kind of training, that’s going to help you to get referral source development. Because the second tip here is if you can show with this year over year revenue growth, consistent referrals coming from referral source development, that business is going to be more value because it’s not just buying a book of clients that are existing patients. It’s also buying the relationships that this business has set up that have proven track record, which is something that I know from the summit and all the things that you talk about. A home care pulse, where agencies have to track their referrals.
They have to track their conversion. They have to track all of that stuff. The better you are at tracking all of that stuff. The more revenue the business is going to make while it’s also going to be able to show the value of your business to a potential buyer down the line. If I’m buying a business and say, I’m buying a $2 million business, I have a $2 million business here, and $2 million business here. This $2 million business has no idea where the referrals are coming from because they don’t, it. They’re not sure what their conversion ratio is. And, and it’s just, you know, 40 to 50 clients, maybe 60 clients on their census versus this one over here where they can show me their year over year revenue growth three years ago, they were at a million. Then now they’re at $2 million. They can show referral source development.
They can tell me their conversion ratios. They can tell me their closing ratios and everything else. This is a more attractive business. This is a business that’s going to get more money from the sale. And you’re going to have more people interested in buying your business, which could lead to a bidding war, which the owner of the home care business that’s selling. The second one is going to win out versus this one is going to just really get somebody who’s just going to buy the book of business. It’s going to be worth less money. So referral source development is the best way to get your revenue, to continue to show an upward trend and show to a potential buyer that, Hey, they’re still more revenue that can come in on top of the book of business that you currently have, which is your patients that you’re servicing.
Yeah. That referral source development. It’s interesting, you know, you’re, you’re comparing even to $2 million agencies, there are large agencies out there that, like you said, are not tracking all of this information. It kind of blows my mind a little bit. It’s, you know, how, how do they not know where these referrals are coming from? How do they stay organized to gain more referrals? It’s, it’s so fascinating that there are large agencies because the demand is so high that are growing, but they don’t even necessarily know how or where they’re just drumming up business. So, so tracking is, is so key. Let’s kinda just segue right into the third point. You know what, what’s another recommendation that you have
Th th and this is probably even though I started with the year over year revenue, and then I talked about the referral source development. This next one, right here is probably the most important one, and that is making sure your business is profitable. As I, as I look at the 16 clients that I’m currently working with to help exit their business this year, as I’m looking at all of my mastermind clients that I’m working with every single month, pretty much, I look at the, you know, the hundred and 50 or so coaching clients we have that we’re working with. And, and the hundreds of students in my hurricane university program, I’m always talking about profits and the people that I’m working in the closest with, I’m always looking at that profit margin and making sure it’s as high as possible. When people go to sell their business, they’re going to look at EBITDA, you know, which is after everything is paid, how much money is left over, and most business valuations is going to be a multiple of that profit.
And so, you know, for somebody who’s a million dollar business, well, you can have a million dollar home care business. And then you could be generating a hundred thousand dollars is profit, or you could be generating $200,000 is profit. There’s the rough business valuation of the one with a hundred thousand dollar profit is gonna be about 300 grand is worth. But the one that has $200,000 in profit, same, same total revenue, but they’re more profitable is going to be worth more like $600,000. It’s literally double the business because it’s a triple multiplier at that level. And, and there’s so many other factors that go into it. But the reason why I’m mentioning profitability is because I know, and it’s just something that I deal with every single day, all of my clients, right? I help them with their sales and their closing processes. This caregiver challenge that we’re facing is so big that a lot of folks are not increasing their rates, or they’re not upping what they’re charging, but they’re upping what they’re paying the caregivers because they have to.
Now, I don’t want to get into the whole caregiver discussion because, you know, there’s, there’s multiple ways to look at it. But at the end of the day, what I always tell people is, you know, would you be a caregiver? If your answer is no, because it’s hard work, then that’s why they’re asking for more money, right? That that’s the bottom line. That’s why I always say, if you wouldn’t do the work, then now, you know why people are asking for so much money for it. But when the care cost of care is going up, if you’re not raising your rates appropriately, and your profit margin is below 10%, which I find a lot of folks, profit margin is below 10%. You are just crushing your valuation of your business. So with that three years of revenue growth, you also want to make sure that you’re monitoring your profit. And if you can get it 15%, 20% of what your total gross revenue is as profit 20%, you are going to have a great business valuation and maximum return on investment when you go to exit.
Yeah. Let’s drill down on that. Why what’s the hesitancy behind agency owners not wanting to raise their rates? You know, have you seen any specific trends as to why people hesitate so much to raise their rates? What is it
It’s because they don’t, they don’t feel that people can afford it. And I understand that a hundred percent, you know, I remember back when I had my company care choice back in the day we started out as one of like the, we were on the lower end of the average price. And then quickly as I started vamping up the marketing, we went to the average price. And then probably within two years of starting on, we became the above average price agency in the area. And we always stayed about two to $3 an hour over what all of our competitors were charging. We weren’t the highest we were in that highest group. And I felt that that was a very safe spot to be. Now, when I would sit down with families, the families would say to me, you know, Steve, the guy down the street is $2 an hour, less, $3 an hour, less for services.
And, and, and my response was always keep it objective in here, right? Cause when you get subjective, then it’s like, eh, well, you know, every time I’ve ever lowered my rate over the years, it’s always bit me in the butt. And every pay every client out there home care owner can tell you the same thing. Every time they cut their rate, this was the client that was the most difficult client. And it’s like, man, why did I cut the rate? Because I’m doing all this work for them. And now I’m not even breaking even, or I’m losing money or whatever. Right? So what I used to do is very objectively and tell folks, if you want to go with the company down the street, you can go with the company down the street, but I’m sure someone probably told you that we are the best in the area.
And we are the best in the area. Part of the reason why we’re the best in the area is because we pay better than anybody else, which means the best cream of the crop caregivers in this area are working at my agency. So do you want me to proceed with setting up care for your loved one and nine times out of 10, the son, the daughter, the does the spouse, the patient him or herself would say, well, I tried, okay. Yes. We’ll sign up with you. And then we give them the services. And then we give them the very best that we can give what I’m finding as I’m working with my clients. I got it. I have a group of fast star clients as part of the hurricane university here. There’s like four programs in that class. But fast start is the first part of that program.
I’m teaching my clients how to not only market and sell, but how to improve the level of care that they’re giving. When you are doing a lot of the things that I’m teaching you, then that empowers my clients so that they can say, you know what? We are going to raise our rates because the other home care companies, aren’t doing what we’re doing and we’re delivering a superior product. And when you deliver a superior product and it goes back to the age, old saying a good product, isn’t cheap and a cheap product. Isn’t good. That’s why people drive BMWs and Lexuses and Mercedes, because it’s a good vehicle and it’s worth the money you’re paying for it. Not that there’s anything wrong with a key or a Hyundai, but you, you know, you can take a look at it and see who’s got the issues and how you’re going to drive and everything else. And so be the BMW, be the Lexus, put that best foot forward. Then you won’t have to worry about the caregiver challenges as much. And it’ll allow you to keep the business profitable, which allows you to expand or eventually one day exit for somebody else to continue the mission.
Yeah, really, really good examples. And it’s just upholding your value. You know, if you’re, if you’re confident in your care and the service that you’re providing own it and you know, live out what you’re promising your clients, and then they’ll understand and see it for themselves. So you’ve just got to, you know, maintain that level of confidence
And my clients that if somebody’s underpaying you for services or paying you what you’re worth, and the phone rings at two o’clock in the morning, are you going to answer it either way? The answer is yes. So why not get paid? What you should be getting paid because you know, you’re going to take care of it anyway. And that’s, and that’s the bottom line. And, and the other thing is to inflation and everyone understands inflation and families still have a need, and you have to pair it up. You have to, you have to do your work. It is a give and take, but you just have to make sure that you hold on that prices. And you’re making sure that you really it’s the margin. I look at the margins on your P and L statement from home care pulse. And the margins are not as an, as an industry. Most agencies are paying about 65% straight across doesn’t matter what level you’re at. 65% of the revenue collected goes towards caregiver compensation and things to acquire caregivers. And that is too high. I work with my clients and try and get them to have a 60% margin for everything there cause that extra 5% goes towards the profits, which allows for bonuses, for your staff and revenue growth and expansion, bigger office raises all these other things that you want to be able to do that most agencies currently can’t,
I’m really glad you brought that up. We’ve got the data show, but I wanted to ask with these companies that are preparing to sell, do they have that 60, 65% margin focused on caregivers or are they cutting costs and other areas which is helping them increase profitability, any other trends that you’re seeing on where people are spending or overspending and why that’s hurting them?
Most people are overspending in the caregiver department and it’s, and it’s not that they’re overspending on caregivers because that’s a, you have to, they’re doing it out of necessity, but they’re not raising the rates so that it keeps that 60% margin, the people that I’m working with, if they’re working with me for years. Cause it’s what I will say from my, my experience. It’s a it’s a pulling teeth, right? So I’m constantly telling them to raise their rates, raise your rates, raise your rates, raise rates. Somebody will be with me for a year. You know, say their, their business did $2 million a year before they work with me. They work with you for a year. Now they did $2.5 million, 25% growth, right? That’s their biggest growth year they’ve had in the last five years. And, and then all of a sudden they’re a, and they’re like, Steve, I did $2.5 million, but I only made like $30,000 more in profit.
And I’m like, you got re I’ve been, I told you all year to raise your rates. Now, are you going to finally listen to me and do it? And then they’re like, all right. Cause now that I got them to make the revenue, but they didn’t see the profit or it was very little. Now they finally raised the rate. So usually my clients it’s in that second year, when they start to raise the rates, like I asked them to, and then my clients were with me was like four or five years. They’re, they’re constantly at this 60% of what they’re receiving is going to all things, caregivers, they have this 40%, we’ll say a gross profit before other expenses, which is now keeping them in this 15 to 20% net net at the end. And they’re happy as can be. And they’re living their life and their business has the value. And so when my clients been me for a while are ready to exit, they’re the ones getting top dollar on their return.
Yeah. Just thinking out loud, we need like a, raise your rates jingle for the industry. I’m gonna, I’m gonna craft a song and I’m going to tee you up to seeing that. And we’re going to push it out to the industry,
Yes. We need, we need something because I just that raise your rates. It is just so hard for people to hold on to, but it’s so important. And we talk about it all the time and we just need to drill it into people’s minds. We’ve covered a lot. I just love to hear, you know, one piece of advice you have for tired business owners right now, you talk to so many people and people are burned out, like you’ve said, but what advice or what hope do you want to instill in people right now?
The best advice I can say, if somebody is tired and they’re like burnt out is it’s never too early to have a conversation. It doesn’t hurt to reach out to somebody about exiting your business doesn’t mean that you have to do it. You know? So one of my clients, the one that I’m talking about North Carolina, that I’m trying to help with, you know, we’ve been talking about it for six months and only this week, right? Like a couple of couple of days ago that they say, okay, Steve, now we’re, we’re ready to move forward, but we can talk about it for six months. So it never hurts to have a conversation. Never hurts to see what your business is valued at today. Even if I may not exit in the next three years or so. The other reason why I say this is because there’s multiple ways.
You know, one, one thing that I’m seeing people are doing is like a split equity where they’re bringing somebody in and they sell the majority of their shares to this bigger firms, then going to put a million dollars or so in resources. And to help you hire some big level, you know, executives for your business and take your, your $4 million business. And then in the next three years or so it’s a $10 million business. And then you can exit at that point and then sell off the rest of your sheriffs at the valuation of your business in the future. And so this way you kind of get like a little bit of money now, and then you get a larger sum later on and you’re still part of your business. So you never know what could happen. So it never hurts to have a discussion, even if you’re not ready to do something today.
Yeah. Really good point have that conversation. You know, whether you’re a startup, you’re two, three, five years in, you’ve been in it for 20 years. It’s never too early just to have the context to have this in mind of, you know, maybe one day you’re going to sell. So set yourself up now, have that conversation and be ready to do so. So really good points, Steve, it’s been a pleasure until next time
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