October 9, 2013

October 9, 2013

Optimizing Your Exit Event

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Presenter’s Background

Scott Osborne, founder and Managing Principal of Osborne HomeCare Group

BEGIN WITH END IN MIND

» WHO will likely acquire my firm?» WHAT will the likely purchase price & deal

structure be?» WHEN will I receive the proceeds?» HOW much of the proceeds do I get to keep?

WHY IT MATTERS?

Investment Return = Owner Income + Capital Gain

($000) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9Year 10 Total

Owner Income ($100) $0 $50 $100 $200 $225 $250 $275 $300 $400 $1,700 Sale $0 $0 $0 $0 $0 $0 $0 $0 $0 $1,500 $1,500 Taxes $0 $0 ($15) ($30) ($60) ($68) ($75) ($83) ($90) ($345) ($765)Net Proceeds ($100) $0 $35 $70 $140 $158 $175 $193 $210 $1,555 $2,435

•In this example, Capital Gain is almost half of the post-tax investment return

WHO, What, When, How

» Owner-Operator

» Private Equity Firm

» Industry Buyer » Strategic Buyer

Who, WHAT, When, How

» Quantify Owner Income– EBITDA + owner compensation & benefits + non-recurring items +

non-essential items » Qualify Transferability & Sustainability

– Perceived risk = required rate of return– Headwinds include a) ACA b) exemption repeal c) increased income tax rates

Who, WHAT, When, How cont.

» Example: Owner Income Margins of 15% on Annual Revenue of $2,000,000 = $300,00

– Equity Injection (20%): $200,000 (includes assumed client service deposits) – Retained Working Capital: 70,000 (half a month of expenses)  

Who, WHAT, When, How cont.

– Bank Loan (70%):             700,000– Cash @ Close (90%):      $970,000   – Seller Note (10%):           100,000 Total Deal:                     $1,070,000 (3.57 multiple) 

Who, What, WHEN, How» Seller Note average term = five years» Example: $100,000 Seller Note

– Seven percent (7%) accrued, simple interest during two-year “standby” period

– $114,000 principle amortized over ten years payable in three years– 36 monthly payments of $1,323 – final “balloon” payment of

$87,700 

Who, What, WHEN, How cont.

» Seller Note Benefits– Attractive interest rate – Tax deferral to lower income years– Increase potential pool of prospective buyers

» Seller Note Risks– Non-payment

Who, What, When, HOW

Two net proceeds considerations include;»  Tax impact

– Organization– Purchase Price Allocation

» Seller Note Structure– Contingency– Security

OPTIMIZATION TACTICS

1. Begin a Sale Preparation Process at least three years prior to going to market.2. Assemble your exit team: transaction attorney, tax accountant, mergers & acquisitions intermediary, financial point person.3. Ensure financial statements are prepared on an accrual basis and reviewed quarterly by a CPA. 

OPTIMIZATION TACTICScont.

4. Scrutinize questionable deductions/expenses and if in doubt, take them out.5. Identify key staffers and develop business protection and retention strategies.6. Transition mission critical activities to staff that will remain post-sale. 7. Conduct a legal review.

Situation:

The Capital Gain achieved from the sale of a home care firm is a major contributor to the overall investment return.

Solution: Optimizing Your Exit Payday involves knowing what you don’t know, building the right exit team, and prioritizing the necessary planning & preparation.

Regulatory Headwind’s Impact On Home Care Deal Value

» Deal Value1 = 3 year historical cash flows X a risk adjusted multiple.

» Deal Value2 = 3 year projected cash flows X a risk adjusted discount rate.

– The commonality is a risk assessment.– Risk is in the eye of the beholder.

Regulatory Headwind’s Impact On Home Care Deal

Value cont.Risk Assessment

Risk Rating Multiple Range Discount Rate RangeHigh 2.0 – 2.99 30% - 35%

Moderate 3.0 – 3.99 25% - 29%

Low 4.0 – 5.0 20% - 24%

Sophisticated buyers seek a rate of return commensurate with the risk.

Risk Factors

» Risk is the perceived transferability, sustainability and predictability of cash flow.

» Cash flow volatility and uncertainty adds risk and detracts from value.

1. Management Continuity2. Client Diversification3. Payer Source Diversification4. Referral Source Diversification5. Cost of Care Trends

o Regulatory headwinds negatively impact cost of care.

Regulation That Jeopardizes Cost of Care

» Work versus welfare expected to perpetuate caregiver shortage.

– Welfare currently pays more than a minimum wage job in 35 states.

– In 13 states it pays more than $15/hour.» The Affordable Care Act is expected to undermine the 40 hour work week and add staffing complexity.

Regulation That Jeopardizes Cost of Care cont.

» Companion Care Exemption repeal expected to undermine around-the-clock care affordability and add staffing complexity.

Potential Valuation

» Under this example the homecare firm’s value decreases by 20%.

From (Moderate) To (High)Revenue $2,000,000 $2,000,000

Cash Flow $300,000 $300,000

Multiple 3.5 2.9

Discount Rate 27% 32%

Valuation1 $1,063,089 $882,037

Next Week’s Webinar

For more info and to register for this free webinar, go to: bit.ly/15VjFqY or visit the Home Care Pulse blog.

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Thank you, Scott!

www.osbornehomecare.com