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
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Thank you, Scott!
www.osbornehomecare.com