Home healthcare franchise

March 19, 2021

by a searcher from The University of Chicago - Booth School of Business in Carmel, IN, USA

Hi everyone,

I've been looking at home healthcare franchises in the 500K SDE range. Curious what sort of multiples people are seeing here? From what if seen the smaller ones 100-200K SDE are in the 2-3X range but wondering if that is reasonable here.
Thank you

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Reply by an intermediary
from Indiana University at Bloomington in Carmel, IN, USA

It always gets down the the debt coverage ratio, how much you put down and bank loan metrics. If you are using an SBA, I always use 10% down, 10 yr. amort. SBA legal limit is 1.2 but never had a buy client pay more than 1.5X in debt coverage ratio. That is what I use for the highest that can be paid (and that is what the banks will look at as he who holds the Gold makes the rules). Then you have to look at all the soft factors as there is always a standard deviation of 25%+/-. Generally all businesses in almost every industry, the average SDE is 2.78 and EBTIDA is 3.81X (true EBITDA not what you see listed as most confuse SDE and EBITDA). Its all about cash flow. And as the business is bigger, then the multiples increase at a 45 degree angle. I have helped Buyers buy a few franchises as well as independents. It is a lot easier for someone not in the business to buy a franchise. Many independents are small, no marketing, owner is big part of the equation, etc. Negatives of Franchise is geographical growth, restrictions on doing skilled care and Medicare clients. But you look at the Cash Flow after franchise fees.

Some states are crazy in the approval process, in one deal in NY, because they accepted Medicaid, had to go through state approval and took 13 months AFTER the Purchase Agreement (not the LOI) to get approval. The old owner even had a heart attack during this time and thank god he didn't die. This was a franchise, and the new owner double sales and profitability in 24 months.

Reply by a searcher
from Georgetown University in Minneapolis, MN, USA

I've seen independent HHC businesses in the 500k-1M EBITDA range consistently go for 4-5x multiples. I don't have any experience with acquiring franchises though, so I don't know if there are any dynamics that would make their valuation different from an independent.

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