Selling an Adult Day Services Center

What a buyer is paying for

Revenue in this business is daily attendance multiplied by what each participant brings in. A buyer will want average daily attendance by month for several years, set against the number of participants the center is licensed or built to serve. A center that is full on weekdays and has a waiting list tells a different story from one that is half empty and has been for a long time. Buyers look closely at the gap between enrolled participants and those who show up on a given day, because absences cost the center money in most payment arrangements.

The second thing is the mix of who pays. Some participants pay privately, some are covered through a state Medicaid waiver program or a managed care plan, and some through the Veterans Administration or a long term care insurance policy. Private pay usually carries a better rate and fewer forms. Government and plan payments are more predictable once a participant is authorized, and they also come with rate changes the owner does not control, authorization limits and slow payment when paperwork is wrong. A buyer will want the daily rate for each source, how many participants sit in each group, and how long payments take to arrive.

The third is the staff. A center needs a director who meets the state's requirements, nurses or health aides in the numbers the license calls for, activity staff and drivers. If the owner is also the director, a buyer will count that as a job they have to fill, and they will adjust the earnings to pay someone market wages to do it. Our post on owner dependency covers how to reduce that exposure before you go to market.

What makes one center worth more than another

Stability counts for more than size. A center whose participants stay for years, whose staff have been there since before the last licensing survey, and whose referrals come from several sources such as hospital discharge planners, social workers and physician offices is easier for a buyer to finance. A center that depends on one managed care plan for most of its participants carries the same risk as any business with one big customer, and we treat it that way in the valuation. The principle is covered in our post on customer concentration.

Condition of the building and the vans matters more than owners expect. Participants with mobility needs require ramps, wide doorways, accessible restrooms and a safe place to rest. Transportation is a large part of the daily operation, and a buyer will walk the parking lot. Vans with lifts, kept in service and insured with clean driver records, are worth something. Old vans that need replacing are a cost the buyer will subtract from the price.

The kind of center also changes who buys it. A social model center, with meals, activities and supervision, is simpler to run and has a wider group of buyers. A center that provides health services, with nursing, therapy and medication management under a stricter license, can earn more per day and is harder to staff and to inspect. Buyers who run clinical businesses are comfortable with the second kind and first-time owners often are not.

Things that bring the price down are fairly predictable. Survey deficiencies that were never fully corrected. Participant files that are missing signed care plans or authorizations. Claims that were denied and never resubmitted. A lease with a short term left. Staff files without current background checks, health screenings or training records. Each one can be fixed, and each one is easier to fix before a buyer finds it.

The records a buyer will ask for

A buyer and their lender will ask for business tax returns, monthly profit and loss statements and a balance sheet, usually for three years. They will want the attendance records by day, a participant list with the payer for each person, the billing history and an aging report showing what is owed to the center and by whom. They will ask for the license, the most recent inspection reports and any plan of correction that followed.

They will also ask for payroll records, an organization chart, job descriptions, and evidence that staff credentials are current. Insurance history matters here, including general liability, professional liability and the policy covering the vans. Buyers will want incident reports, which show how the center handles falls, medication errors and complaints.

The books need to match the billing system. When revenue in the accounting records does not tie to claims submitted and payments received, a buyer stops trusting both sets of numbers and their accountant takes over the deal. Our post on getting your financials ready for a buyer explains what clean books look like.

What has to transfer

The license comes first, and in many states it does not simply pass to a new owner. Some states treat a sale as a change of ownership that requires a new application, an inspection and sometimes a waiting period during which the center cannot assume it is covered. Rules vary by state and your attorney confirms what applies to your center. Payer enrollments are the next question. Medicaid waiver contracts, managed care agreements and Veterans Administration arrangements may each have their own process for a change of ownership, and some of them require the buyer to be approved before payments can be made to the new owner. A gap between closing and the first payment can be long, and a buyer will ask how it will be bridged. Many deals include a plan for that period, such as the seller staying on, a short transition arrangement or an adjustment to working capital. We covered that last subject in our post on earnouts, holdbacks and working capital.

The lease is the other item that can stop a deal. Most centers rent a building that was fitted out for the use, with a kitchen, accessible bathrooms and a fire safety setup that took time to approve. A landlord who will not consent to an assignment, or who will only offer a short term, leaves the buyer without a place to operate. Our post on the lease as part of the deal goes through how that conversation tends to go. The van registrations, the food service permit and any outside meal or transportation contract need checking too.

What tends to sink a sale

In most of the deals we see, a sale of this kind fails because the owner was the director and the center cannot run without that person, or because the regulator's timeline was misjudged and the buyer's lender lost patience. Payer paperwork that was loose for years also comes up late and costs money. A rumor to staff or families that the center is being sold can cause departures and participant withdrawals before the buyer has signed anything, and for a business that depends on trust that is a serious loss.

For that reason we market a center without naming it, and buyers sign a nondisclosure agreement before they see anything that identifies it. How that works is described in our post on how we market a business confidentially.

How to get the center ready

Start a year out if you can. Audit every participant file for a current care plan, signed consent and payer authorization. Fix open items from the last inspection and keep the paperwork showing they were fixed. Bring the billing in line with the books. Train a director or assistant director who could run the center on a bad week, and write down the routines that live in your head, from morning check-in to how an incident is reported. Talk to your landlord about the term well before a buyer asks, and keep the vans serviced.

When you are ready, the work at Business Advisors of America starts with a valuation built from your own numbers. We then prepare the materials a buyer and lender will expect and screen the buyers before anyone sees the center. If you want to see how buyers tend to look at a center like yours, the page on selling an adult day services business is a good place to start, and a short call with us is the next step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.