Owners of home health or hospice agencies should not consider selling their agencies or bringing in an investor until they have done their due diligence and have their financial statements in order. This article will explore what owners should consider and pitfalls they should avoid before a sale based on observations from professionals at Forvis Mazars.
Potential buyers or investors will expect up-to-date financial information using the accrual basis of accounting. Many agencies may not maintain accounting records that fully comply with GAAP, using the cash basis of accounting or some other hybrid of cash and accrual basis.
The cash basis method—recording revenue when cash is received and recording expenses when cash is paid—does not accurately represent operations in line with GAAP.
Be aware that you must plan well in advance of a sale or investor transaction since accrual-based financial statements can be complicated and time-consuming. In addition, potential buyers or investors will usually require at least a year of historical information.
As we shared in our previous FORsights™ article, “Are Your Home Health or Hospice Agency’s Financials Ready for Sale?,” some common issues that we have observed in due diligence review include:
- Lack of timely or accurate cash reconciliations
- Old, uncleared/stale outstanding checks
- Inaccurate valuation of patient accounts receivable
- Uncollectible or old accounts receivable
- No consideration of an estimate for an allowance for uncollectible accounts receivable
- Unrecorded hospice cap liabilities
- Lack of an accrual for Medicaid hospice room and board expenses
- No estimate for liabilities related to self-insured risks, such as employee health insurance and workers’ compensation claims
- No consideration for estimated incurred but not reported (IBNR) claims outstanding under self-insured risks
- No liabilities recorded for settlements on legal matters
- Intercompany balances not reconciling
- Errors or missing prepaid expenses causing inappropriate expense fluctuations
- Unrecorded liabilities due to lagging receipt of related invoices
- Lack of an accrual for employee compensated absences
- Inaccurate or no accrual for payroll liabilities
- Inconsistencies in recording of capital assets
- Improper recording of owner expenses
In addition, due diligence reviews often request financials in various formats so that key performance indicators (KPIs) and margins can be analyzed. These formats are also very helpful in managing the day-to-day operations of the business and provide value to the financial reporting process. If the business has a complex structure, the appropriate accounting software and configuration are often key for reporting accurately.
How Forvis Mazars Can Help
Forvis Mazars offers a full suite of Outsourced Accounting Services tailored to assist with each agency’s unique needs. We can help you with the back-office burden of maintaining accurate and timely accounting records, so you don’t need to be concerned with internal staff turnover in these responsibilities. We also help agencies be prepared if and/or when the day comes to consider a sale of the company, bring in an outside investor, or add value to your existing financial reporting structure.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.