Optimizing Accounts Receivable & Payroll Accruals Before the Sale
When negotiating the sale of a home health or hospice agency, most owners obsess over the "Multiple" (e.g., 6x EBITDA). They fight tooth and nail for a higher valuation on paper.
But while the multiple sets the Enterprise Value, the Net Working Capital (NWC) Peg determines the cash you actually wire to your bank account.
We often see owners leave $200,000 to $500,000 on the table at the closing table simply because they didn't understand how Accounts Receivable (AR) and Payroll Accruals impact the final purchase price calculation.
Here is the deep dive into optimizing your balance sheet 6 to 12 months before you go to market.
The Concept: The Working Capital "Peg"
To understand why you might lose money at closing, you must understand the concept of the Working Capital Peg.
In almost every deal, the buyer requires you to leave enough "Working Capital" (Current Assets minus Current Liabilities) in the business so they can operate on Day 1 without injecting more cash.
Think of it like selling a car. You can sell the car (the business), but the buyer expects there to be gas in the tank (Working Capital) to drive it off the lot. If you hand them a car with an empty tank, they will charge you the cost to fill it up.
How It Is Calculated
The Peg is usually calculated based on your average working capital over the last 12 months.
The Trap: If your AR has been bloated (due to slow collections) for the last year, your average working capital is artificially high. The buyer will demand a High Peg (e.g., $500,000).
The Result: At closing, you must leave $500,000 worth of AR or Cash in the business.
The Goal: If you tighten operations now, you can lower that 12-month average to $200,000. That means you keep the extra $300,000 in your pocket.
1. The AR Lag: Why Slow Payers Cost You Double
In the operational world of home care, high Accounts Receivable (AR) is often viewed as an asset—it's money owed to you! But in the M&A world, high AR is a liability to your exit price.
If your Days Sales Outstanding (DSO) sits at 60 days because you are lax with billing or slow to chase Medicaid claims, you are inflating your Working Capital needs.
The "Quality of AR" Problem
Buyers don't just look at the total amount owed; they look at the age.
0-90 Days: Generally considered "Good Assets."
90-120+ Days: Buyers often consider this "Bad Debt." They may refuse to count this toward the Peg, forcing you to leave cash instead to make up the difference.
The Optimization Strategy
Six months before listing, you must launch an aggressive collections campaign to "Clean the Aging Report."
Reduce DSO: Aim to get your DSO down from 60 days to 35 days. This lowers the total capital needed to run the business.
Write Off Junk: If you have old claims (120+ days) that are uncollectible, write them off before the 12-month lookback period starts. This lowers your asset base and, consequently, lowers the Peg.
Shorten Billing Cycles: If you bill monthly, switch to weekly. The faster you invoice, the faster you collect, and the lower your average AR balance becomes.
Bottom Line: A lean AR process proves the business generates cash efficiently, allowing you to negotiate a lower Peg and walk away with more proceeds.
2. Accrued Payroll: The Hidden Liability
Payroll in home care is complex due to the lag between when a caregiver works (earns the money) and when they get paid (cash leaves the bank).
On the day of closing (The Cut-Off Date), there will inevitably be "Accrued but Unpaid Payroll."
Example: You close the deal on a Wednesday. Your staff worked Monday and Tuesday. They haven't been paid yet because payday isn't until Friday.
Who pays for Monday and Tuesday?
Technically, this is a debt you owe. However, the buyer will be the one cutting the checks on Friday.
To fix this, the buyer will take a "Purchase Price Reduction" equal to the accrued amount. They essentially keep that money from your payout so they can pay your employees for the work done under your ownership.
The Optimization Strategy
While you can't change the calendar, you can optimize how this is calculated and avoid disputes.
Clean Cut-Offs: We often advise scheduling the closing date to align exactly with a payroll cycle end date. This simplifies the math and prevents disputes over "prorated" taxes and benefits.
Audit PTO Liabilities: Many agencies carry significant "Accrued PTO" (Paid Time Off) on their books. Buyers view this as a debt (100% dollar-for-dollar reduction). Before selling, encourage staff to use their PTO or pay it out annually to keep this liability low on the balance sheet.
3. The "Cash-Free" Myth
A common objection we hear is: "But my LOI says the deal is Cash-Free, Debt-Free! Why can't I just take all the cash?"
"Cash-Free" means you keep the excess cash—the profit. It does not mean you can strip the operating capital.
If your Working Capital Peg is set at $300,000, and you only have $250,000 in collectible AR, you must leave $50,000 in Cash in the business to meet the Peg. If you take that $50,000 out, the buyer will simply deduct it from the purchase price.
The Lesson: You cannot "trick" the math. The only way to keep more cash is to lower the Peg before the deal starts.
4. The Strategy: Fix It 6 Months Out
You cannot fix your Working Capital Peg the week before closing. It is a trailing 12-month average. The actions you take today will determine how much cash you keep next year.
The Pre-Sale "Balance Sheet Cleanse":
Month 1-2: aggressive collections blitz. Call every payer with a balance over 60 days.
Month 3-4: Write off uncollectible bad debt. Clean up the "Unapplied Cash" on your books.
Month 5-6: maintain a strict weekly billing cycle to show a consistent, low DSO trend line.
Summary: Don't Leave Money in the Operations
Your goal is to sell the engine, not the gas in the tank.
By optimizing your AR and Payroll cycles now, you demonstrate a highly efficient machine that requires less gas to run. This allows you to negotiate a lower Peg and siphon that extra fuel (cash) into your own retirement account.
Is your Balance Sheet ready for scrutiny? Let’s run a Working Capital analysis to see where your Peg stands today.