Seller Financing and Earnouts in Home Care Agency Acquisitions
A home care agency’s future revenue depends on whether clients, caregivers and referral sources stay after the sale. Buyers and sellers sometimes address that uncertainty by deferring part of the purchase price. Home care agency seller financing and earnouts are two possible structures for doing so. Each shifts risk between the parties in a different way, and neither is right for every transaction.
This article discusses these structures for acquisitions of established non-medical home care agencies, such as personal care, companion care and homemaker-service businesses, rather than skilled home health or clinical providers. No structure is universally available, appropriate or acceptable to a lender. This is not legal, tax or regulatory advice; buyers and sellers should work with qualified professionals when structuring terms.
Why Deferred Payments May Be Considered
- Client relationships, caregiver stability and referral sources may change after a sale
- Deferred payments can give the seller a reason to support the transition
- They can reduce the cash a buyer needs at closing
- They can help bridge a gap between the asking price and what a lender will finance
Our articles on home care payer mix and referral concentration and home care caregiver retention explain the risks these structures may be used to address.
Seller Financing
With seller financing, the buyer signs a promissory note for part of the price and repays the seller over time with interest. Terms to consider include:
- The note amount and repayment schedule
- Interest rate, as negotiated between the parties
- Whether payments begin immediately or after a delay
- Security, guarantees and default provisions
- Whether the note is subordinate to a bank or SBA loan
- Whether the balance can be adjusted if certain results are not achieved
A fixed note gives the seller more certainty. A note that can adjust based on post-closing results shifts more risk back to the seller.
Earnouts
An earnout ties part of the price to the agency’s performance after closing, such as revenue or hours of care over a defined period. If results meet the agreed measure, the seller receives the contingent amount; if they fall short, the payment is reduced according to the agreement.
Earnouts require careful drafting. Agreements should clearly define:
- What is measured and over what period
- How changes the buyer makes, such as pricing, services or staffing, are treated
- The seller’s role and responsibilities during the earnout period
- Reporting and how disputes are resolved
Loose definitions can lead to disagreements. Depending on the agency’s payer arrangements, certain compensation structures may also raise regulatory questions, so earnout terms should be reviewed with qualified legal and healthcare-regulatory counsel.
How Lenders View These Structures
- Total debt payments, including any seller note, must be supportable from cash flow
- The lender may require a seller note to be subordinated
- The lender may restrict payments on a seller note in certain situations
- Contingent payments need to be accounted for in projections
SBA Considerations
SBA-financed acquisitions have specific rules for seller notes and contingent payments. Depending on current SBA requirements and lender policies, a seller note may count toward part of the buyer’s equity injection under certain conditions, while some earnout structures may not be permitted. Rules change, so confirm current requirements with your lender. See our guides to SBA loans for home care agencies and buying a business with 5% down using SBA financing.
Structure and Price
A higher price with more deferred or contingent payments may be worth less to a seller than a lower price paid mostly at closing, and vice versa for a buyer. Compare offers on both price and terms. Our guide to home care agency valuation explains what drives price.
Modeling Your Payments
Model the combined payments on the bank loan, any seller note and possible earnout payments under several scenarios, alongside payroll obligations. Our conventional loan calculator can help estimate loan payments.
Choosing a Structure
The right structure depends on the agency, the seller’s goals, the buyer’s resources and the lender’s requirements. Clear terms, realistic projections and professional advice protect both sides.
US Professional Funding helps buyers structure acquisition financing for existing non-medical home care agencies that can work alongside seller notes, subject to lender review. Learn more about our home care agency acquisition financing.
