Demystifying Home Care M&A, Part 1: Due Diligence

Selling a home care agency is a significant decision, and for many owners, the process can feel opaque. At Pando Home Care, we’re trying to build an acquisition approach around transparency. This article is the first in a multi-part series where we walk through our M&A process step by step: what we look for, why we ask for certain information, and what determines the price and structure that we include in our offer. Our goal is to give owners of home care agencies a clear understanding of what to expect before they ever decide to engage in a sale conversation. And, of course, we hope that they consider us as a potential buyer.

This article goes deep into our “pre-LOI diligence process”. That phrase has a lot of jargon, so let us break it down. Before we can make an offer on a home care agency, we need to understand it well enough to determine what that offer should be. We ask for certain data from owners and then dive into the data to evaluate the financial and operational performance. The process of asking for and evaluating data is called “due diligence”.

We separate our due diligence efforts into two periods: pre-LOI and post-LOI. This article focuses on the pre-LOI phase. But to get there, we need to start with what an LOI actually is.

What Is an LOI?

LOI stands for Letter of Intent. It is a non-binding agreement that outlines the key terms (e.g., purchase price, structure¹, major conditions) that will be included in the purchase agreement. Think of it like an offer to buy a home: you need to submit the offer to go under contract, but the house isn’t yours until you close. Similarly, signing an LOI does not transfer ownership of the business, but does initiate an exclusivity period of 45 to 90 days during which both parties finalize the purchase agreement.

¹Structure defined: how much is paid at closing versus over time, whether any portion is tied to future performance (called an "earnout"), and what the seller’s post-close role looks like. Two offers at the same number can look very different depending on the structure.

The Purpose of Pre-LOI Diligence

At Pando, we want to avoid a situation where we submit one offer in the LOI and then need to walk it back or change key terms during the exclusivity period. As such, the goal of our pre-LOI diligence is to learn enough about the business to put together a credible offer on price and structure. For each of the three acquisitions we have completed to date, we have not changed major terms after the LOI was signed.

Side note: Before reaching an LOI, we sometimes issue an Indication of Interest (IOI)—a lighter, non-binding document/email that pressure-tests price, structure, and terms before either party commits more time. It's an extra step upfront, but it tends to make the LOI process faster and the exclusivity period smoother once we get there.

Why This Process Can Feel Intimidating

Most sellers feel some hesitation going into diligence, for three common reasons:

•        You’re sharing sensitive information with someone you’ve only recently met

•        It’s not always clear why a buyer is asking for specific pieces of data

•        You may not (currently) have everything on the list

None of these should stop you from having the conversation. Imperfect records are never a dealbreaker for us. What matters most is a willingness to be transparent. The rest of this article explains what we request and why each item matters to us.

What Pando Asks For (And Why)

For more context on the value drivers behind these requests, see our article Drivers of Value in a Home Care Business.

Financial statements (last 3 years, by month, with proposed add-backs to EBITDA)

Revenue and EBITDA² (or SDE³ for smaller agencies) set the foundation of the valuation for any home care agency. We could (and likely will) write an entire article on how we calculate EBITDA. The most important thing for owners to know is that our goal is to establish the true normalized earnings of the business. As such, we adjust the figure to account for owner-specific or one-time expenses that would not be incurred if we owned the business.

For example, if the owner pays themselves $350,000 per year but a replacement manager would cost $150,000, we will add back the $200,000 difference when calculating EBITDA. Other typical add-backs include personal vehicle expenses, one-time legal fees, or family members on payroll who won’t stay post-close. Identifying these together is a normal and expected part of the process.

Note that we ask for the last three years because we want to see how revenue and profit have grown (or declined) over time. We also ask for monthly figures to see if there is any seasonality or significant month-to-month swings which impact the predictability of the business.

²EBITDA defined: Earnings Before Interest, Taxes, Depreciation, and Amortization. The standard profitability metric used to value larger home care businesses.

³SDE defined: Seller’s Discretionary Earnings. Similar to EBITDA but adds back the owner’s full compensation. Typically used for smaller, owner-operated agencies.

Gross Profit Summary Reports (last 24 months, by month)

Financial statements show the overall picture. Gross profit reports from your billing platform (typically found in Agency Management Systems like WellSky or AxisCare) let us go deeper into client economics: revenue and gross profit per client, client concentration, average client tenure, and retention trends. A business where a handful of clients account for most of the revenue has a different risk profile from one with a broad, stable client base.

One important note: we always ask for this data to be blinded (i.e., not attached to client names) as we're only interested in the financial, not personal information.

Top 20 referral partners (category, new client starts, relationship owner)

Referrals are often the primary source of new business in home care. We ask for data to help us evaluate the concentration of referral sources (how many leads and client starts are you getting from each referral source) and understand who internally has the best relationship with each referral source. This helps us understand how dependent the agency is on the owner or a key business development employee.

We count all referral sources, not just traditional healthcare referrers. Word of mouth, Google, Yelp, caregiver referrals, and client referrals all tell us something useful. We especially appreciate it when agencies can break "online" into more specific categories, since it helps us understand what is actually driving new client growth and how repeatable it is. A diversified and well-understood referral base is one of the strongest indicators of a healthy home care agency.

Current accounts receivable (AR) aging report

A clean AR report with balances in the 0-to-60-day range signals that billing is well-managed. A report heavy with 90-plus day balances raises questions about collections or billing issues worth understanding before we make an offer.

One clarification worth making: we do not acquire accounts receivable as part of the purchase. AR is typically an excluded asset, meaning it stays with the seller. That said, understanding your current AR helps us anticipate what receivables may look like in the weeks after close, which matters for transition planning.

Bill rates, pay rates, and billing policies

Margins in home care come down to the spread between what you bill and what you pay, and how efficiently you manage scheduling and overtime. This information lets us understand how you are positioned in your market and what your target gross profit margin is.

We also cross-reference this against the gross profit summary reports to assess whether your current client census aligns with the bill and pay rates you describe. Significant gaps between the two can surface pricing inconsistencies worth understanding before close.

Admin employee details (salary, hire date, responsibilities)

A tenured admin team can be one of the most valuable assets for a home care agency. Our desire is to retain and build upon the existing team, so we want to know who does what, how long they have been there, and what their comprehensive compensation is (e.g., salary, bonus, benefits).

We have also seen situations where certain key employees are paid below market rates. If we identify that, we may need to increase their compensation after closing. Understanding this upfront helps us factor it into normalized earnings and, therefore, into our offer.

Internal KPI dashboards or tracking reports

If you track active client counts, weekly billed hours, caregiver turnover, or client satisfaction scores, we want to see them. These tell a story that financial statements alone cannot.

Beyond the numbers themselves, these reports give us a sense of how data-driven the culture is. That matters for integration. The more an agency already manages by metrics, the less change management tends to be required when we introduce the tools and processes we use across our network.

What Happens After Review

Once we have this information, we run it through a structured scorecard. We are not grading the agency as good or bad. We are assessing fit: how does this business align with the markets we operate in, where are the key risk areas, and how does it perform across revenue growth, gross margin, and net profit?

That scorecard drives our LOI. Specifically, it helps inform:

1.     The total purchase price.

2.     How much we are willing to pay at close versus over time. Our preference is to put as much at close as possible, because that is usually better for sellers and aligns with their goals.

3.     What we expect from the seller post-close. At a minimum, we ask for a 6-to-12-week transition period. In cases where the seller is central to key relationships or operations, we may structure a longer arrangement, provided that fits the seller’s goals.

4.     The length of the exclusivity period and the specific focus areas for confirmatory diligence.

It's common for an owner to send us a big data file after our request followed by a 30-to-60-minute call to ensure that we understand the data and answer any questions we have. While it's tempting for owners to want to embellish or withhold data to paint a rosy picture, we believe that the goal on both sides should be to arrive at an LOI with enough conviction that the deal closes on the terms agreed upon.

A Good Deal Works for Everyone (Win-Win-Win)

Our goal is for each acquisition that we complete should create value for all constituents: the selling owner, the admin employees, the caregivers, the clients, and the buyer (us). For the seller, that means a fair price and confidence that their legacy is protected. For the caregivers, clients, and employees, it means continuity and stability. For us, it means a deal that works financially and operationally.

We're fortunate that across all three acquisitions we've completed, the previous owners have become genuine Pando advocates. We stay in close contact, and they've each gone out of their way to refer others to us. There's no greater compliment we could receive and no better proof that a deal was structured, completed, and integrated the right way.

If you’re curious what your agency might be worth, or want to understand the process before committing to anything, we’re always happy to have a conversation.