September 24, 2025
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Mid-Market Investor (Buy-Side)
Fractional CFO Services
Turning Financial Blind Spots Into Strategic Leverage
About Case Study
Industry Context
Home healthcare remains an active area for M&A, particularly after 2023, due to demographic shifts and favorable policy trends. However, Medicaid-heavy agencies present unique risks: fragmented billing cycles, compressed margins, and increased compliance scrutiny. For investors, precision is critical to avoid inheriting operational liabilities that diminish long-term value.
Client Challenge
The investor sought to acquire a licensed agency with a solid Medicaid and VA services foundation. Initial reports indicated modest net losses but acceptable cash collections and positive EBITDA after owner adjustments. Before proceeding to term sheets, the client requested a comprehensive quality-of-earnings (QoE) review and an assessment of operational cash flow health. 1
Our Approach
Egort & Partners applied a tailored five-phase diligence framework, emphasizing normalized earnings, sustainable cash flow, and billing controls.
Phase 1: Planning & Preliminary Screening
● Flagged discrepancies between accounts receivable (AR) growth and reported revenue
● Identified a dual-owner compensation structure requiring normalization
Phase 2: Financial Health Review
● Normalized EBITDA to a range of $65K–$90K, compared to a reported net loss of ~$10K
● Confirmed 73% Medicaid revenue share and modeled risk from delayed billing
● Found negative cash from operations of ~$194K, driven by spikes in unbilled AR
Phase 3: Operational & Compliance Checks
● Owner performed both CFO and administrative roles—creating $100K+ in replacement cost risk
● Staff recruitment costs were high (~$91K), with no tracked return on investment
● Aging Medicare AR lacked formal tracking or resolution protocols
Phase 4: Strategic Impact Modeling
● Applied adjusted EBITDA against a 3×–6× multiple range to assess valuation implications
● Modeled cash shortfall scenarios and tested liquidity runway
Phase 5: Deal Structuring Guidance
● Recommended including a post-close hiring buffer in working capital negotiations
● Advised retention of a billing consultant for deeper insight into AR and revenue reporting practices
Key Insights
Critical Findings
Unbilled and Aged Accounts Receivable
Over $137K in unbilled Medicare claims and $91K in aged AR distorted cash performance. Working capital was overstated; revenue quality required downward adjustment.
Cash Flow Misalignment
While EBITDA appeared positive post-normalization, cash burn of nearly $200K signaled operating inefficiency. Revenue was recognized without matching collection assurance.
Owner Dependency Risk
The seller functioned as both Administrator and CFO. Estimated annual replacement costs between $120K–$150K,material to margin and EBITDA multiple calibration.
Overstated EBITDA
Owner compensation, legal and non-operational costs were embedded in OPEX. Once isolated, reported EBITDA dropped by ~20%—impacting valuation benchmarks..
Liquidity Risk
Cash declined over 50% year-over-year, closing at $179K. Outstanding payroll and liabilities placed the business at risk of breaching solvency under continued AR pressure.
Results
Outcomes & Strategic Value
Deliverable Quality
The diligence process preserved pricing discipline and prevented a premature close. More importantly, it gave the buyer clarity and negotiation leverage—turning hidden risks into strategic tools.
Business Impact
Egort & Partners helped the client:
● Re-anchor valuation based on operational and talent risks
● Structure post-close integration plans addressing HR and billing continuity
Lessons Learned & Best Practices
Best Practices in Lower Middle Market Healthcare Diligence
● Normalize with Intent: Strip out owner perks, replace real roles, and model third-party costs
● Follow the Cash: Reconcile billing logs with AR aging and verify collectability
● Scrutinize Revenue Mix: Medicaid and unbilled AR are not created equal
● Don’t Underprice Talent Risk: Founder replacement isn’t plug-and-play
● Run Liquidity Scenarios: Positive EBITDA doesn’t guarantee solvency—especially under billing delays
Turning Financial Blindspot into Strategic Leverage Glossary
1. Buy-side due diligence: A buyer’s financial deep-dive before acquiring a company.
2. Cash flow strain: Trouble covering costs despite reported profits.
3. Owner dependency: The business can’t run smoothly without the current owner.
4. Earnings overstatement: Profits look better than they actually are.
5. Liquidity trap: Risk of running out of cash and not meeting obligations.
6. Medicaid-heavy: Business relies heavily on Medicaid, which often pays slowly.
7. EBITDA: Profit before interest, taxes, depreciation, and amortization.
8. Owner adjustments: Removing personal or unusual expenses to show real profits.
9. QoE (Quality of Earnings): Audit showing how accurate and sustainable profits really are.
10. Operational cash flow: Cash generated from regular business activities.
11. Accounts receivable (AR): What customers owe the business.
12. Normalized EBITDA: EBITDA adjusted to reflect ongoing business performance.
13. Unbilled AR: Work done but not yet billed to clients.
14. Negative cash from operations: Losing cash from everyday business, despite reported profit.
15. CFO: Chief Financial Officer—the top financial leader.
16. Replacement cost: Cost to hire someone to take over the owner’s roles.
17. Adjusted EBITDA: A cleaned-up, more accurate profit figure.
18. Multiple range (3×–6×): A standard EBITDA multiplier used to estimate company value.
19. Liquidity runway: How long cash will last if spending continues at the current rate.
20. Working capital: Available cash to run the business daily.
21. Billing consultant: Specialist who helps untangle and optimize billing issues.
22. Aged AR: Payments that are significantly overdue.
23. Revenue recognition: When sales are officially counted in the books.
24. OPEX: Regular operating expenses like rent, salaries, etc.
25. Valuation benchmarks: Standard metrics used to determine a company’s worth.
26. Solvency: The ability to pay long-term debts.
27. Pricing discipline:Staying firm on price, even when pressured
