Guest post by Chris Williams, CEO of System Six.
The short answer: Buyers, and the lenders and quality of earnings (QoE) analysts working for them, don’t spend much time on the P&L itself that a seller hands over – they dig deeper. They test five things behind it: whether revenue ties to hours actually delivered and cash actually collected, whether the caregiver payroll under that revenue is fully loaded and legally compliant, how concentrated the client and referral base is, how much working capital the agency quietly needs, and which of the seller’s add-backs survive. Nearly every finding in a home care QoE lands in one of those five.
I’ve been the buyer three times now: System Six through a self-funded search in 2021, with an SBA loan and a personal guarantee, and two add-on acquisitions since. I remember exactly how it feels to stare at a seller’s P&L and wonder what it isn’t telling you. Today my team runs buy-side quality of earnings work for searchers, and home care, home health, and hospice agencies show up in that work more and more every year.
This point about technology due diligence is one I’d underline twice. The seller’s version of the business and the version you inherit are rarely the same. The books are where that gap usually shows up first, and in home care agency due diligence the gap has a particular shape. Here’s what we look for:
Why does a home care P&L flatter the seller?
Most agencies under $5 million in revenue keep cash-basis books. Revenue shows up when the payer pays, not when the caregiver delivered the visit. Payroll shows up when it runs. So the P&L is a picture of when money moved, not of what the business earned. In a business where private-pay clients autopay weekly, Medicaid managed care plans pay in 30 to 60 days, and long-term care insurers pay when they get around to it, the difference can be large in either direction.
That’s the first job of a buy-side QoE: rebuild the last two or three years on an accrual basis, so revenue sits next to the payroll that produced it. Sometimes the seller’s number goes up. More often it comes down, and the seller is surprised too, because nobody ever showed them the accrual version.
Does the revenue tie to hours and to cash?
Home care revenue is hours times a rate. So we start with hours. Scheduled hours in the platform (AxisCare, WellSky, whatever they run), clock-in records, billed hours on the invoices, and paid hours in payroll should all tell roughly the same story. When they don’t, something is leaking. Visits delivered and never billed. Visits billed and denied because the EVV record didn’t match. Overtime paid for hours that were never billable.
Then we trace it to the bank. Proof of cash is the single most important test in any QoE, and in home care it’s the one that catches the most. Take the deposits by month and by payer and reconcile them to the revenue the seller reported. If $2.8 million of reported revenue turned into $2.5 million of deposits, you need to know where the other $300,000 went, and whether it’s ever coming.
Payer mix matters too. Private pay, Medicaid waiver programs, VA community care, long-term care insurance, and Medicare home health each collect differently, deny differently, and carry different clawback risk. An agency that’s 80% Medicaid is a different asset from one that’s 80% private pay, even at identical revenue.
Is the caregiver payroll fully loaded?
Caregiver pay is the biggest cost in the business, usually well over half of revenue, and it’s the line where a P&L is most likely to be quietly wrong.
Start with the spread. Say an agency bills $36 an hour and pays $21. That looks like $15 an hour of gross margin. Now subtract the employer’s payroll taxes, workers’ comp (never cheap for caregivers), the overtime paid to the caregiver who covered 48 hours because nobody else would, travel time between clients, and the cost of recruiting and onboarding the next caregiver, because you’ll need one. The 2026 Activated Insights Benchmarking Report put caregiver turnover at roughly 75%, barely better than the year before. By the time everything is loaded, that $15 is closer to $10, and the whole valuation rests on which number you believed.
Then check compliance. Federal overtime rules for home care workers have shifted more than once in the past decade, and California layers its own on top. An agency paying caregivers as 1099 contractors, or straight time past 40 hours, is carrying a liability that transfers to you at close whether or not it’s on the balance sheet.
One more thing. Look for the owner on the schedule. In a lot of small agencies the owner is the on-call manager on nights and weekends, the backup caregiver when someone no-shows, and the scheduler, and none of that is in the payroll number. You’ll have to pay somebody to do it. That’s a cost, not an add-back.
How concentrated is the census?
Revenue rests on the census, the roster of active clients, and a home care census erodes on its own. Clients move to assisted living. Clients pass away. A 24-hour client who’s 15% of revenue can be gone next month through no fault of anyone’s. So we look at the client list by hours and revenue, how long the top ten have been on service, and how many new clients started each month for the last two years. An agency that replaces a third of its census every year has to keep a marketing engine running just to stay flat, and that engine costs money the seller may have stopped spending once they decided to sell.
Referral sources concentrate the same way. If one hospital discharge planner or one placement agency sends half the new clients, ask what happens when they retire, or when the relationship walks out the door with the seller.
How much working capital does the agency quietly need?
Here’s the part that surprises first-time buyers. Payroll goes out every Friday. Some payers take 45 days. An agency billing $3 million a year that collects in 45 days on average has roughly $370,000 sitting in receivables at any moment, and someone has to fund it. On a cash-basis P&L, nobody sees this. In an asset purchase where the seller keeps the receivables, that someone is you. Picture closing on a Friday. Your first payroll runs the next Friday. Your first Medicaid check lands six weeks later. Until then, payroll comes out of the same cash that’s servicing the loan.
Look on the other side, too. Client deposits and prepaid hours are liabilities. If the seller collected two weeks of deposits from every private-pay client and spent the money, you’re inheriting an obligation to deliver care you haven’t been paid for. A working capital peg in the purchase agreement handles both, and you can only set one if you’ve done this work.
Which add-backs survive?
Sellers add back what they can. The ones that hold up have a document behind them: owner compensation normalized to what you’d pay a replacement administrator, personal expenses that really are personal, one-time costs that really happened once. The ones that fail are recurring costs wearing a one-time costume: the marketing spend cut in the year before the sale, the family member on payroll at half rate doing a real job, the “one-time” caregiver bonus that’s been paid every December for five years. I’ve written about this in more detail in our piece on buy-side quality of earnings; the math is unforgiving. At the four to seven times these agencies can trade at, a $50,000 add-back that doesn’t survive is $200,000 to $350,000 of purchase price.
How do you turn findings into a number?
Brendan sorts technology findings into three buckets. Financial findings sort the same way. Some change the price: earnings that weren’t there. Some change the structure: a working capital peg, a holdback against a payroll audit or a Medicaid recoupment, a larger seller note. And some just change your first-year plan: the recruiter you need to hire, the receivables you need to fund. Put a range on each, argue about them before you sign, and you’ll close on the business you actually bought.
The takeaway
A seller’s P&L is the opening bid in a conversation about what the business is worth. A quality of earnings report is how you get to the number behind it. It won’t catch everything, and you shouldn’t rely on it to fully protect you, but it finds most of what sinks a deal. Run it after the LOI, alongside the technology review Brendan describes, and inside the same diligence window. The two reviews find different things, but they answer the same question: what is this business going to cost me once I own it? The cheapest time to find out is before you close.
If you’re under LOI on a home care, home health, or hospice agency, this is the work System Six does. My team runs buy-side quality of earnings for searchers, from a QoE Lite on deals under $5 million to a full-scope review, and every engagement is led by a partner who has sat in the buyer’s seat, not handed to an analyst pool. Send us the CIM and the seller’s books, and we’ll tell you what scope you need and what we’d test first.
Talk to a QoE partner at System Six before you set the price.
What if you’re the owner planning to sell?
If you own an agency and expect to sell in the next few years, this is the list a buyer will run on you. Accrual books, a payroll register that ties to hours, and an add-back schedule with documents behind it are cheaper to fix now than to explain later. A year or two of lead time is usually enough, and our piece on cleaning up your books before a sale covers where to start. If you would rather not do it alone, my team does this cleanup for owners getting ready to sell.
Frequently asked questions
Do I need a quality of earnings report on a small home care deal?
If you’re taking on SBA debt with a personal guarantee, yes. A QoE Lite on a deal under $5 million typically runs $10,000 to $20,000 and is usually done inside 10 business days once the data is in. A single failed add-back usually pays for it several times over.
The seller’s books are cash basis. Is that a red flag?
No, it’s normal. What matters is whether you or your QoE provider rebuilds them on an accrual basis before you set a price. The rebuild is the diligence.
What should I ask the seller for first?
Three things: a client list with hours and revenue by month for the last 24 months, a payroll register for the same period, and monthly bank statements. Hours, pay, and cash. Everything else comes out of those.
About the author
Chris Williams is the CEO of System Six, an outsourced accounting, payroll, and CFO advisory firm serving 300+ businesses. He acquired System Six through a self-funded search in 2021, has since completed two add-on acquisitions, and works with searchers and acquisition entrepreneurs on financial diligence before close and on the books after it.
