Letter of Intent Template for Acquiring a Home Health Agency

Parties and Transaction Overview

Identifies the buyer entity, seller entity, and the specific assets or equity interests being acquired. For home health, this section must clarify whether the transaction is structured as an asset purchase or stock purchase, since that choice directly affects how Medicare and Medicaid certification transfers and how the CHOW process is triggered.

💡 Sellers often prefer stock purchases to preserve certification continuity and avoid CHOW delays, but buyers typically prefer asset purchases to avoid inheriting unknown liabilities including prior billing errors, open RAC audits, or CMS overpayment demands. If the seller insists on a stock purchase, require full indemnification for all pre-closing compliance liabilities with a meaningful escrow holdback. Confirm CMS provider number status and whether the agency has undergone any prior ownership changes in the last 36 months, as recent CHOWs can complicate re-enrollment timelines.

Purchase Price and Valuation Basis

States the proposed total consideration, the valuation methodology used to arrive at that number, and how the price is allocated between tangible assets, intangible assets, and goodwill. For home health agencies, purchase price is typically expressed as a multiple of trailing twelve-month EBITDA or adjusted owner's discretionary earnings, with the multiple reflecting payor mix quality, CMS star ratings, and census stability.

💡 Home health agencies in the lower middle market typically trade at 3.5x–6x EBITDA depending on Medicare star ratings, payor mix diversification, and geographic demand. Agencies with 4–5 star CMS ratings, clean compliance histories, and private pay or managed care revenue above 20% of total revenue command multiples at the high end of the range. Build in explicit price adjustment triggers tied to patient census, payor mix, and compliance findings so you are not renegotiating after due diligence with no contractual basis. Sellers should push back on overly broad adjustment clauses by requiring that any downward adjustment be supported by specific documented findings above a materiality threshold.

Earnout Structure

Defines any contingent consideration payable to the seller after closing, tied to the business meeting specified performance thresholds during a defined post-closing period. Earnouts are common in home health acquisitions to bridge valuation gaps caused by census uncertainty, CHOW-related payor disruption, or disagreements over normalized EBITDA.

💡 Sellers should insist that earnout metrics be based on census and revenue figures that are objectively measurable from billing records and Medicare claims data, not on EBITDA metrics that buyers can influence through post-closing expense allocations. Buyers should ensure the earnout is tied to factors the seller can meaningfully influence during a post-closing transition period, such as referral source introductions and staff retention support. Both parties should define what constitutes a 'disruption event' outside the seller's control — such as a CMS reimbursement rate cut or a natural disaster — that would toll or adjust the earnout measurement period.

CHOW Contingency and CMS Re-Enrollment

Specifies that the closing of the transaction, and the transfer of Medicare and Medicaid billing privileges, is contingent upon successful completion of the CMS Change of Ownership process and state Medicaid re-enrollment. This is the most operationally critical clause in any home health LOI.

💡 This is the clause where most home health deals stall or fall apart. Buyers must understand that Medicare billing gaps can occur during CHOW processing and should negotiate a working capital bridge or interim management arrangement to cover operating cash flow during this period. Sellers should resist any clause that allows the buyer to walk away solely due to CHOW delays caused by the buyer's own failure to file timely or respond to MAC requests. Both parties should consult a healthcare regulatory attorney familiar with their state's Medicaid CHOW requirements, as Medicaid re-enrollment timelines vary significantly by state and can extend beyond the Medicare CHOW process.

Due Diligence Period and Access

Establishes the length of the due diligence period, the categories of information the buyer is entitled to review, and the conditions under which the seller provides access to records, staff, and facilities. Home health due diligence is more intensive than most lower middle market industries and should include billing compliance, clinical quality, and workforce credentialing reviews.

💡 Forty-five days is a realistic minimum for a thorough home health due diligence review, though buyers with limited healthcare compliance experience may need 60–75 days, especially if they are engaging outside billing auditors. Sellers should require a mutual confidentiality agreement to be signed before any clinical or patient records are shared, and should limit access to employee records until later in the due diligence process after the parties have established rapport and the deal appears likely to proceed. Buyers should not waive billing compliance review under any circumstances — undisclosed RAC audit activity, open CMS overpayment demands, or systematic billing errors can represent liabilities that exceed the purchase price.

Exclusivity

Grants the buyer an exclusive negotiating period during which the seller agrees not to solicit, entertain, or negotiate with other prospective acquirers. Given the length and complexity of home health due diligence and the CHOW process, exclusivity is especially important in these transactions.

💡 Sellers should resist open-ended exclusivity and insist on a defined expiration date with specific extension conditions. Buyers should tie the exclusivity period to their CHOW filing timeline and due diligence scope — if you need 45 days for due diligence and expect 30 days to negotiate the definitive agreement, a 75–90 day exclusivity period is reasonable. Sellers working with multiple interested buyers should be transparent about the process before signing an LOI to avoid being locked into exclusivity with a buyer who is unlikely to close.

Deposit and Break-Up Fee

Specifies any good faith deposit made by the buyer upon LOI execution and the conditions under which it is refundable or forfeited. In home health transactions, a deposit structure incentivizes both parties to move efficiently through the CHOW process.

💡 For home health acquisitions in the $1M–$5M revenue range, a deposit of $25,000–$75,000 is typical and signals serious buyer intent. Sellers should push for a larger deposit given the significant operational disruption caused by a failed CHOW process, including potential staff anxiety and referral source uncertainty. Buyers should negotiate a clear list of due diligence findings that constitute legitimate grounds for a full refund so there is no ambiguity about what 'material adverse findings' means — examples might include undisclosed CMS overpayment demands above a dollar threshold or discovery that key clinical staff have plans to leave.

Conditions to Closing

Lists the specific conditions that must be satisfied before the transaction closes, beyond CHOW approval. Home health acquisitions typically include conditions related to licensure, staff retention, patient census, and regulatory clearances that are unique to the industry.

💡 The patient census condition is one of the most negotiated clauses in home health LOIs. Sellers will argue that census fluctuations of 10–15% are normal and should not be a deal-stopper, while buyers are right to protect against a material decline that would reset the valuation basis. Define the census measurement date carefully and specify whether it is measured by active patients, billable visits per week, or monthly revenue run rate. The key staff retention condition is equally critical — if the Director of Nursing or lead therapist plans to leave at closing, the buyer is acquiring a shell, not a functioning clinical operation.

Representations and Warranties (Summary)

Identifies the high-level representations the seller is expected to make in the definitive agreement regarding the accuracy of financial statements, the status of CMS certifications, billing compliance history, and the absence of undisclosed liabilities. In the LOI, this section signals the scope of reps and warranties to be negotiated in the Purchase and Sale Agreement.

💡 Sellers should anticipate that buyers will require an indemnification escrow of 10–15% of the purchase price held for 12–24 months post-closing to backstop billing compliance representations. This is standard in Medicare-dependent businesses. Buyers should work with a healthcare M&A attorney to draft reps and warranties that specifically address PDGM billing accuracy, OASIS coding compliance, and episode management practices, since these are the most common sources of post-closing billing liability in home health transactions. Sellers who have completed a pre-closing billing compliance audit are in a much stronger position to resist broad indemnification demands.

Non-Compete and Non-Solicitation

Specifies the geographic scope, duration, and activities covered by the seller's post-closing non-compete and non-solicitation obligations. These provisions are particularly important in home health given that the seller's personal relationships with physicians, hospital discharge planners, and referral sources may constitute a significant portion of the business's value.

💡 Three years is the standard non-compete duration for home health acquisitions in the lower middle market, and courts in most jurisdictions have upheld reasonable geographic restrictions in healthcare business sales. Sellers who plan to retire should have little objection to these terms. Sellers who intend to remain active in the healthcare field — particularly if they are clinicians — should negotiate carve-outs for clinical practice activities that do not involve home health agency ownership or management. Buyers should ensure that the non-solicitation clause explicitly covers hospital discharge planners and ACO care coordinators, since these are the referral sources most likely to follow a departing seller.

Transition and Seller Cooperation

Outlines the seller's obligations to support a smooth operational and clinical transition following closing, including referral source introductions, staff orientation, and billing system handoff. This is especially important during the CHOW period when billing may be temporarily disrupted.

💡 Buyers should treat transition support as a deal-critical provision, not an afterthought. Home health agency value is concentrated in referral relationships and clinical staff confidence — both of which require active seller participation to preserve. Sellers who resist meaningful transition obligations should expect buyers to seek a lower purchase price or a larger earnout holdback to compensate for transition risk. If the seller is a clinician who intends to retire, consider structuring a paid consulting arrangement for 6–12 months that provides Buyer access to the seller's clinical network while compensating the seller fairly for their continued involvement.