Evaluating Residential Care Homes To Buy

A business category currently generating a great deal of buyer interest involves the operation of facilities catering to an aging American population.

Described in various ways, as licensed care homes, assisted living properties and residential care facilities, these enterprises can be very profitable and offer substantial potential for growth as the market for their services expands.

According to current industry estimates, nearly eight million people require living circumstances which include some degree of assistance. The figure is expected to approach ten million individuals by 2010, and continue to grow in the years following. This is an appealing prospect for entrepreneurs seeking promising business opportunities.

CHARACTERISTICS OF BUSINESSES

Those investigating the industry should be aware there are several business models for companies that deliver services in this area. They include, at one end of the spectrum, the adult day care organizations which do not provide living facilities, and at the other extreme, nursing home operations which employ medical professionals on site, to aid clients living on premises. In between are a number of facilities with limited care for seniors who are full-
time residents, and are able to handle most of their needs, but rely on the staff to handle such tasks as preparing meals and organizing activities. These limited-care operations are of particular interest to investors.

Licensed and highly regulated by the states in which they do business, residential care facilities range in size from one small property with three or four beds, up to a complex of several buildings and 100 or more clients.

Entrepreneurs reviewing businesses of this type for possible purchase will discover that most include the real estate, with pricing influenced by the location and condition of the property along with the amenities offered. A property for sale in an easily accessible locale, that shows well and includes a game room, café and well-equipped exercise facility is more valuable than one which generates the same income but lacks these appealing features. But property is not always available; some licensed care homes are marketed to business buyers with long-term leases, perhaps with the right of first refusal to purchase the real estate if offered in the future.

WHAT TO KNOW

Due diligence should begin by determining the licensing status of a prospective purchase and its record with authorities. Companies that have incurred violations of health, facility maintenance, or record-keeping rules often continue to operate, but may be subject to penalties by government agencies. A prospective new owner should be aware of any such problems because if they are not resolved, he or she may, after purchase, become responsible to pay fines or incur expensive corrections to bring the facility and its operations into  compliance.

Valuation of companies in this industry is based primarily on earnings. These average from 35% to 50% of gross revenues, depending on operating efficiencies and level of occupancy. A facility with clients occupying 85% or more of its capacity will show more earnings as a percentage of gross than a similar-sized operation with only, for example, six or seven of ten beds in use. A company being sold with its real estate commands a higher price than a similarly performing business marketed with only the right to lease property owned separately. However, cash flow generated is usually the largest single factor considered in the determination of business valuation. Appraisers consider properties used for residential care companies similar to hotels and other single-use real estate in the hospitality industry. Rather than the building and its improvements being priced by comparison with residential properties in the area, the real estate used for an assisted living business is valued as a commercial 
property--it is worth a multiple of the earnings generated by the business occupying it.

Industry rules of thumb calculate the value of a residential care business using a multiple of six or seven times annual earnings before deducting interest, taxes and reserves for amortization and depreciation. Another approach is to peg the value in the range of 70% to 80% of the annual revenues averaged over the prior three years.

Interested buyers should become informed about trends in this industry and should recognize that values are expected to grow as demand for this service continues to increase in the future.

About The Author - Peter Siegel is the founder and President of BizBen.com - Businesses For Sale In California. A nationally recognized author (3 books and a syndicated small business blog) and expert consultant. If you are selling a business and need professional assistance utilizing high performance advertising, marketing, and highly effective strategies, or individual customization with your BizBen Power Search options in buying a California business, you can reach him at 866-270-6278.

Posted on June 1, 2010  |   Email This Blog Post   |   Print This Blog Post   |  All Contributions From Peter Siegel, MBA