The market for investment and acquisition in the UK healthcare sector is highly active, fuelled by interest from overseas investors, corporate consolidators and private equity backed management teams.
Even small, independent care homes and nursing homes are attracting high levels of interest when they come to market.
However, when it comes to valuing a care home or nursing home business, there’s more to consider than market trends. A realistic valuation – one which attracts credible buyers and results in a quick and successful sale – depends on a whole mix of other factors unique to the business in question.
10 Factors Affecting The Valuation Of A Care Home or Nursing Home
The success of a care home or nursing home business is inextricably linked to the premises from which it operates. The nature and condition of those premises, therefore, has a significant effect on the valuation of the business as a whole.
Factors to consider include:
1) Freehold or Leasehold?
Freehold property gives business owners exclusive occupation of the premises, offering long-term security together with the potential to alter and/or extend the premises to accommodate the growing needs of the business or satisfy changes in legislation. As such, freehold care home businesses command a significantly higher price than those which operate from leasehold premises.
Leasehold properties limit tenants’ occupation and use of the premises for a specific period of time. The value attributed to a leasehold property will, therefore, depend very much on the terms of the lease, including length of the remaining term, rent provisions and repair and maintenance obligations.
As a general rule, modern, purpose-built care homes and nursing homes command a higher value than those operating from older adapted and/or converted premises. Older, poorer quality premises require more capital expenditure and investment. There may also be environmental or planning issues to manage.
2) Fixtures, fittings, furnishings and equipment
A care home or nursing home’s inventory of assets will be extensive. From lifts and specially equipped ensuite bathrooms to alarm systems and mobility equipment, identifying what’s included in the sale, and establishing a current value according to its condition, is an important part of assessing the overall valuation of the business.
3) Registered bed capacity
Ultimately, the operating capacity of a care home or nursing home business is dictated by the physical constraints of the premises and whether or not there is scope to extend.
While the number of registered beds should not be used as the sole guide for valuation, it serves as a useful benchmark when comparing valuations for similar properties in the same area or when comparing the cost of buying an existing care business versus the cost of building a turn-key solution from scratch.
Location is key for businesses in the care sector. Whether or not you are based in an affluent area will impact directly on your ability to achieve a profit.
Income received for local authority funded residents often does little more than cover expenses. To run a truly profitable care business requires a high proportion of privately funded residents, or local authority funded residents who pay a top-up fee.
Accessibility, in terms of parking and public transport, is also an important factor and will impact on your ability to attract both residents and staff
In addition to assessing the business premises, a care home or nursing home valuation will take into account the actual and potential trading performance of the business.
Factors to consider include:
5) Reason for sale
Why is the owner selling? A forced or distressed sale – sadly, not uncommon in the care sector – will result in a discounted valuation. Likewise, a care home or nursing home that has closed down will typically achieve a valuation 2.5 to 4 times less per registered bed than a care home that is still trading.
6) Financial performance
Key to determining the value of a care business will be an assessment of its profitability.
With a growing elderly population and demand for care home beds often outstripping supply, it’s easy for investors to get caught up by the exciting prospect of potential future growth. But bear in mind that potential is just that. And operating a profitable care home business is not always easy, even when there is high demand for beds.
The formula normally used to value a care home business is a multiple of the weighted average of the business’s earnings before interest, tax, depreciation and amortisation (EBITDA). The multiplier used will depend on market forces at the time of sale. Currently (June 2018), that ranges from 5% to 8%, occasionally higher.
7) Occupancy rates
Large care homes offer greater capacity and also benefit from operational economies of scale. However, the physical operating capacity of a care home won’t always translate to consistent occupancy rates. A care home business that is poorly managed, marketed or operated – or which has location or access issues – may have low occupancy rates.
As mentioned above, you should also consider how many spaces are currently allocated to local authority funded residents. The funding provided for such residents is meagre and it requires careful management to make these places pay.
The reputation of the care home will also be a key factor when deciding on a valuation and forms part of the ‘goodwill’ of the business. The most recent Care Quality Commission inspection rating is obviously important but will form only part of the picture.
Brand identity, customer base, customer satisfaction and employee satisfaction all contribute to the reputation of the business and will be considered when assessing the value of the goodwill.
How many employees are there, what are their qualifications and what are their terms and conditions of employment? This will impact both on the number of residents the care home can accommodate and on the overheads of the business.
The care industry is facing a shortage of suitably qualified nurses and carers. However, a care business with a particularly high turnover of staff is likely to be hiding other issues.
How many other care homes or nursing homes are there within a 10 mile radius of the business? What is their reputation and what kind of set up and rates do they offer?
If there is direct competition from a successful rival, do the demographics of the business’s catchment area provide a sufficient pool of prospective customers to maintain a healthy income stream?
Will the seller agree to the inclusion of a non-compete clause in the sale contract?
Do You Need A Broker To Sell A Care Home Business?
It’s important that you obtain a valuation from someone with experience and understanding of the sector to avoid the risk of a costly miscalculation. A business broker who has specialist expertise in the care sector can do this for you. If you are a seller, s/he will also save you time and money by pre-qualifying prospective buyers to establish how serious their intentions are and whether they have proof of funding.
However, whilst all of the factors listed above are relevant to establishing a fair value for a care home or nursing home business, do remember the old adage that a business is only worth as much as a buyer is willing to pay – and a bank is willing to lend!
Bear in mind, also, that much of the detail required to establish whether the figures stack up won’t be uncovered until after an offer is made and the buyer, with a solicitors’ help, gets responses to pre-contract enquiries (a process known as ‘due diligence’). The outcome of due diligence – and the warranties and indemnities that the seller is prepared to give in response – may also affect the agreed final price.
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