How to Value a Care Home Business
Thinking of buying or selling a care home? Here are some factors to consider when putting a price on a business in the care sector.
The care industry is in a near-constant state of flux. Like the whole healthcare industry, the care sector was hit hard by the COVID-19 pandemic.
As a result of this and general economic shifts, many care home owners are making significant changes to their portfolios - be that the disposal or acquisition of facilities.
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Whether you are buying or selling a care home business, then it’s important for you to understand the valuation process. Typically, a valuation will be carried out by the buyer’s lender to ensure that the care home finance provided accurately reflects the value of the business. The valuation will impact the entire acquisition process, including the finance amount, terms and any conditions set by either party. For that reason, it’s vital that you get it right.
While the full extent of the pandemic’s impact on the industry remains unknown, it’s certain that there will always be a need for high-quality care facilities in the UK, with seaside spots Bournemouth, Blackpool and Southend boasting the country’s oldest populations. In fact, the location of a care home is one of the contributing factors to its value, along with the type of property ownership, any equipment, legal history and CQC scores and many other factors.
Any valuation should be carried out by an experienced professional, particularly if it impacts the sale of the business. However, both the buyer and the seller should have a strong understanding of the factors considered and how the valuation is typically generated. So, keep reading to find out more about the care home valuation process and what to expect.
One of the most important factors contributing to the value of a care home business is the type of property and its legal standing. We’ll talk a little more about the location of the premises later, but in this section, we’re focusing on the condition and ownership status of the care home - is the property still fit-for-purpose or does it require significant renovations? And does the current owner have a freehold or leasehold agreement? Is the space shared with any other businesses? All of these questions are relevant when valuing a care home.
A freehold agreement typically means you own both the land and the property. A freehold property is likely to only be occupied by one business, and the owner has greater power over the property than in a leasehold arrangement. For that reason, a care home with a freehold agreement will likely be worth significantly more than a leasehold one of the same capacity.
As we alluded to above a leasehold agreement gives the owner less control over the property. It typically means paying a “lease” for a certain period of time to the freehold owner. You may share the space with other businesses or occupy the entire building, but even if it is the latter then the leasehold arrangement (such as cost, duration, etc.) will impact the value of your business.
If your care home is in operation, then it will have to be maintained to a certain level to meet CQC guidelines. However, there is still a huge variation in standards between facilities, and the condition of your property will impact the valuation. For example, if you have regularly invested in maintenance then the impact will be noticeable from the outset, while any periods of neglect to both the interior and exterior of the building will be considered by the lender and any potential buyer.
As we mentioned in the introduction, the location of your care home will make a significant impact on the value of the business. If your care home is located in an area with an ageing population or close to a growing residential community, then this will make your care home a desirable place for residents and their families.
In addition, if your care home is situated in an area with high crime rate, for example, this will affect the resale value. Remember, not all buyers will be intending to keep the business as a care home, so the location and condition of the property will heavily impact the value - especially if the facility is freehold and has the potential to be a hotel or another commercial venue.
And finally, the site of your care home will be taken into consideration by the valuer. For example, does the property have its own car park or is it shared with other businesses in the building or area? And how many spaces are available for staff and visitors? Since a care home welcomes a lot of visitors and professionals to the premises every day, sufficient parking is vital to the day to day operation of the facility.
When it comes to selling or buying a care home, the business operations will impact the valuation. Operations is a general term because it covers everything about the commercial side of the business, such as financial accounts, day-to-day operations, staff and bed capacity.
A potential buyer will likely ask for a copy of the care home’s financial statements for the last few years as it will give them insight into the business’ strengths and weaknesses. You may be selling because the business is no longer making a profit, and you won’t be able to hide any such struggles from the buyer and their valuation team.
The current staff situation will also be of interest to the buyer. Depending on the final sales agreement between both parties, the care home staff will be subject to TUPE Transfer of Undertakings (Protection of Employment) and will therefore be a consideration for any buyer, particularly if you have a strong, dedicated management team with a significant track record at your care home.
Capacity and occupancy
Two of the biggest factors to consider when valuing a care home is the capacity and current occupancy. Obviously, the more beds the care home has, the higher-earning potential for the owner. However, larger care homes are more expensive to run and sometimes a smaller but more prestigious facility presents higher profit margins.
For this reason, the surveyor will look closely at the care home’s past performance, including occupancy vs capacity and the existence of any poor reviews or even legal issues. As you will know, the profit margins for a care home are narrow. With property costs, ongoing equipment purchase and maintenance and staff salaries, many care home owners find it difficult to turn a profit. As a result, high occupancy rates are required to ensure ongoing profitability. If the care home in question has high occupancy rates with a waiting list for new residents then this will reflect on the valuation. Equally, a care home that has struggled to maintain occupancy over a period of time may be worth less, even if the capacity is high.
Remember, these are just a few of the primary factors that will be taken into account when putting a value on a care home. If you are the seller, then it’s very important you appoint a selling agent to help oversee the whole process. And if you are the buyer, then work with a broker who will not only help to match you with the right lender and finance options for you, but they will also support the application process and identify any significant risks or concerns that may impact the valuation from the outset.
Reason for sale
Of course, when selling any business you expect the potential buyer to be curious about why you are choosing this route. But did you know that the reason for sale can even impact the value of the care home? For example, if the care home is no longer profitable, and has struggled with low occupancy for a long period of time, then this will highlight the need for ongoing investment and special attention from any future owner. There is a big difference between buying a business that is already turning a profit versus one that requires time, attention and investment.
You may also be selling for personal reasons, such as retirement or choosing to move into another sector. This is still relevant to the buyer, even if it doesn’t impact the valuation. Remember, it’s vital to be honest about the reason for sale from the outset because it will always become clear during the sales process.
Any potential buyer, particularly one relying on a finance application approval, will look very closely at the business as a whole and any issues surrounding profitability, reputation and even litigation will soon be revealed.
From the point of view of the buyer, the reason for sale will always be of interest, but that’s not to say that an unprofitable care home will struggle to sell. For example, one Rangewell client acquired an underperforming care home with the exact intention of transforming the business. Due to the facility’s past, the buyer was able to get a good deal on the property and secure finance for the initial purchase. Then, after a period of investment and the improvement of both CQC scores and resident satisfaction, the owner transferred onto another, more favourable finance product to reflect the better circumstances that the business was now in.
Every business is unique, making the valuation process a difficult one. So, whether you are the buyer or the seller, cooperation and communication is key to any successful care home sale.
Assets and equipment
Regardless of the buyer’s intentions for the care home, the assets and equipment will affect the final valuation. Not least because equipment is required for the running of a CQC approved care home, but also because the assets themselves have a value and could be sold off or may need to be replaced.
When carrying out the valuation, the buyer’s team will require a full inventory of the equipment in the care home and its value - although they may also take this information and carry out an independent valuation of the equipment to ensure the figures are accurate.
Equipment isn’t just beds and other medical equipment, while that is often of significant value for a care home any size. It also includes computers, tablets, company smartphones and any other hardware that your staff require to do their jobs.
Along with equipment, the buyer will want to know about the assets - even down to the number of office chairs and sofas in the communal areas, for example. Everything has a value and this needs to be accurately reflected in the valuation.
While harder to put a number on than the assets and equipment, the staff is also a consideration for any buyer instructing a valuation.
If the care home is still in operation, then there will be a team at the helm. This typically includes management, nurses, care assistants and admin support staff who oversee the day-to-day operations of the business. If the team has any specialist care providers, then this may increase the value of the care home. Equally, high staff turnover and a poor reputation could sway the valuation the other way.
You may be wondering how people can impact the value of a business as they are not fixed to the business and could leave at any time? Of course, this is definitely a possibility and part of the reason why staff is a consideration but not typically a major factor in valuation.
In addition, any buyer will need to adhere to TUPE (The Transfer Of Undertakings Regulations). TUPE is in place to ensure the protection of employees, so the buyer and seller will need to discuss the existence of contracts, current working hours, salaries and any other relevant arrangements as part of the negotiation phases.
The buyer will need to maintain certain obligations under TUPE so this is why staff is considered in the valuation of an operation care home.
Selling a care home? Appoint a selling agent with Rangewell
Now you know more about the care home valuation process, it’s time to bring in the experts. If you are selling a care home, then you will benefit greatly from having a selling agent on your team. They are the port-of-call for the entire sales journey, and have comprehensive knowledge of the journey you are embarking on, so they can answer any questions as you go.
Furthermore, your selling agent’s vast experience puts them in good stead to identify any risks and concerns that a buyer may have, and will help you to assemble all the information required, navigate the due diligence process and formalise the sales agreements.
Ready to meet your sales agent? Get in touch with Rangewell today and we will match you with a skilled selling agent with experience in your industry.
Buying a care home? Secure the finance you need with Rangewell
Not only can we help sellers to meet their selling agents, we are also a specialist finance broker with vast experience in the care home and general healthcare industries. From helping care home providers to refinance their current operations through to supporting a budding entrepreneur to buy their first care home, we’ve done it all. Get started with your acquisition process and let’s find the right finance to meet your needs.