- annual after-tax income of $40,000-$80,000
- or a net worth of $600,000 assuming the senior citizen only utilizes assisted living for less than 10 years.
Reshaping This Largely Traditional Business
Rule of ThumbRemember V=B/C from Episode 1?
- This rule of thumb is for a going concern, which is the entire business including real estate, operations, and goodwill.
- V = B/C
- NOI = net operating income. Cash flow from the business, before the mortgage, or cost of financing, and before taxes and non-cash expenses.
- Cap Rate = capitalization rate – the cost of operating and owning the business.
“Independent Living Facility 8-9% Assisted Living Facility – 9-10% Memory or Specialized/Nursing Facility – 10-12% – due to higher cost of operations equating to higher risk the cap rate is higher Continuing Care Retirement Community – 10-11%”Sometimes facilities are valued based on the number of licensed beds or square footage. However, valuations based on the above rule of thumb are more acceptable. Individual investors who may have certain investment KPIs in mind generally use the rules of thumbs based on beds or square footage. There are three things that current owners can work on to maximize the value of their current facilities –
- Local reputation – it is called a community for a reason. The collective efforts of staff, owners, residents, and family members make or break this business. Work with local community leaders to improve everyone’s experience. Pay attention to your online footprint. That is the first place any potential resident (or their family members) will find you.
- Quality of facilities and staff – the smallest things make the biggest difference. Customers are visual. Manicured lawns. Fresh interior and exterior paint. Polite staff. Clean facilities. Well-groomed staff with new pressed uniforms. Small additional expenses can help you charge a premium of up to 25%.
- Internal controls – keep your house in order. Regularly renegotiate with your suppliers and vendors. Document medical and transactional records electronically. Conduct regular staff training. Have a consistent community schedule of activities.