A summary of the key drivers of value when selling care homes.
When considering a sale of your care homes, it’s vital to understand the key drivers of value in the market. In doing so, it will allow each of these drivers to be presented in the best possible light and any required actions to be taken in advance of commencing a sale process.
We have created a high-level guide to the valuation of care homes which can be downloaded here. This article aims to provide some further granularity to the drivers which will increase the Earnings Multiple applied to your business’ profits.
For any acquirer, a key identifier of quality will be CQC/Ofsted ratings. Whilst this is not rocket science, the importance of quality cannot be understated when valuing a care home.
Ratings of “Outstanding” are rare, highlighting a professional and well-run home, which is also likely to be reflected in the occupancy and financial performance. As a result, homes with outstanding ratings will drive premium Earnings Multiples and are likely to be attractive to a broad pool of potential acquirers.
At the other end of the spectrum, “Inadequate” ratings will seriously hamper the Earnings Multiple applied to homes. Such a rating will drive concerns about the willingness of Local Authorities provide future placements, or to attract private paying residents.
Given the material impact that regulatory ratings have on the value of a home, it is advisable to factor this into the timing of a sale process. For example, for a home which was previously rated as “Requires Improvement” but is due a further inspection in the near future, it may be worth delaying a sale process in order to try and upgrade the rating to “Good” from the new inspection. Conversely, if a home has recently had an upgrade in its rating, this is likely to be the optimum time to consider kicking-off a sale process.
It’s probably no surprise that homes with higher fee levels tend to attract greater Earnings Multiples. What is as important as the fee levels themselves, is the reason for achieving strong fees. These reasons tend to differ between elderly and specialist care.
In the elderly care market, higher fee levels are often associated with a service user group which consists of predominantly private pay occupants, with limited Local Authority funded placements.
Linked to this, the location of the homes and affluency of the local area will have an impact on the fee level – primarily because more affluent areas will tend to have a greater proportion of private paying occupants.
Specialist care/children’s services
Fee rates within the specialist care and children’s services market will often be driven by the complexity of care provided. As such, homes dealing with higher acuity service users will be able to command greater fee levels which will be beneficial to the valuation of the business.
Homes which are not tied to Local Authority frameworks and have control of their “off framework” fees, will generally have the ability to charge higher fees and this will again help to achieve greater Earnings Multiples.
It’s all very well having high fee levels, but if a care home has no residents it’s unlikely to achieve a strong valuation.
Occupancy is therefore another key factor in driving value. A care home which can consistently achieve high occupancy levels is another sign of a well-run and professional home and will clearly be beneficial to the financial performance.
Acquirers will look to analyse the historical trends in occupancy – it’s therefore important to be able to explain any fluctuations in occupancy over the last two to three years of trading. Consistency is key, with volatility in the occupancy levels likely to cause some concern for acquirers.
Staffing remains a hot topic in the care sector, with ongoing staffing shortages creating difficulties for operators across all segments. As such, staffing levels and costs are also directly relevant to the Earnings Multiple attributed to a particular home.
The labour/fee ratio (i.e. labour costs divided by total fee income) is a metric heavily used by acquirers to assess the adequacy (or over-supply) of staff in the home. If the labour/fee ratio is too high, it may suggest that the home is over-staffed or is not achieving fee levels which adequately compensate the business for the level of care being provided.
Agency costs are also a significant area of focus for acquirers, with high levels of agency staff suggesting that a home may be struggling to recruit and maintain a sufficient staffing pool to support the business.
It’s clear that property is a key factor in any care home sale. There are various strands to how property impacts on the value of the business and it’s therefore important to discuss each of these separately.
Firstly, a business which owns the freehold property within which the care home operates will achieve a higher Earnings Multiple. Homes with long leasehold agreements will still attract reasonable multiples, with shorter term leases driving discounted multiples due to the uncertainty over future use.
Next, it’s worth considering the impact that the type of property has on value. Generally, new build and purpose built properties will be more attractive to acquirers than retrofitted and traditional properties. This is largely due to the fact that these new facilities are custom built to meet the needs of a modern care home, whereas older properties are likely to have operational disadvantages and will require greater ongoing maintenance spend.
Thirdly, it’s important to note some of the common property pitfalls which are likely to impact on valuation. The basic requirements of any care home property are access and utilities. If there are any constraints in these areas (such as access issues or cumbersome rights of way), it is important to address and rectify these prior to commencing a sale process if at all possible. Issues of these nature can often be “dealbreakers” for acquirers and may result in negotiations ceasing. Another common issue is an adjustment to price for “catch up capex” – in other words where a property has been underinvested in recent years and the acquirer will need to undertake additional capital expenditure to bring it up to the required standard. As such, it is not wise to delay or defer required capital expenditure in the 12 months prior to selling – this is likely to come back to haunt you.
Finally, it’s important to note that when valuing a care home business, the property is not treated separately to the main valuation. For example, let’s look at a scenario where a care home business generates £500k of EBITDA, attracts an Earnings Multiple of 7x and holds freehold property with a value of £750k. In this case, the total business, inclusive of the freehold property, will be valued at £3.5m. Many vendors feel that logically the property value should be over and above the £3.5m, but this is not the case. Where the property is vital to the ongoing operation of the business, it is not treated separately – instead, the valuation is adjusted for the freehold ownership by applying a higher Earnings Multiple as noted above.
The scale of the business’ operations is the final element which will have a material impact on value. In simple terms, the bigger the business, the higher the Earnings Multiple which will be applied. This is applies to both the size of the homes themselves (i.e. the number of beds) and the number of homes operated by the business.
This is the case for a number of reasons, including the diversification of risk, cost synergies and negotiating power with Local Authorities and clients.
The care home market has a range of unique drivers which will impact on valuation. It is therefore vital to utilise the experience and expertise of an advisor who understands the market and can achieve the optimum outcome for you and your business.
We are experts in care home sales and can advise you on the best strategy and timing to maximise value. Please get in touch for an initial conversation.