With elderly people living longer because of medical advances and the trend towards healthier lifestyles, demand for care providers has been growing in recent years. However, the care home sector has not been immune from the credit crunch as funding has been difficult to obtain. In this climate though the shortage of quality homes has helped to keep prices relatively stable. Care homes are seen as a good investment as they offer a good maintainable income over time.
Who buys a care home and what are the skills necessary to do so?
Experts in the sector generally agree that management experience is a given for anyone considering buying or running a nursing home. A genuine desire to care for the elderly and to create a good working atmosphere that will be felt by residents is essential. It is important to realise that there is high level of administration and a need to keep on top of the regulations as a poor inspection can have a detrimental effect on the value of the home.
Rules and regulations
The National Care Standards Commission has regulated care homes since the Care Standards Act replaced the Registered Homes Act in April 2002.
As a result of the Act coming into force, a large number of care homes were deemed unsuitable. This prompted many under-qualified owners to sell up or close down their homes, leading to a shortage of beds for the UK's elderly residents.
Anyone who wishes to register themselves as a care manager must have at least two years' experience in senior care management, as well as a level-four NVQ in care and management.
The National Care Standards Commission interviews every individual who applies to register and also visits the premises for inspection. Once the home is up and running, unannounced inspections take place twice a year, at any time of the day or night.
Qualified care managers will be heavily involved in the day-to-day tasks involved in looking after clients. Individuals keen to focus on running the business and managing staff will need to hire a qualified care manager at an annual cost of between £20,000 and £30,000.
Care homes are covered by the same Health and Safety regulations as other businesses. They must also be registered with the Environmental Health department to comply with the Food Safety Act.
As a result of the Care Standards Act, there are strict rules on the minimum areas of living space that nursing homes must provide per resident. These rules extend to the number of assisted bathrooms available to clients, as well as ramps and shaft lifts to provide access to communal and private areas.
Potential buyers are advised to assess whether properties are flexible enough to be adapted to the required standards; if necessary, a consultant will be able to assess a given property, cost any necessary changes and deduct the sum from the purchase price.
How much should I expect to pay?
The traditional method of valuing care homes is the price per bed basis of valuation. A care home would be valued from £30,000 per bed for the most basic type, with a high proportion of state-funded beds to £60,000 per bed for the top-of-the-range newly purpose-built care home in a desirable area. However this valuation method has been largely superseded by the profit method basis of valuation.
The profit method looks at the total operating profit of the care home and then applies a multiple to the figure to arrive at a total capital value. Higher multiples are largely pushed up by investor demand. This might be when there is an acute shortage of care homes for sale or where there is a high expectation of good future profits.
Newly-built care homes will have higher multiples as they are much less likely to fall foul of new regulations that require changes to the property and they will need less maintenance costs in the future. Currently the market is pricing in multiples of around 5-7 times the profit.
The profits for the purpose of valuation of a care home are derived from the fees resident pay, either through health insurance/self pay or from local authorities paying for care - less operating costs. The income can vary from £300 pw to over £1,000 pw per resident.
The biggest cost is staff, which absorbs typically 45-60% of care home fees. They include care staff, catering, cleaning and laundry staff, and management, administration and reception staff.
Other costs include utilities, provisions, registration fees, grounds maintenance and buildings maintenance. Typically, they absorb 12-16% of care home fees. They can be calculated fairly readily on a 'per resident' basis, with relatively little regional variation.
Where local authorities pay for the care home places, the amount they pay is determined by the total cost plus a return on capital allowance of between 10 - 16%. The total fees are negotiated with the local health authority.
What is the current market like for care homes?
Tom Driscoll of Pinkertons commented that the market has been hit to a certain extent by the credit crunch. Banks were once prepared to lend on an 80/20 basis but now they are looking at a minimum 70/30 split.
Another funding problem is that pre-crunch funding that could be arranged in 2-4 weeks is largely history. The funding process has now lengthened to 8-10 weeks as the banks look much more diligently at any proposition.
Furthermore, many banks refuse to fund any care home purchase where there has been a recent inspection stating that the home is just adequately meeting the required standards, as opposed to exceeding them. Not unlike the housing market, there are very few good care homes coming to the market and those looking to buy are finding it difficult to raise finance. However, the shortage is helping to keep prices from falling further.
Prices have softened a little due to the thin level of transactions encouraging valuers, who normally are acting for the bank, to take a more cautious view of values.
According to Mr Driscoll, the valuers are using the profits-based method of valuation in the first instance.
However, if the profits method is showing the home is valued at £60,000 per bed and the valuer can't find comparable evidence, they tend to say they cannot justify such a high figure. As such, they will often adjust the price down up to 20% per bed, in this case to £50,000 - £55,000.
Where to look?
There are numerous specialist agents which focus on the care industry, with Pinkertons being just one of them. It is worth noting that confidentiality needs to be respected when looking to buy a care home, as carers and patients can be understandably upset if rumours that the care home is for sale circulate.
As such, it is important to be taken seriously at the outset when contacting agents. So ensure that you can show you have all the correct qualifications and likely funding in place.
If you are looking for a care home make sure to browse our medical listings at: http://www.business-sale.com/carehomes/
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