Buying a business: Nursing homes

What is it?

It is generally acknowledged that people are living longer these days. Advances in healthcare and a trend towards a healthier lifestyle have caused the older population to swell in number, and while this is obviously great news, there are some important social consequences.

Elderly people are often unable to look after themselves in the twilight years, and with more people living longer, the demand for resources to care for them is growing. Family and friends often help, but an increasing amount of the responsibility is being taken up by a growing sector of care providers. In fact, the figure of older people in care homes now approaches 500,000 in the UK alone.

The elderly care industry can be split into two categories – nursing homes and residential care homes. Nursing homes are basically private hospitals for elderly residents requiring high levels of care, staffed by managers and nurses with advanced levels of medical and care training.

Residential care homes, on the other hand, are old people’s homes. They provide a place to stay for elderly people who perhaps cannot do everything for themselves, yet nevertheless enjoy a degree of independence and require little hands-on care. They are staffed by qualified carers whose level of training need not be as advanced as those working in nursing homes.

In April 2002 the Registered Homes Act was superseded by the Care Standards Act. Under the new system, both nursing homes and residential care homes are regulated by the same body – the National Care Standards Commission.

The residential care home sector is open to a wider range of people but much of the information on residential care homes will also be relevant for nursing homes.

What is the market like?

Despite the uncertainty of the current economic climate, the care home sector is healthy enough at the moment. This is due to a number of recent developments in the sector.

There is a high number of care homes in the UK, especially in the popular retirement towns of the South East. However, the extra legislation introduced through the Care Standards Act has created the situation where a large proportion of the care homes have been deemed unsuitable or require extensive renovation, and many care home owner/managers will be under-qualified. Consequently, owners have been selling up and many nursing homes have closed and are continuing to close.

This has led to a shortage of beds for elderly residents in the UK which, coupled with a growing demand, means that anybody now going into the sector will almost be guaranteed a thriving business and a steady income.

John Read, a partner of Chandler & Co, specialists in healthcare financing. “The market is improving drastically every day because more and more homes are closing down and nobody is building new homes. Land is at a premium and the cost of building a new one means it’s not practical or economically viable.”

Yet whereas starting from scratch is inadvisable, recent falls in purchase prices means it is now a very good time to buy an existing care home, according to Andrew Long, director of specialist healthcare business brokers, GLP. “Typically a care home business will be valued as a percentage of its yearly profit. This has stayed at around four to five times the annual profit. Interest rates are low so the cost of lending is low, while demand for beds has increased, partly due to the new regulations that have forced some care homes to close down. All this means that the market is healthy at the moment.”

Be warned, however. The numerous regulations concerning staff, training and premises means that potential purchasers must be prepared to make a substantial commitment, both financially and personally, in a care home business.

Who is it suited to?

Far from being the sole domain of experienced nurses, the care industry is open to people from a wide range of backgrounds. Having said that, however, people with medical or care experience naturally feature strongly in the sector.

“They are often nurses who want to go into business for themselves, usually with a husband who has been a professional of some kind. We work with a lot of doctors and other people from the caring industry – and we get a lot of entrepreneurs as well,” says Read.

He adds that whatever their background, care home purchasers nevertheless share a common asset.

“There is one element that is common to everyone who buys a nursing home. They are all people who are successful, because to buy a nursing home you’ll probably need at least £100,000 of your own money. If you haven’t got this to start with, you’ll have problems raising the necessary finance.”

Apart from your background and financial situation, however, owning a care home also requires a certain type of personality. Long explains: “First and foremost you must have a desire to care for the elderly. Then you need to have management skills, be able to organise staff and create a good working atmosphere that will rub off on your residents.

It is not a simple nine-to-five industry. You may be interrupted in the small hours if there’s an emergency. For example, if a client is dying – and in the care home industry this is a reality – you will need to deal with it but also be sympathetic. It takes a special kind of individual to deal with this.”

Remember that this is also a business as well. “One of the things that does help is if you have management experience. Dealing with staff and dealing with the authorities and administration are the main responsibilities, since the caring will usually come down to the care manager,” says Read.

In fact, the amount of hands-on caring will depend greatly on your experience and qualifications. If you have the qualifications to register yourself as a care manager, then you will be heavily involved in the day-to-day care of your residents. If you don’t have the necessary skills, then you will have to hire a qualified care manager, which will require a larger home to support it, and you will focus on running the business and managing the staff.

It is also worth bearing in mind that this is not the industry for those who prefer to stay clear of government authorities and red tape.

“You will be inspected on a regular basis, twice a year, and they will be unannounced inspections, at any time of day or night. Being a private care home means that you are simultaneously being in charge of your own ship while also working for the local authorities. You are highly regulated and because the local authority will also be your main purchaser, paying for maybe 15 out of 20 beds,” says Long.

Rules, regulations and personnel

It will come as no surprise that providing care for a vulnerable group such as the elderly is highly regulated.

Personnel

As a care home owner, you will have to be registered as a care provider. “People have to prove that they have the relevant experience, aptitude and business skills to run a residential care property,” says Long. The National Care Standards Commission interviews everyone who applies for registration and also visits the premises.

As well as a registered owner, every care home must also have a registered care manager. You can register yourself as the manager if you have at least two years’ experience in senior care management plus an NVQ level four in care and management. Otherwise, you will have to employ somebody else, which can cost £20,000-£30,000 per year.

At least 50% of the care staff must be trained to NVQ level two, which can make finding staff a major problem when running a care home. You may need to offer wage incentives in order to attract the right calibre.

Premises

Care homes are covered by Health and Safety regulations similar to other places of work. Since you will be preparing food you will have to register with the Environmental Health department, which will help you comply with the Food Safety Act.

However, the Care Standards Act has also introduced new standards for care home buildings, which you will need to consider when viewing properties. Pinders, a specialist healthcare valuers, has outlined some main areas of concern.

The home must provide at least 14.1 sqm of living space per resident. There is some flexibility in how this space is distributed between communal space and bedroom space, but for most homes this will mean:

• At least 4.1 sqm communal space per resident
• At least 10 sqm of usable space in single bedrooms
• At least 16 sqm of usable space in shared bedrooms

It is thought that these rules will put many rooms out of use, and turn many shared rooms into single rooms. Also, existing homes must provide 80% of places in single rooms.

The new standards also require an assisted bathroom for every eight residents, and ramps and shaft lifts to provide access to all communal and private space.

Many converted care homes may fall foul of these standards. Commenting on the new regulations, Pinders said “Whilst the standards are to be welcomed, their implementation in existing homes is likely to result in disruption, expenditure and, in some cases, loss of capacity as it is either physically or financially impossible to affect the necessary change to the property.”

Looking for a business

It is vitally important that you check whether the business you are looking at is going to be affected by incoming regulations.

David King of Brent King Healthcare Consultancy says, “The Care Standards Acts is changing the whole industry and means that some of the older converted properties may not have a future. There are a lot of changes going on in the market, but with someone guiding you through the process, pre-empting the changes you will be okay.

“The main thing is to buy a property that has the flexibility to be adapted to the new standards. There are very few older homes that will not need some changes, and vendors are perhaps not being as free with the information as they could be. If in doubt, get a consultant to assess the properties, costs the changes that will need to be made and deduct the costs from the purchase price”

Another factor that will dictate the type of business that you look at is your experience. “If you are an owner occupier with the necessary qualifications to register yourself as a care manager, you will be able to buy a fairly small home, around 10-15 beds. Any non-qualified people will be buying a home with at least 20 beds, since anything smaller cannot support a care manager,” says King.

There is quite a wide selection of care homes available. Start by looking in Daltons weekly and on websites such as www.businessesforsale.com There is also a number of specialist agents and business finders concentrating on the care sector, and online resources such as www.buyacarehome.com

Getting funding

Once you have found a care home that you are keen to buy, you will probably need funding. Normally a lender will provide 70-75% of the purchase price.

Speak to your bank to let them know what you a planning to do, but also talk to specialist brokers who understand the sector and will be able to explain how it works.

How much can I earn?

The main barrier to people wanting to buy a business in this sector is cost. Care homes are expensive businesses, and as a buyer you will need to possess a substantial personal wealth before you even start looking.

“For good quality 10-bedders, you can pay £20,000 per bed depending on location. To buy a 20-bed home, spending at least £20,000 per bed, would therefore cost £400,000, of which you will need a minimum of £100,000 of your own money,” explains King. See how this compares to starting a nursing home from scratch by looking at our guide to opening a care home.

Read adds that it is important to factor in the extra costs when buying a business. “Out of £100,000, quite a lot is eaten up in costs. For example, when buying a business for £320,000, you will use £80,000 of your own money and £240,000 of the bank’s money. Then there is stamp duty of around £9000 and solicitors costs, valuation costs and registration fees together costing around £5000 altogether.

“It’s also good to have some cash for when you start, although care homes actually need relatively little working capital, since payment is in generally in advance while you pay wages in arrears.”

Since any investment into a care home will be a significant amount, you would expect the returns to be substantial as well – and you’d be right. Running a care home can be a very lucrative business, explains King.

“In the smaller care homes, if you’re the registered manager you can make 35-40% profit from fees. Fees are around £250 per week per bed. Therefore, on a smaller home with say 10 beds, you will make a profit of £50-60,000 before interest payments.

“With larger businesses you can make more money since you get economies of scale. Although of course, for a bigger one you will need to get a manager in.”

We were quoted yields of between 20 per cent and 23 per cent which for a business costing £450,000 would give a profit of around £100,000, after overheads but before loan costs.