An Opportunity to Hit the Ground Running
In today's episode, John describes the process of buying a small senior care business. He'll cover the key criteria buyers consider when evaluating a small business.
The senior care business sector has evolved significantly over the past 15 years, with franchisees becoming a big part of the industry.
Our Sponsor
We're proud to have the University of Tennessee Physician Executive MBA Program, offered by the Haslam College of Business, as the sponsor of this podcast.
The UT PEMBA is the longest-running, and most highly respected physician-only MBA in the country. It has over 700 graduates. And, the program only takes one year to complete.
With the UT Physician Executive MBA, you will develop the business and management skills you need to find a career that you love. To find out more, contact Dr. Kate Atchley’s office at (865) 974-6526 or go to nonclinicalphysicians.com/physicianmba.
Unveiling the World of Franchises and Small Businesses
Owning a small franchise business offers a dual pathway to financial success. This endeavor combines income generation with the creation of a valuable and transferable asset. This makes it a compelling prospect for creating financial freedom.
Unlike a physician practice, nonmedical businesses produce a product or offer a service that is not based on your medical license. And there is no need for you to provide the services directly. As the owner, you can generate more revenues and profits by leveraging the skills of your employees.
When the business is large enough, you can transfer management duties completely. The business then becomes a passive income source that does not require day-to-day management.
A senior care business is well suited to physicians, nurses, social workers, and others in healthcare because they:
- have an interest in improving the health and wellness of clients;
- understand the healthcare system, and how senior care fits in; and,
- have an advantage in identifying referral sources for clients (e.g., nursing homes, hospices, assisted living facilities, physician offices, and hospitals).
Factors Behind Senior Care Business Success
The senior care business has firmly established itself due to several key factors. Strong and growing revenues and profits are the foundational elements sought by potential buyers. This reflects a proven track record of financial success and demonstrates the business's value proposition. Here are the basic components of the business:
- caregiver recruitment, screening, and training;
- client recruitment and scheduling; and
- billing and collections.
In contrast to unproven startups, a senior care business's consistent growth and profitability make it a solid contender for investors.
The operational simplicity of the senior care model contributes to its popularity and viability. Additionally, its ability to generate positive cash flow, minimize accounts receivable, and avoid debt, enhances its financial stability.
Summary
A small business can be an effective way to generate income and value. Opting for a franchise enhances success. And acquiring an established franchise can expedite the process. Senior care services have been one of the fastest-growing franchise opportunities in the U.S. over the past 15 years.
For those interested in exploring a successful senior care business, there is an opportunity in the greater Chicago area. Interested qualified buyers, can learn more by sending an email expressing your interest to seniorcareoffer@gmail.com.
NOTE: Look below for a transcript of today's episode.
EXCLUSIVE: Get a daily dose of inspiration, information, news, training opportunities, and amusing stories by CLICKING HERE.
Links for Today's Episode:
- International Franchise Association: 2023 Franchising Economic Outlook
- How to Improve Your New Business Odds of Success by Buying a Franchise- 292
- NewScr!pt
Download This Episode:
Right Click Here and “Save As” to download this podcast episode to your computer.
Podcast Editing & Production Services are provided by Oscar Hamilton
Transcription PNC Podcast Episode 314
Want to Buy Your Own Senior Care Business?
John: All right, nonclinical nation. Over the past 15 years, I've come to know a half a dozen or so owners of what is often called a senior care business. All of them are franchisees of a large national senior care franchise. Now, this is also called an in-home care business, and it's to be distinguished from home healthcare because it's non-medical, non-nursing type of care.
Three of those owners that I've known have since sold their franchises to a new entrepreneur. And today I will describe how these owners prepared to sell their businesses based on what a buyer looks for when buying such a business. And then finally, I'll tell you about a franchisee who's offering to sell their franchise and how to contact that owner if you're interested in learning more about buying it yourself.
So, let's get started talking about franchises and small businesses and that kind of thing. When you think about it, if you look at how an individual can generate a sizable amount of income more than you can generate generally in a typical salary situation, unless you're an attorney or a physician or a highly compensated person.
But if you want to generate income and create a valuable asset at the same time, probably owning your own small business is the best way to do that. Usually by doing so with a lot of hard work, you can create a company that pays you well, but in a combination of both W2 type of salary plus and owner's draw. And there's some flexibility and you structure that in order to minimize your taxes to some extent and achieve some other benefits.
But if you look around you at those who have been running a small business for 5, 10, 15 years, chances are the owner takes a salary plus has some leeway in drawing funds off of the business depending on how successful it happens to be. Sometimes that's seasonal, sometimes that goes in cycles. But most small business owners like to run their business in a way that increases revenues, increases profits over time for the long term.
And then you have that asset that you've created that you can eventually sell, usually creating a pretty sizable cash out. And most of the time the cash out results in money in your pocket or in your bank account. And generally that if it's a capital gain, it's going to be taxed at a much lower rate than let's say income of a similar amount.
So, if you were in a salary situation, you're nearing the end of your career and somehow you got a raise and made $400,000 or $500,000 during that final year, you're going to pay income tax on that. Whereas if you have a small business and you cash out and you generate $500,000 value and cash at the end when you sell it, then of course, that's going to be taxed at a much lower rate. That's another benefit.
Many physicians over the years I've worked with have tried to sell their practices and actually the hospital that I worked at bought many practices. But funny that it didn't really pay so much in terms of the value of the practice because almost all of the profits, if any, were really paid out to the individual physician as salary. And unfortunately, you cannot replace that physician in that practice with anyone other than another physician who's also going to want to take that amount, if not more than the previous owner. And so, usually you end up buying just the assets of the practice, which oddly enough, you'll earn less than maybe selling a small franchise.
Ideally, if your small business grows sufficiently, you can hire a manager to run it and then you have now turned that asset into something that's like a passive investment. Of course, you'll have to keep track of what the manager's doing and watch the certain parameters of performance, but it's kind of like having real estate that throws off some net proceeds every year. But usually a small business again generates more for the amount of money that's invested. We'll talk about that in a minute.
Now, if you're a person that wants to build a huge business based on some new invention, new process or technology, then you're probably going to have to go the public route. Meaning ask investors, angel investors and others to invest in your idea. Give away a lot of shares to do that, but that usually pays off even more but it's a much lengthier process and probably has a lot more risk.
Now, I did want to talk a little bit about franchises as one way to get into a small business. I'm not going to go into great detail. I think we've talked about at least once or twice before on the podcast. But what happens with a franchise is in exchange for paying a regular franchise fee, monthly, quarterly, or annually, you get the benefit of all the experience of the person that created the franchise itself. I'll call it the parent franchise if you want to call it that, or franchisor and ideally all the policies and procedures, all the tools that are used and approach to marketing.
Everything you would need to start a small business already has been worked out. And so, you pay 4% or 5% or 6%, 7% annual franchise fee off the top of your revenues generally in exchange for getting all of that know-how, which makes it much easier to start the business and to grow the business than if you were creating all of those policies and procedures and deciding on which software to use to run your business and so forth on your own.
Now, you could take it one step further, and if you believe in a franchise as a way to find and develop a small business that grows rapidly and is likely to be more successful than something you start on your own, then you might really like the idea of purchasing an established franchise with one or two territories. Most franchises have a territory that delineates where or to whom you can sell your product or services.
And while it's a more expensive way to go, if you can buy an existing franchise that demonstrates that it's growing, that it has significant revenues, that it's expenses are contained, and therefore there is a history of profits that are also growing over time, that can be a good way to get into a business more quickly.
Essentially if you buy an existing growing viable business, the day you take it over, it will be profitable because it was probably profitable for the three or four or five years before you bought the business. The downside of that is that you have to pay a much higher fee than you do to start a franchise from scratch in which you dedicate sort of your sweat equity and pay for expenses as you go, maybe with a loan or you've got savings, that kind of thing. But the cost of that is much lower than actually buying an existing franchise business that's been in place for a while and is currently profitable.
Again, I don't want to belabor the point of franchise businesses, but I think many people don't understand or realize how many local businesses that provide services and products that they use on a regular basis are actually franchises. Let me just list some of the companies that use franchisees to grow their network of businesses. And of course, we all know McDonald's, Taco Bell. Ace Hardware is a franchise, the UPS store, Subway, Pizza Hut, visiting angels, other senior care businesses, there's at least a dozen of those that are franchises. Great Clips, Wendy's, Planet Fitness, Dunkin Donuts, Dairy Queen, and the list goes on and on.
They're all over the place and there's a reason for that. And that's that they tend to be successful. They're not 100% when you start, if you don't do your homework or you're in a market that for some reason doesn't work, you can lose. But when you're in a market that's been demonstrated to be successful, then buying an existing franchise can be the way to go.
Before you get into that it would be nice if you had at least some business background personally, or at least have a partner or someone you can hire to help you manage the job. Although with any franchise, and particular the senior care franchises, they offer extensive training immediately after the handoff occurs from the previous owner.
And again, this is the reason why franchising is such a great option for a small business and why purchasing a franchise usually ensures that you have all the software you need. You already have plans for how to market, you have plans for how to run the company, how to structure it, the types of employees you'll need, and also how to train new employees.
But there are some other considerations that you should keep in mind. These are the things you'll probably be thinking about when you are approaching this issue. One of my favorite quotes is "Begin with the end in mind." That's from Stephen Covey. And so, I think if you are thinking about buying a franchise and running a franchise yourself, then you should probably know what most other people that have already done that look for when they're buying such a business.
Now, before I do that, I want to just say the reason that senior care is such a popular franchise. There are several, and this isn't based on any study, but I can tell you just from talking with people that first of all, it meets the need that some people have to help others. And of course you can help others. Pretty much any business you do, you're helping others in some way.
But I've heard several franchisees who own senior care businesses say that they got into it because their own parent needed help when they were getting older or another relative and they couldn't find help. And wouldn't it be great if there was a place where you could go and get that kind of help from people who were trained to do it and in a way that they had some backup if they were sick or holidays and so forth. Or there was a place where you could fill in that schedule. And so, that's why these businesses originally were created.
That's why I think a senior care franchise business is really a good one for anyone who's been in healthcare. It could be a physician, it could be a nurse, psychologist, social worker, you name it. They're already familiar. They already also have potential sources of referrals. Not only friends and relatives that have elderly parents or grandparents, but also hospitals, nursing homes, independent living facilities, attorneys who work with estates. You might know those people. And so, that's a source of new clients if you do open such a business.
The other thing is with the demographics, we're still having the baby boomers. I guess the average baby boomer just hit 65 in the last year or so. So we have this massive number of elderly people who need more support at home. And that plus the idea that most of us now really don't want to even consider going into a facility if we can help it because of the disastrous situation that occurred during the pandemic when a novel virus could run through a nursing home.
So, people want to live at home as long as they can. Sometimes people want to die at home. And so, these businesses are there to help them do that. And that's why I'm focusing on that to some extent today.
The first thing you want if you're looking to buy something like this is you need a business that has strong and growing revenues and profits. That's kind of the bottom line. If it's a rock solid investment because of demonstrated improvement over time in growth and revenues and profits, then at least it passes the initial sniff test.
When you or any other buyer is looking to buy something like this, it's a type of investment. And so, you're comparing it to other investments from those that are extremely safe, like buying government bonds for the most part to those that are extremely shaky like investing in a startup in the very early years before there's demonstrated proof of concept.
And so, investors will put some money in those kinds of things and hope that one out of 10 ends up maybe even making a profit. And who knows, it might even be less than one out of 20 or 30 that actually have an IPO and go public.
So, you got to figure where you are in the continuum but again, what we're talking about is someone like yourself who either personally or has someone that they can hire to run this new business from the get go because we're buying something that's already an ongoing venture and you'll have to hit the ground running and hopefully it'll take off.
Most senior care businesses meet this threshold. They wouldn't be so popular if they weren't successful. And the model is very simple. Your purpose or what you're doing through your business to provide care to the seniors is number one, hiring and training capable, reliable caregivers. They could be completely lay caregivers with special training. They could be a CNA or some other associated type of position. Maybe a medical assistant who's now doing this in-home work and matching them up with people at home.
And that home can be anywhere. It could be at their actual home, it could be in a family member's home, it could be in a nursing home, it could be in an assisted living. But since that's their home anywhere they are, sometimes they need this extra help and you're just matching up the caregivers with the people that need help. And then you just need processes for scheduling people, tracking people, monitoring them, and also for doing assessments of potential clients and then billing them. So, it's pretty straightforward.
The other thing that you want to make sure is that besides just revenues and profits, you want positive cash flow, some working capital, no delinquent taxes, no debt and accounts receivable that are current. There aren't bills from six months ago. And in this kind of business, the AR is generally fairly low.
Some senior care businesses will actually take a deposit, particularly when they're just starting out, so that in essence, the client is prepaying for their care because if they decide not to pay for two weeks, then you've already got the deposit to cover that and there's still no AR. Once you get going, most companies don't do that. But because you're on a two week cycle, usually if someone fails to pay a bill then you can just cancel services immediately until they get caught up. And so, the AR is never really all that high and the vast majority of clients pay as they go on a very timely basis.
The other thing as a buyer you want to be certain there are no pending or threaten lawsuits about the company. That can be hard to determine, but usually you can do some due diligence with others in the community, looking at newspaper articles and other things to look for any pending lawsuits. But it's very unusual that a senior care company would be sued. Of course, the owners have insurance to help cover any losses related to a lawsuit. And you can get a good sense of the reputation and standing in the community for most of these companies.
Now, we've talked about this next one, but buyers want to buy a business that has a clear product or service with a strong demand and continued prospects for growth. Well, because of the aging population that one is met. The other thing is that some of these companies will also, besides selling just the one-on-one service, some will expand into transportation. And most of them also offer remote monitoring services and medical alert systems that also help seniors to remain independent in their homes.
Another consideration that buyers have, particularly if there is a need for a visible business in the community is the location. Buyers want an office that's conveniently located and maybe in a prominent location where it offers the ability to market through signage.
A buyer also wants to be sure that the equipment that's owned by the business, that supporting software licenses can be easily transferred to them at the time of a sale. They want clear cut training and a clear set of policies and procedures. And of course, that's again one of the big advantages of buying a business that's part of a franchise.
Prospective buyers want to see that the client list is stable and growing in a business like this. And that's pretty easy to demonstrate over time. The model is good because usually it takes a little bit of effort to get a new client, but once you have a new client, they tend to stay for months or even years. And the rate of accumulating new clients far outpaces the timing of loss of patients, either because of moving away or because of passing away generally because there are so many seniors in this group that you just accumulate more and more clients over time. And so, part of your work is simply keeping up with managing them and hiring new caregivers to meet that need.
Finally, and again, this is addressed by it being a franchise, the buyer of a small business wants to make sure that everything involved in that business, every policy, procedure, process, staff, software, equipment, hardware can be transferred to the new owner at the time of the sale.
And again, that is absolutely simple with a franchise. And in fact, the new owners will for a senior care franchise end up going to anywhere from two to six weeks of training to make sure that they fully mastered the process that the franchisor has created.
And one of the things about a franchise is you must follow their rules. That's for the most part a good thing so that there's consistency. And then if they're doing any kind of national marketing, then you can benefit from that and spend your time learning how to do other things.
I was looking at the website BizBuySell, which is at bizbuysell.com. And I was just looking at some recent sales of senior care businesses in the Midwest in recent years. And as I was looking at those, they have a pretty broad range, but it is a small business. So, most of them were sold at the time when they had anywhere from $650,000 to well over $2 million in revenues. I didn't see any that were above $5 million. And I suspect that the ones at that level are actually home healthcare agencies that actually do some senior care non-nursing type of business as well.
And in this situation, usually you're going to sell based on a ratio to either EBITA, which is earnings before interest taxes and amortization, or the seller's discretionary earnings, because that gives a good figure to look at for those small businesses in which the owner is also the manager. So, you can't separate the CEO from the owner because they're usually doing both roles and businesses of this size.
They use seller's discretionary earnings as the thing to look at. And the definition of the SDE is really adding up the bottom line profit that appears on the P&L statements plus the owner's compensation if they're getting compensated as a W4 type of employee or W2. Plus paid interest expense, depreciation and amortization and the discretionary expenses that are really designed to support the owner only like cell phones, meals, entertainment, travel, things like that. Plus adjustments for any non-recurring expenses that shouldn't show up on an annual basis like a lawsuit or flood damage.
So, you take that SDE, which is basically what you take out of the business on an annual basis, and usually, depending on how fast the company's growing, you apply some ratio and that's the asking price for the business.
If you have basically a combination of all the above things that I mentioned, it comes out to $150,000 a year, you might sell that for two to three times the SDE, which would be $300,000, or $450,000.
When I looked online at BizBuySell, I would see that most of the businesses did fall between that two to actually three and a half times SDE depending how well established and growing they were and whether or not the seller was willing to finance part of the sale or not, which is another big factor that comes into play when you're selling a business.
I guess I will end my discussion of small businesses at this point. I wanted to let you know that a small business is a very effective way to build value in something, to invest your time and money in something and at the same time, generate income.
Going the franchise route is a way to increase your odds of success. And if you have sufficient funds, then buying an existing running franchise is possibly an even better approach to get things moving quickly.
And finally, if you're looking for a franchise, there are hundreds of different types of franchises and thousands of individual companies within those different types. And a senior care or in-home care franchise is definitely one that have been successful for many, many business owners.
And before I close completely, I do want to mention that one of the reasons that I've decided to address this issue today is because I am aware of the sale of a fairly mature senior care franchise in the greater Chicago area.
The business has been going for about 15 years. Its revenues in recent years have consistently been in the low seven figures like most of the other similar businesses in the Midwest that I'm aware of. And there was a lot of pressure during the pandemic, but the growth in activity, in clients, in hours of service and in revenues and profits has increased since the pandemic. And so, I think this is something that if you're interested in getting into this kind of business and want to buy a business, then you can check into this.
And the way to find out more about this opportunity is to send an email to seniorcareoffer@gmail.com and let the owner know that you might be interested and then they will take it from there. Again, that email address is seniorcareoffer@gmail.com. Well, that's all I have for today.
Sign up to receive email reminders, news, and free stuff every week!
Enter your name and email address below and I'll send you reminders each podcast episode, notices about nonclinical jobs, information about free and paid courses, and other curated information just for you.
Transcription PNC Podcast Episode 314
Want to Buy Your Own Senior Care Business?
John: All right, nonclinical nation. Over the past 15 years, I've come to know a half a dozen or so owners of what is often called a senior care business. All of them are franchisees of a large national senior care franchise. Now, this is also called an in-home care business, and it's to be distinguished from home healthcare because it's non-medical, non-nursing type of care.
Three of those owners that I've known have since sold their franchises to a new entrepreneur. And today I will describe how these owners prepared to sell their businesses based on what a buyer looks for when buying such a business. And then finally, I'll tell you about a franchisee who's offering to sell their franchise and how to contact that owner if you're interested in learning more about buying it yourself.
So, let's get started talking about franchises and small businesses and that kind of thing. When you think about it, if you look at how an individual can generate a sizable amount of income more than you can generate generally in a typical salary situation, unless you're an attorney or a physician or a highly compensated person.
But if you want to generate income and create a valuable asset at the same time, probably owning your own small business is the best way to do that. Usually by doing so with a lot of hard work, you can create a company that pays you well, but in a combination of both W2 type of salary plus and owner's draw. And there's some flexibility and you structure that in order to minimize your taxes to some extent and achieve some other benefits.
But if you look around you at those who have been running a small business for 5, 10, 15 years, chances are the owner takes a salary plus has some leeway in drawing funds off of the business depending on how successful it happens to be. Sometimes that's seasonal, sometimes that goes in cycles. But most small business owners like to run their business in a way that increases revenues, increases profits over time for the long term.
And then you have that asset that you've created that you can eventually sell, usually creating a pretty sizable cash out. And most of the time the cash out results in money in your pocket or in your bank account. And generally that if it's a capital gain, it's going to be taxed at a much lower rate than let's say income of a similar amount.
So, if you were in a salary situation, you're nearing the end of your career and somehow you got a raise and made $400,000 or $500,000 during that final year, you're going to pay income tax on that. Whereas if you have a small business and you cash out and you generate $500,000 value and cash at the end when you sell it, then of course, that's going to be taxed at a much lower rate. That's another benefit.
Many physicians over the years I've worked with have tried to sell their practices and actually the hospital that I worked at bought many practices. But funny that it didn't really pay so much in terms of the value of the practice because almost all of the profits, if any, were really paid out to the individual physician as salary. And unfortunately, you cannot replace that physician in that practice with anyone other than another physician who's also going to want to take that amount, if not more than the previous owner. And so, usually you end up buying just the assets of the practice, which oddly enough, you'll earn less than maybe selling a small franchise.
Ideally, if your small business grows sufficiently, you can hire a manager to run it and then you have now turned that asset into something that's like a passive investment. Of course, you'll have to keep track of what the manager's doing and watch the certain parameters of performance, but it's kind of like having real estate that throws off some net proceeds every year. But usually a small business again generates more for the amount of money that's invested. We'll talk about that in a minute.
Now, if you're a person that wants to build a huge business based on some new invention, new process or technology, then you're probably going to have to go the public route. Meaning ask investors, angel investors and others to invest in your idea. Give away a lot of shares to do that, but that usually pays off even more but it's a much lengthier process and probably has a lot more risk.
Now, I did want to talk a little bit about franchises as one way to get into a small business. I'm not going to go into great detail. I think we've talked about at least once or twice before on the podcast. But what happens with a franchise is in exchange for paying a regular franchise fee, monthly, quarterly, or annually, you get the benefit of all the experience of the person that created the franchise itself. I'll call it the parent franchise if you want to call it that, or franchisor and ideally all the policies and procedures, all the tools that are used and approach to marketing.
Everything you would need to start a small business already has been worked out. And so, you pay 4% or 5% or 6%, 7% annual franchise fee off the top of your revenues generally in exchange for getting all of that know-how, which makes it much easier to start the business and to grow the business than if you were creating all of those policies and procedures and deciding on which software to use to run your business and so forth on your own.
Now, you could take it one step further, and if you believe in a franchise as a way to find and develop a small business that grows rapidly and is likely to be more successful than something you start on your own, then you might really like the idea of purchasing an established franchise with one or two territories. Most franchises have a territory that delineates where or to whom you can sell your product or services.
And while it's a more expensive way to go, if you can buy an existing franchise that demonstrates that it's growing, that it has significant revenues, that it's expenses are contained, and therefore there is a history of profits that are also growing over time, that can be a good way to get into a business more quickly.
Essentially if you buy an existing growing viable business, the day you take it over, it will be profitable because it was probably profitable for the three or four or five years before you bought the business. The downside of that is that you have to pay a much higher fee than you do to start a franchise from scratch in which you dedicate sort of your sweat equity and pay for expenses as you go, maybe with a loan or you've got savings, that kind of thing. But the cost of that is much lower than actually buying an existing franchise business that's been in place for a while and is currently profitable.
Again, I don't want to belabor the point of franchise businesses, but I think many people don't understand or realize how many local businesses that provide services and products that they use on a regular basis are actually franchises. Let me just list some of the companies that use franchisees to grow their network of businesses. And of course, we all know McDonald's, Taco Bell. Ace Hardware is a franchise, the UPS store, Subway, Pizza Hut, visiting angels, other senior care businesses, there's at least a dozen of those that are franchises. Great Clips, Wendy's, Planet Fitness, Dunkin Donuts, Dairy Queen, and the list goes on and on.
They're all over the place and there's a reason for that. And that's that they tend to be successful. They're not 100% when you start, if you don't do your homework or you're in a market that for some reason doesn't work, you can lose. But when you're in a market that's been demonstrated to be successful, then buying an existing franchise can be the way to go.
Before you get into that it would be nice if you had at least some business background personally, or at least have a partner or someone you can hire to help you manage the job. Although with any franchise, and particular the senior care franchises, they offer extensive training immediately after the handoff occurs from the previous owner.
And again, this is the reason why franchising is such a great option for a small business and why purchasing a franchise usually ensures that you have all the software you need. You already have plans for how to market, you have plans for how to run the company, how to structure it, the types of employees you'll need, and also how to train new employees.
But there are some other considerations that you should keep in mind. These are the things you'll probably be thinking about when you are approaching this issue. One of my favorite quotes is "Begin with the end in mind." That's from Stephen Covey. And so, I think if you are thinking about buying a franchise and running a franchise yourself, then you should probably know what most other people that have already done that look for when they're buying such a business.
Now, before I do that, I want to just say the reason that senior care is such a popular franchise. There are several, and this isn't based on any study, but I can tell you just from talking with people that first of all, it meets the need that some people have to help others. And of course you can help others. Pretty much any business you do, you're helping others in some way.
But I've heard several franchisees who own senior care businesses say that they got into it because their own parent needed help when they were getting older or another relative and they couldn't find help. And wouldn't it be great if there was a place where you could go and get that kind of help from people who were trained to do it and in a way that they had some backup if they were sick or holidays and so forth. Or there was a place where you could fill in that schedule. And so, that's why these businesses originally were created.
That's why I think a senior care franchise business is really a good one for anyone who's been in healthcare. It could be a physician, it could be a nurse, psychologist, social worker, you name it. They're already familiar. They already also have potential sources of referrals. Not only friends and relatives that have elderly parents or grandparents, but also hospitals, nursing homes, independent living facilities, attorneys who work with estates. You might know those people. And so, that's a source of new clients if you do open such a business.
The other thing is with the demographics, we're still having the baby boomers. I guess the average baby boomer just hit 65 in the last year or so. So we have this massive number of elderly people who need more support at home. And that plus the idea that most of us now really don't want to even consider going into a facility if we can help it because of the disastrous situation that occurred during the pandemic when a novel virus could run through a nursing home.
So, people want to live at home as long as they can. Sometimes people want to die at home. And so, these businesses are there to help them do that. And that's why I'm focusing on that to some extent today.
The first thing you want if you're looking to buy something like this is you need a business that has strong and growing revenues and profits. That's kind of the bottom line. If it's a rock solid investment because of demonstrated improvement over time in growth and revenues and profits, then at least it passes the initial sniff test.
When you or any other buyer is looking to buy something like this, it's a type of investment. And so, you're comparing it to other investments from those that are extremely safe, like buying government bonds for the most part to those that are extremely shaky like investing in a startup in the very early years before there's demonstrated proof of concept.
And so, investors will put some money in those kinds of things and hope that one out of 10 ends up maybe even making a profit. And who knows, it might even be less than one out of 20 or 30 that actually have an IPO and go public.
So, you got to figure where you are in the continuum but again, what we're talking about is someone like yourself who either personally or has someone that they can hire to run this new business from the get go because we're buying something that's already an ongoing venture and you'll have to hit the ground running and hopefully it'll take off.
Most senior care businesses meet this threshold. They wouldn't be so popular if they weren't successful. And the model is very simple. Your purpose or what you're doing through your business to provide care to the seniors is number one, hiring and training capable, reliable caregivers. They could be completely lay caregivers with special training. They could be a CNA or some other associated type of position. Maybe a medical assistant who's now doing this in-home work and matching them up with people at home.
And that home can be anywhere. It could be at their actual home, it could be in a family member's home, it could be in a nursing home, it could be in an assisted living. But since that's their home anywhere they are, sometimes they need this extra help and you're just matching up the caregivers with the people that need help. And then you just need processes for scheduling people, tracking people, monitoring them, and also for doing assessments of potential clients and then billing them. So, it's pretty straightforward.
The other thing that you want to make sure is that besides just revenues and profits, you want positive cash flow, some working capital, no delinquent taxes, no debt and accounts receivable that are current. There aren't bills from six months ago. And in this kind of business, the AR is generally fairly low.
Some senior care businesses will actually take a deposit, particularly when they're just starting out, so that in essence, the client is prepaying for their care because if they decide not to pay for two weeks, then you've already got the deposit to cover that and there's still no AR. Once you get going, most companies don't do that. But because you're on a two week cycle, usually if someone fails to pay a bill then you can just cancel services immediately until they get caught up. And so, the AR is never really all that high and the vast majority of clients pay as they go on a very timely basis.
The other thing as a buyer you want to be certain there are no pending or threaten lawsuits about the company. That can be hard to determine, but usually you can do some due diligence with others in the community, looking at newspaper articles and other things to look for any pending lawsuits. But it's very unusual that a senior care company would be sued. Of course, the owners have insurance to help cover any losses related to a lawsuit. And you can get a good sense of the reputation and standing in the community for most of these companies.
Now, we've talked about this next one, but buyers want to buy a business that has a clear product or service with a strong demand and continued prospects for growth. Well, because of the aging population that one is met. The other thing is that some of these companies will also, besides selling just the one-on-one service, some will expand into transportation. And most of them also offer remote monitoring services and medical alert systems that also help seniors to remain independent in their homes.
Another consideration that buyers have, particularly if there is a need for a visible business in the community is the location. Buyers want an office that's conveniently located and maybe in a prominent location where it offers the ability to market through signage.
A buyer also wants to be sure that the equipment that's owned by the business, that supporting software licenses can be easily transferred to them at the time of a sale. They want clear cut training and a clear set of policies and procedures. And of course, that's again one of the big advantages of buying a business that's part of a franchise.
Prospective buyers want to see that the client list is stable and growing in a business like this. And that's pretty easy to demonstrate over time. The model is good because usually it takes a little bit of effort to get a new client, but once you have a new client, they tend to stay for months or even years. And the rate of accumulating new clients far outpaces the timing of loss of patients, either because of moving away or because of passing away generally because there are so many seniors in this group that you just accumulate more and more clients over time. And so, part of your work is simply keeping up with managing them and hiring new caregivers to meet that need.
Finally, and again, this is addressed by it being a franchise, the buyer of a small business wants to make sure that everything involved in that business, every policy, procedure, process, staff, software, equipment, hardware can be transferred to the new owner at the time of the sale.
And again, that is absolutely simple with a franchise. And in fact, the new owners will for a senior care franchise end up going to anywhere from two to six weeks of training to make sure that they fully mastered the process that the franchisor has created.
And one of the things about a franchise is you must follow their rules. That's for the most part a good thing so that there's consistency. And then if they're doing any kind of national marketing, then you can benefit from that and spend your time learning how to do other things.
I was looking at the website BizBuySell, which is at bizbuysell.com. And I was just looking at some recent sales of senior care businesses in the Midwest in recent years. And as I was looking at those, they have a pretty broad range, but it is a small business. So, most of them were sold at the time when they had anywhere from $650,000 to well over $2 million in revenues. I didn't see any that were above $5 million. And I suspect that the ones at that level are actually home healthcare agencies that actually do some senior care non-nursing type of business as well.
And in this situation, usually you're going to sell based on a ratio to either EBITA, which is earnings before interest taxes and amortization, or the seller's discretionary earnings, because that gives a good figure to look at for those small businesses in which the owner is also the manager. So, you can't separate the CEO from the owner because they're usually doing both roles and businesses of this size.
They use seller's discretionary earnings as the thing to look at. And the definition of the SDE is really adding up the bottom line profit that appears on the P&L statements plus the owner's compensation if they're getting compensated as a W4 type of employee or W2. Plus paid interest expense, depreciation and amortization and the discretionary expenses that are really designed to support the owner only like cell phones, meals, entertainment, travel, things like that. Plus adjustments for any non-recurring expenses that shouldn't show up on an annual basis like a lawsuit or flood damage.
So, you take that SDE, which is basically what you take out of the business on an annual basis, and usually, depending on how fast the company's growing, you apply some ratio and that's the asking price for the business.
If you have basically a combination of all the above things that I mentioned, it comes out to $150,000 a year, you might sell that for two to three times the SDE, which would be $300,000, or $450,000.
When I looked online at BizBuySell, I would see that most of the businesses did fall between that two to actually three and a half times SDE depending how well established and growing they were and whether or not the seller was willing to finance part of the sale or not, which is another big factor that comes into play when you're selling a business.
I guess I will end my discussion of small businesses at this point. I wanted to let you know that a small business is a very effective way to build value in something, to invest your time and money in something and at the same time, generate income.
Going the franchise route is a way to increase your odds of success. And if you have sufficient funds, then buying an existing running franchise is possibly an even better approach to get things moving quickly.
And finally, if you're looking for a franchise, there are hundreds of different types of franchises and thousands of individual companies within those different types. And a senior care or in-home care franchise is definitely one that have been successful for many, many business owners.
And before I close completely, I do want to mention that one of the reasons that I've decided to address this issue today is because I am aware of the sale of a fairly mature senior care franchise in the greater Chicago area.
The business has been going for about 15 years. Its revenues in recent years have consistently been in the low seven figures like most of the other similar businesses in the Midwest that I'm aware of. And there was a lot of pressure during the pandemic, but the growth in activity, in clients, in hours of service and in revenues and profits has increased since the pandemic. And so, I think this is something that if you're interested in getting into this kind of business and want to buy a business, then you can check into this.
And the way to find out more about this opportunity is to send an email to seniorcareoffer@gmail.com and let the owner know that you might be interested and then they will take it from there. Again, that email address is seniorcareoffer@gmail.com. Well, that's all I have for today.
Sign up to receive email reminders, news, and free stuff every week!
Enter your name and email address below and I'll send you reminders each podcast episode, notices about nonclinical jobs, information about free and paid courses, and other curated information just for you.
Disclaimers:
Many of the links that I refer you to are affiliate links. That means that I receive a payment from the seller if you purchase the affiliate item using my link. Doing so has no effect on the price you are charged. And I only promote products and services that I believe are of high quality and will be useful to you.
The opinions expressed here are mine and my guest’s. While the information provided on the podcast is true and accurate to the best of my knowledge, there is no express or implied guarantee that using the methods discussed here will lead to success in your career, life, or business.
The information presented on this blog and related podcast is for entertainment and/or informational purposes only. I do not provide medical, legal, tax, or emotional advice. If you take action on the information provided on the blog or podcast, it is at your own risk. Always consult an attorney, accountant, career counselor, or other professional before making any major decisions about your career.
Leave A Comment
You must be logged in to post a comment.