How to Value a Nursing Home or Assisted Living Facility
Businesses in the nursing and assisted living industry provide nursing, rehab, and long-term living quarters for people with illnesses or disabilities. According to IBIS World, there are over 27,000 nursing homes or assisted living facilities in the United States. Together, these facilities generate over $30 billion in revenue per year. We can expect steady growth to continue in the coming years. As such, it may be a good time to buy, grow, or sell a nursing home or assisted living facility. Whether you are entering or exiting the nursing or assisted living facility, it is crucial to know how to value a nursing home or assisted living facility.
The most effective way to learn how to value a nursing or assisted living facility is to obtain a business valuation. During a business valuation, a valuation analyst will determine the fair market value of a nursing home or assisted living facility. Additionally, the valuation expert will highlight the risks and opportunities of your nursing home or assisted living facility. This can help you take the next steps in maximizing the value of a nursing or assisted living facility.
Peak Business Valuation, business appraiser, works with many nursing or assisted living facilities across the nation. We are happy to provide you with a business valuation for a nursing home or assisted living facility. In addition, Peak can discuss any questions you may have on how to value a nursing home or assisted living facility. Schedule a free consultation with Peak Business Valuation today!
How to Value a Nursing Home or Assisted Living Facility
When deciding how to value a nursing home or assisted living facility, a business appraiser considers a variety of valuation approaches. Peak Business Valuation most commonly uses the market approach and/or the income approach. Both of these valuation approaches are effective, however, each provides a different perspective on the value of an assisted living facility or nursing home. The valuation expert will determine which method is best during a business valuation for a nursing home or assisted living facility. This often includes using a combination of valuation approaches.
Valuing an Assisted Living Facility or Nursing Home Using the Market Approach
Business appraisers often use the market approach to value a nursing or assisted living facility. The market approach is similar to the real estate appraisal process. When valuing a property, real estate appraisers consider similar houses that recently sold in the area. Then, they can accurately calculate the value of the property. With the market approach, business appraisers assess similar businesses that recently sold on the open market. If the nursing home or assisted living facility is private, the expert refers to private transaction databases to gather relevant information.
Multiples for a Nursing Home or Assisted Living Facility
When using the market approach to value a nursing or assisted living facility, business appraisers rely on valuation multiples. Multiples are ratios that compare the value of a business to a financial metric. Some common metrics include cash flow, earnings, or revenue. To determine the valuation multiples for a nursing home or assisted living facility, valuation analysts apply the proper NAICS or SIC code. Below, we highlight the basics of SDE, EBITDA, and REV multiples for a nursing or assisted living facility.
SDE (Seller’s Discretionary Earnings) Multiple for a Nursing Home or Assisted Living Facility
- SDE multiples assess the seller’s discretionary earnings of a nursing or assisted living facility. This multiple is common when valuing a nursing home or assisted living facility.
EBITDA Multiples for a Nursing or Assisted Living Facility
- EBITDA multiples reflect a nursing or assisted living facility’s earnings before interest, taxes, depreciation, or amortization. This indicates the return on investment (ROI) a nursing or assisted living facility can expect to generate.
REVENUE or SALES Multiples for a Nursing Home or Assisted Living Facility
- The REVENUE or SALES multiple measures the value of a nursing or assisted living facility based on its total revenue or sales. By applying the multiple to a nursing or assisted living facility’s revenue, business appraisers can calculate its fair market value.
To learn more about valuing a nursing home or assisted living facility using the market approach, see Valuation Multiples for a Nursing Home or Assisted Living Facility.
Valuing a Nursing Home or Assisted Living Facility Using the Income Approach
Another common business valuation approach is the income approach. The income approach measures the value of a nursing or assisted living facility by assessing its income potential. In addition, the income approach considers the risks of buying or selling a nursing home or assisted living facility. Below, we highlight a few common risks.
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- Financial Performance. Operating a nursing or assisted living facility can come with high overhead expenses. As such, it is vital to have strong financial management and planning skills at a nursing home or assisted living facility.
- Regulatory Compliance. There are many regulations designed to protect patients in nursing and assisted living facilities. To operate, it is crucial to understand and comply with these regulations.
- Skilled Workforce. Nursing or assisted living facilities host patients with a variety of illnesses and/or physical limitations. As such, it is important to hire skilled and experienced healthcare professionals at a nursing home or assisted living facility.
- Competition. The nursing and assisted living industry is very competitive. To succeed, operators need to differentiate from competitors and create diverse revenue streams.
Methods to Value a Nursing Home Using the Income Approach
There are several variations of the income approach for valuing a nursing home or assisted living facility. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. In the following paragraphs, we discuss how to value a nursing home or assisted living facility using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is ideal for nursing or assisted living facilities with stable histories. When using this income approach, business appraisers determine an appropriate amount of cash flow for one period. Then, the analyst applies a capitalization rate to the cash flow that calculates the rate of return an investor can expect. Additionally, the capitalization of cash flow method considers any risks that may prevent investors from meeting expected earnings.
Discounted Cash Flow Method
The discounted cash flow method is best for nursing or assisted living facilities with strong financial histories. This method is also beneficial for facilities with reliable forecasts. The discounted cash flow method involves projecting future cash flows over a 3-5-year period. Business appraisers then apply a discount rate that takes the time value of money into account. Keep in mind, the discounted cash flow method is less common since it relies on future income estimates which can be inaccurate.
Summary
There are several valuation approaches and multiples that valuation experts may use when valuing a nursing home or assisted living facility. To understand which methods and multiples are most suitable for your nursing or assisted living facility, obtain a business valuation. As part of a business valuation, you will learn how to value a nursing home or assisted living facility. Additionally, a business appraiser can help you understand how to maximize the value of a nursing or assisted living facility. This is important whether you are looking to buy, grow, or sell a nursing home or assisted living facility.
Peak Business Valuation, business appraiser, is happy to provide you with a business valuation! We work with nursing or assisted living facilities on a regular basis. Peak can answer any questions about valuing a nursing home or assisted living facility. Start today by scheduling a free consultation with Peak Business Valuation, business appraiser!
For more information see Valuing a Nursing Home or Assisted Living Facility, Value Drivers for a Nursing Home or Assisted Living Facility, and Valuation Multiples for a Nursing Home or Assisted Living Facility.
