This valuation has two parts. Think real estate on one side and the business on the other. You have a home which is the real estate with value. Let’s talk about that first. The home is a residential property. It’s a residential home in a residential neighborhood. Notice I keep stressing “residential” because as much as you think it’s commercial because it’s a business, it’s not. It’s residential.
The home is valued based on the comparable market analysis, based on the other homes in the area. If the garage was converted to a living space, that’s a plus and a minus because now you have extra living space, extra square footage which is good, but you no longer have a garage which is bad. If the home is twice the size of every other home in that neighborhood, it’s not worth twice as much.
It’s going to be worth more, but not twice as much. The additional space that is created which is very common in residential assisted living is not worth per square foot the exact same as every other square foot for every other home in the area. Additional space is good for the business, but it’s not worth the same on every single level.
When you take out a bathtub and you put in a shower, that’s a plus and a minus as well. When you add grab bars, a plus and a minus as well. All those different things you add, they add to the valuation. Realistically, a lot of times specifically for a residential property, an appraiser is going to have a hard time getting that appraisal correct.
I’ve had appraisers come to the home and look at it and go, “You know, it looks like a duck and it quacks like a duck, but this duck is a little bit different. It’s in a residential neighborhood, but it’s got business inside. There’s a license on the wall, there are grab bars on the wall; there are different things going on.” They have a bit of a hard time getting the correct appraisal.
What about appraising for an SBA loan? The appraiser understands that there’s a business involved, it is residential real estate and it’s a guaranteed loan by the government, so even though there’s the bank involved, the government guarantees. The appraiser has a different level of experience. I’d have to say that the appraisers that come in when there’s an SBA loan involved tend to have a little higher level of experience.
Let’s talk about the business.
I’m going to give you a couple of ways to value this business. – Tweet this!
First, if it were a big box like a Brookdale, Sunrise, Atrium, it’s all about the cost per bed. They’ll have 100 beds and they’ll say it’s worth $100,000 per bed, $200,000 per bed. Keep in mind, they have an infrastructure that includes parking lots, boiler rooms and commercial kitchens, and everything else relevant to a huge facility.
We can’t look at it the same way for a residential facility. As a business is worth one thing and then per bed is worth something else. Let’s assume the business is worth 50,000 (just giving you a number). Then per bed, depending on the revenue each bed generates, the gross revenue might be worth $10,000 per bed to $25,000 per bed.
If it’s $10,000 per bed (10 beds), $50,000 for the business and $10,000 a bed, 10 beds, that’s an extra $100,000; that business is worth $150,000. Let’s check the cash flow. If you have $50,000 a month coming in, and your expenses are $30,000 a month, you have $20,000/month of net income. Each year, $240,000 in profit. If I have a multiple of two, that would be $480,000.
That would be one way to value that business. I could go 1x that multiple, 2x or 3x. Bear in mind that this is not a technology company. It’s not going to be worth 10x, or 100x that. Unfortunately, a lot of people do not understand this business the way I do. They will value the business on something like 5x, or 10x the cash flow of the business.
If you valuate on the gross and not the net income; the numbers will really skew. – Tweet this!
You really need to know this business the way I do. Frankly there’s just not a lot of people out there that do it. At the Residential Assisted Living Academy, this is all I do. It’s what I teach, it’s what I know. I do this business myself, that’s why people call me to ask me what do I think, and how do I do it.
There are two parts on the valuation. One is the real estate. Pretty cut and dry. What is it worth compared to what other properties are worth? What alterations have been done to the property? Just because you made it twice as big, it doesn’t mean it’s worth twice as much.
On the business side, we can go per bed
plus something for the business, but I would rather you do it on a profitable basis. How much is the profit, let’s have a multiple, and is it worth 1x the annual profit, or2x? Maybe 3x?
If I’m buying it, let’s call it 1x. If I’m selling it, let’s call it 3x. – Tweet this!
This is the valuation of residential assisted living. If you’d like to learn more, and I bet you do, this is a great industry where you can learn how to make money and help people do good and do well. Come on over to our website at www.ralacademy.com
Watch this short video: https://flipnerd.com/show/valuation-residential-assisted-living/
Do GOOD and Do WELL!
Founder of the Residential Assisted Living Academy.
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