The value of a care home is multifaceted. Care homes profoundly impact individuals’ happiness, health and longevity. To its residents the value includes receiving compassionate care delivered with dignity and respect; to families it encompasses the wellbeing and quality of life of a loved one; to society it is part of creating a fair and just society where people can live their life to the fullest potential and to its employees it is contributing significantly to social value and self fulfilment: promoting competence, empowerment and engagement.
As the owner of a care home, UHY’s vision of helping people prosper resonates well. Well run care homes help people prosper.
There is of course an economic value to care homes and the care home sector. The sector produces approximately £25 billion of economic activity annually in UK. According to carehome.co.uk, there are currently nearly half a million people living in care homes in the UK, and the sector employs around 750,000 staff, and demand is increasing. It is estimated that there will be an additional 1.1 million people aged over 80 years old by 2032. The current over 80-year-old to care home bed ratio is 7.45:1. Reducing the ratio to 5:1 by 2032 would require the delivery of approximately 440,000 additional beds. (Source: Savills using Oxford Economics). This of course will also generate significant economic activity within the property sector.
As a corporate finance business, we are asked to value care homes for lenders and investors. The valuation methodology will always be based on a lender’s or investor’s instructions. Care home valuations are normally carried out based on a Trading Valuation method. Trading Valuations for care homes are normally provided under the Market Value classifications MV1, MV2 and MV3:
- MV1 includes all the relevant licences, inventory and the last three years’ accounts
- MV2 includes inventory but no accounts are available; and
- MV3 is utilized when there are no historical accounts available, required licences have been lost and there is no inventory.
Valuations between MV1 and MV3 can vary significantly.
Capacity and current occupancy play a crucial role in valuations as do CQC rating, EBITDA margins, location, staff team and size and quality of the property/properties. Where accounts are available, and on the assumption that the business owns the freehold property of the home(s), the formulae for valuation include:
- earnings multiples based on EBITDA
- multiple of maintainable turnover; and
- price per bed.
Multiples change from time to time and always fall within a range. By way of illustration EBITDA multiples are currently typically in the 4 to 10 range and current live listings in England have turnover multiples ranging from 1.23 to 2.22. For homes which are leased, a reduction to the EBITDA multiple of at least 2x is likely. Given the wide range of valuations we also work with clients to improve businesses and valuations ultimately to help them prosper.
The next step
Michael Fitch is managing partner of UHY Hacker Young Fitch and owner of Harwood House in Berkshire (harwoodhouse.co.uk). For more information, please contact Michael at m.fitch@uhy-uk.com or your usual UHY adviser.
