Don’t Leave Money on the Table

For nearly every assisted living business owner there comes a time to sell the business. Whatever the reason for selling, you want to command the highest possible price. But, how do you set a price that is reasonable to attract buyers yet guarantees a good return on your investment? Selling without an accurate valuation runs the risk of under-valuing a facility by hundreds of thousands of dollars.

Like most appraisers, we use three approaches to valuation, including income, comparable sales, and replacement cost.

1. Income Approach.  For commercial properties, including assisted living facilities, a buyer will normally pay only what the bottom line supports.  How much mortgage can be supported with the net operating income and what’s left to provide a return on the buyer’s investment?  That’s how much they can afford to pay.

2. Comparable Sales.  Similar properties should sell for similar prices.  While the differences between properties make this approach a bit more subjective, it can help confirm the price calculated from the income approach.

3. Replacement Cost.  If a buyer can build a new property for less than they could buy your property, wouldn’t they?  Sure.  Now buyers also need to take into account the value of goodwill and the cost of leasing up a brand new facility, but replacement cost can place limits on the value of a property.

Is a valuation important? Let these two examples answer this question:

–          A former SCR client had initially struck a deal with a buyer, then they came to us before the transaction was finalized. They had agreed to sell their assisted living facility for $600,000. We studied the deal and realized they undervalued the business, and we succeeded in negotiating a sale for $750,000.
–          Another client had agreed to sell at a certain price but later found that their income statement had substantially understated the facility’s net operating income.  After taking another look at the valuation, the seller realized a price that was $1,000,000 higher than they expected.

Such stories aren’t common but the lesson is important: if you fail to obtain an accurate valuation of your business, you’ll leave money on the table.