September 28, 2022
Adam Hoeksema
The nursing home industry has grown significantly in recent years as the population of elderly people increases. As one of the largest components of the healthcare industry, the nursing home sector provides essential care and services to elderly individuals who are no longer able to care for themselves. Nursing homes offer long-term care services and typically provide 24-hour staff for the residents. Nursing home services include nursing care, physical therapy, occupational therapy, and recreational activities. Different amenities available in nursing homes may include private mini-suites for some residents and recreational areas for social activities.
Nursing homes have become increasingly regulated to ensure quality of care for patients. The Centers for Medicare and Medicaid Services (CMS) sets safety and quality standards for nursing homes and conducts periodic inspections to make sure that nursing homes are providing necessary services in a safe environment. Nursing homes are also required to be accredited in order to be eligible to receive reimbursement from the government. Accreditation is achieved by meeting certain criteria and quality indicators, such as having sufficient staff and qualified personnel. Nursing home staff must ensure that all nursing home regulations are followed in order to maintain the safety and quality of care for the elderly residents.
Thinking of Starting a Nursing Home Business?
There are plenty of good reasons to open a nursing home, not least of which is that running your own business is a liberating and rewarding enterprise if it’s successful. Nursing homes provide a valuable service to those in need, and this is also a source of satisfaction for those who run them.
They’re also profitable. The cost of living in long-term care facilities is increasing at a rate that outpaces inflation, suggesting that it’s’ becoming more profitable for nursing home business owners. However, if you’re considering running the home as a nonprofit, you may be interested to know that nonprofit facilities have better resident outcomes and better rates of staff satisfaction.
In this article I want to walk through a number of tips to help you open your own nursing home, but first just a little bit of background. My name is Adam Hoeksema, I am the Co-Founder of ProjectionHub which helps entrepreneurs create financial projections for potential investors, lenders and for internal planning. We built a Financial Projection Template for Nursing Home Businesses which I will utilize and share some screenshots from as we walk through some of the financial aspects of building a nursing home business.
In this post I plan to cover the following:
- Understanding the Market for Nursing Homes
- Funding Options to Start or Buy a Nursing Home
- Startup Costs for a Nursing Home
- Nursing Home License Requirements
- Business Plan for a Nursing Home
- Nursing Home Employees
- Patient Acquisition for a Nursing Home
- Nursing Home Profit Margins
- How Much Do Nursing Homes Make
With that as a plan, let’s dive in.
Tips on How to Start a Nursing Home from Scratch
You’re starting from the beginning, and you have little to no experience, so we’re going to break it down from the start. Of course, a comprehensive guide to starting a business of any kind would be well beyond the scope of any single article, so consider these as pointers to set you off in the right direction, but be sure to delve much deeper into each section using other sources before you get going.
1. Understand your Market
The very first step to starting any business is market research. The early stages of this are free and they are absolutely invaluable, especially when planning to start a business with such significant startup costs like a nursing home.
If you’re fixed in one location, your options will be limited to that market, but if you can move, you’ll do well to investigate areas with a greater need of your services. Then, you’ll have to identify and explore the competition and see what they do.
You’ll be building an ideal customer as you go, and identifying unique ways to reach and supply them with your solution to their problem. Start looking for holes in the services that are currently provided, and build up your business model in your head, in a way that fills in these gaps. This is how you’ll stay competitive, and provide something that others don’t.
One trick to understanding the current market demand for nursing home services in an area is to call all of the other nursing homes in your target market and see if they have any open rooms available. If they all have rooms available, it might be that there is already an oversupply of nursing homes in that market. If there is a waitlist or difficulty finding a room, then you know there could be an opportunity for additional rooms.
2. Funding Options for a Nursing Home Facility
There are various funding options available to help you either build a new nursing home facility, convert an existing building into a nursing home, or to acquire an existing facility. Before buying a nursing home business, considering a Quality of Earnings Report Sniff Test might clarify your financial path forward.
- SBA Loans - The SBA offers some of the best loan programs available. The SBA 504 loan program can be a great fit for an assisted living facility. This program offers financing for buildings and equipment which will be most of your startup costs.
- Traditional Bank Loans – If you have a strong personal financial situation, you may not even need the SBA and you might qualify for a traditional bank loan.
- Seller financing - If you are looking to buy an existing nursing home facility, you might be able to secure some or all of your financing from the seller. The seller could sell you the business on contract, or they could provide a portion of the financing through a seller note in conjunction with an SBA loan.
- Investors – Another approach would be to get investors involved. With any loan, you will still need to come up with some amount of equity that is invested into the business. Whether that is from your own savings or from outside investors you will need to have at least 5% of the total purchase price of an existing nursing home, or you will need at least 10% of the startup costs if you are starting from scratch.
Raising capital from investors means you will no longer have total control over the direction of your company as you’ll have to appease the shareholders. However, this money is invested at their own risk, not yours, so if you do fail, you won’t be left with a huge debt to pay back too.
However, for the healthcare industry, it’s also worth considering grants. Again, do your own research on this, but look out for grants that might cover the cost of skilled services, nutrition programs, personalized care assistance, and other elements of your business model.
Understanding the funding options is a good place to start, but to choose the right one for you will require you to know exactly what your costs are going to be, and where they’ll be coming from. For this, you’ll want to know who and what you’ve got to pay for.
3. Startup Costs for a Nursing Home
This section alone takes some serious research. There are 3 primary startup cost categories when opening a nursing home:
- Building
- Equipment
- Working Capital for Payroll
You can get an idea of what it would cost to purchase a nursing home facility by looking at the nursing homes for sale on BizBuySell.
If you’re buying a new building, you’re going to have to get it equipped, and if you’re taking over an existing assisted living facility, you’ll still need to know what equipment might need to be replaced in the near term. Some examples of equipment you’ll need for an assisted living facility are:
- Beds
- General Furniture
- Specialized Furniture
- Medical equipment
- Bathroom equipment
- Kitchen Equipment
- Communications Equipment
- PPE
There’s going to be a lot more to consider than just these listed, and from itemizing them you’ll also need to source and cost them to start building your budget. Once you’ve got your market research down, you’ll have a better idea of what size of facility you will build and how much equipment you’ll need.
4. Nursing Home License Requirements
There are several licenses and permits that you may need to get for your nursing home or assisted living facility. Here is a list of several:
- Building Permit
- Certificate of Occupancy
- Food Service License
- Business License
- Fire Safety Designation
- Health Care Facility Licensing
- Nursing Home License
- Medicaid/Medicare Certification
- Fire and Safety Inspection Certification
- Alcohol and Drug Certification
You will also need insurance to cover residents and staff alike, as well as the business itself and the property.
5. Nursing Home Business Plan
Your business plan is more than just a formal document, it’s a journey into the inner workings and the future of your business. The business plan document is split into seven major sections:
- Executive Summary – The front page of your document will cover an introduction, leading the reader through the problems, solutions, and your value proposition. This should be a general overview, and it should be appealing, but never overblown or inaccurate. This page is probably going to be the last you complete, as it’s a summary of a lot of the material from within the document.
- Market Analysis – Your market research should give you a good idea of where your company sits among the competitors and the current state of the market. Include an overview of the industry, and identify how your nursing home will contribute something unique to that market. Lay out a simple plan of action that explains how you’ll take your share of the market, and whom that share represents in terms of ideal customers and their problems.
- Company Description – Now it’s time to go into more detail about who you are and why you’re the right company for the job. List the things you can do that nobody else can, and specify how you’re going to treat the pain points of your customers. Work to set your company apart from the others in your market.
- Organizational Structure – One of the ways you can expand on the company description and how you’ll stay relevant is to display the strengths of your team. Present the management and specialists that you have on board, and how what they can do will contribute to your success. This section can include profiles and resumes of your management team and specialists, where appropriate.
- Products and Services – Here you’ll list the services you provide in the nursing home, along with any products you may sell, if you plan to. Nursing homes often offer insurance packages along with partner organizations, and these should be included. Any services the home provides should be listed here too, along with the details of how the services will be administered and by whom.
- Sales and Marketing – This section will go over your approach to finding your nursing home clients and getting your name out there. List the media avenues, such as TV or radio, and lay out your campaign plans. Detail how you’ll reach potential residents once you get going.
- Financial Projections – Your pro forma income and cash flow statements, as well as your balance sheet, should be completed and accurate for you to be able to form detailed and realistic projections of the financial future of your company. These projections will be important for you, but also absolutely critical for any investment or loan you might want to take on in the future.
For financial projections, consider using our Nursing Home and Assisted Living Projection Template that is specifically designed for a nursing home business and can be further customized with your input and by making use of the free support that comes with it.
6. How to Hire When Starting a Nursing Home Business
Your budget and planning sections should have established who and what you can afford, so now hiring becomes a matter of reaching out to find them. Of course, every career will need the appropriate background check and disclaimers to be filled out, but how do you find them in the first place?
Headhunting from the competition is one method, especially if you have a better salary package or benefits available. As long as you create a comfortable working culture with good compensation, many staff in less-friendly companies will be happy to switch over.
You can also start networking in appropriate groups and locations, and spread the word of your new home opening up. For lower-skilled roles, university graduates may be looking for experience, so get onto forums and social groups to find them.
For specialists, consider people with a wide range of skills at first; those who can impart their experiences onto your new staff and build up skill sets from the inside. Early investment in training can save a lot in the long run, and focus strongly on retaining the staff you do get, to save on the future cost of talent acquisition.
Once you have a team, you’ll be ready to open your doors. This means you’re going to want to have people to look after.
7. Patient Acquisition for a Nursing Home
You will likely find customers / patients for your nursing home through referrals from doctors, therapists, hospital systems, etc. Additionally, you can advertise online through Google Adwords or through platforms like A Place for Mom that helps children find long term care for their parents.
Because the lifetime value of a nursing home patient can be hundreds of thousands of dollars in revenue, the competition to acquire patients can be quite steep. This means your customer acquisition costs can also be quite high. You might spend thousands of dollars on advertising to acquire a single patient for example.
8. Nursing Home Profit Margins
Nursing home profit margins can range from 5% on the high end to 1% or even negative in some cases. Even though profit margins are in the low single digits, nursing homes generate a significant amount of revenue per patient, so a nursing home can still generate a handsome profit for an owner.
9. How Much Do Nursing Homes Make
The average nursing home in the US generates roughly $3.9 million in annual revenue.
We calculated this based on the fact that IBISworld estimates the US nursing home market to be $142 billion annually with 36,195 facilities. This averages out to just over $3.9 million in annual revenue per facility. If we apply a 3% profit margin we can estimate an annual profit per nursing home of $117,695.
In order to forecast how much profit your specific nursing home facility might generate, use our nursing home pro forma and build your own custom forecast.
Conclusion
Setting up a nursing home is no easy feat. It’ll take lengthy planning, lots of paperwork, and significant overheads. However, with an aging population, the demand for such a company is always going to be high, and with the right business model and sufficient financial backing, you could be on your way to a lucrative and rewarding business opportunity.
A business plan forms the framework of all of the preparation you’ll need to take on to get off the ground, so follow it clearly, and make sure your data is accurate. From there, get out and market your roles and your residential positions, and see how your idea quickly evolves into a valuable service.
