NADSA 2020: 5 Trends To Follow

The National Adult Day Services Association held its annual conference in Minneapolis last weekend.  It’s always fun to go to this conference.  It’s not too big, so I’ve been able to meet lots of other adult day providers over the years.  Many have become friends. 

This conference is also a great place to identify trends affecting Adult Day.  Here’s my top 5:

  1. Future expansion of adult day and other supplemental services in Medicare Advantage
  2. Exponential demographic expansion of the older adult population while the size of the future workforce remains steady
  3. Implementation of Home and Community Based Services Definition and regulations
  4. Implementation of Person-Centered Care that also engages the broader community.
  5. Active Day, the largest Adult Day provider in the country, acquires centers specializing in developmental and intellectual disabilities.
  6. Increased professionalization of adult day

I’ll take a look at each of these trends in upcoming posts. 

DFCS and Medicaid: Managing Crazy

If you live in Georgia, perhaps you read this article in the Atlanta Journal Constitution: 17,000 Georgians cut off from Medicaid face messy bureaucracy.  If you didn’t, let me tell you the short version.  Basically, the Department of Family and Child Services (DFCS) issued denial letters for 17,000 Georgians because of they did not properly renew their Medicaid application.  A subsequent article told how an additional 13,000 Georgians were also denied Medicaid benefits.  Fortunately, the state decided to reinstate everyone for an additional year after the article was posted, but what a scary experience for an individual dependent on these benefits.

DFCS claimed that they properly communicated with the Medicaid members by email; however, representative attorneys convincingly claimed that no such communication reach the members email box.  Many, if not most, Medicaid members in Georgia are Aged, Blind, or Disabled (ABD).  Often, these individuals require enormous assistance because of their health status.

If you were to read this article, you would be excused if you thought it were a solitary experience.  It is not.  It is business as usual.  DFCS makes all Medicaid eligibility decisions.  The decision must be made every year.  The process is lengthy.  It is difficult to manage. It is difficult to find out any information.  The process affects Georgians negatively every single day.  Georgians lose eligibility often.

Let me share an example of one of our members at Skylark.  We serve a young man with significant disabilities.  He’s as nice as he can be, but he is unable to fend for himself.  He recently applied for the Elderly and Disabled Waiver Program (EDWP).  To be eligible for this program, he must qualify medically and financially.  When he qualified medically and it looked like he was going to qualify financially, he was authorized to receive services.  He was admitted to a personal care home and to adult day. 

This was a provisional admission.  He then had to pass the gauntlet of Medicaid eligibility with DFCS.  This means that the providers don’t get paid.  He and his family agree to guarantee the payment of the services should he not be deemed eligible for services.  Ten months after the program, DFCS has not granted eligibility.  Actually, they denied him eligibility but didn’t tell anyone.  The bill for the services rendered over the passed 10 months is easily more than $20,000.  Because of the denial, the provider is unlikely to be paid.  Worse, the young man will be discharged from his new home and denied continued services that are very much needed.  He will also be required to repay that $20,000 even though he has no financial resources to do so. 

The good news is that DFCS failed to mail the denial letter.  We escalated the case through the Georgia Department of Community Health.  We quickly discovered that DFCS evaluated the young man for the wrong type of Medicaid, which meant that he was indeed eligible for services.  The case was reopened. The family was required to resubmit all the documentation again (after it had been submitted properly before, then lost at DFCS, and then resubmitted again).  We expect that he will likely receive a letter with good news shortly. 

We have other Medicaid members who completely miss the annual reauthorization required by DFCS. Or they have to resubmit applications repeatedly. Or they have to appeal erroneous decisions.

I wish this story were unique. Or that the denial of Medicaid benefits to 30,000 Georgians surprised me.  But it is not, and I am not surprised.  I learned recently that the Medicaid waiver management division consistently has over 100 cases like this open at any given time.  One of the larger care management agencies for the EDWP has over 500 cases open at any given time.  These six hundred cases are only a drop in the bucket as there are over 12 other case management agencies with the same problem.  It will get worse as the SOURCE program will soon have to go through the eligibility process.  This more than doubles the case load for DFCS for evaluating applications to EDWP. It gets worse again as all nursing homes, hospitals, and other Medicaid using health services must use this same evaluation system. 

This process is brutal for individuals and families.  Many of these families are caring for individuals with Alzheimer’s disease and other dementias, and intellectual and developmental disabilities.  In other words, these individuals can’t help themselves through this process.

It is also brutal for the businesses that serve these individuals and families.  One business reported having to write off over $40,000 because of services rendered to individuals ultimately denied services.  Another business reported that they have a current balance of over $20,000. They expect to write off about $7-10,000 of that because of a delayed eligibility process.  Another business reports rationing access to their services to manage the risks associated with the DFCS eligibility process. 

What is a business to do?

We focus on the affected individual first.  This means that we know the system well and know how to escalate problems within the regulatory environment.  We are often able to help the family navigate the process.

We are also a business.  We have to pay rent, pay employees, pay insurance.  Earned revenue without cash payments drives us towards bankruptcy, so there is a limit to how long we can provide services without payment.   So, some are discharged. Or, families stretch to find the resources to pay for a few months of service with a promise of repayment if and when eligibility is granted. 

Finally, this situation demonstrates the need for a small business to have a public policy and government relations strategy.  In this environment, the business needs:

  1. A good relationship with the regulatory agencies.  Let me rephrase.  Develop a good relation with the right employees in the regulatory agencies who know how to get things done within the bureaucracy.
  2. To be a great member of your local and state trade association.  The association that represents multiple players in an industry develops credibility for the long haul with legislators and agency heads.  It is often true that the association is the only players who can open doors and effectively address challenges.
  3. Persistence.  Face it, when dealing with the government, nothing happens quickly. It takes time, a lot of work, and being the squeaky wheel.
  4. To make Government Relations a priority.

This DFCS problem needs to be solved.  There are millions of dollars at stake.  The lives of the most vulnerable Georgians are adversely affected.  It won’t be a quick resolution as DFCS isn’t responsive, and the problem has been growing for years.  I’m hopeful that our association will jump on it.  This problem probably requires a legislative solution, which makes solving the problem even more complicated.

Yet, perhaps the Atlanta Journal Constitution article can demonstrate the impact on 30,000 Georgians to the Governor and the Legislature.

What else? How does Government Relations figure into your business?

BHAG—WHAT AM I THINKING? 5 Insights for Using the BHAG for Small Business Strategy

The Big Hairy Audacious Goal. 10x 2018 Revenues by 2028. Profitably.

Let’s say my 2018 revenues were $1,000,000 (this is not my revenue, but it’s a nice easy number to work with).  In 2028, that’s $10,000,000.  That’s a compounded average growth rate (CAGR) of 26% for 10 years.  If I tried to do this in 5 years, that would be a CAGR of 58%. If I tried to do this in 10 months, it would be…well you get the picture.

So, what does this mean?

In my business, 10x in 5 years seems unrealistically aggressive, unless I were to raise a lot of investor money.  Since I’m not planning on raising the money right now, I’ll stick with the 10-year time frame.  In case you’re wondering, a 26% CAGR looks like this:

Year Annual Revenue Incremental Revenue
0 1,000,000
1 1,258,925 258,925
2 1,584,893 325,968
3 1,995,262 410,369
4 2,511,886 516,624
5 3,162,278 650,391
6 3,981,072 818,794
7 5,011,872 1,030,801
8 6,309,573 1,297,701
9 7,943,282 1,633,709
10 10,000,000 2,056,718

When first setting the 10x goal for revenue, it seemed aggressive and challenging.  I had just read an article about Google.  Early in its history, there seemed to be a fixation on 10x growth.  The goal seemed to be attainable, but difficult to do. 

Seeing the annual revenue targets of 26% growth on a spreadsheet is daunting.  The growth in the early years seems aggressive, but doable given some new investments.  When I look out several years into the future, I’m not sure where I would find the $1-2 million of new revenue each year to meet the challenge.  It’s the relentless march of 26% and growing off a larger number is harder than growing a smaller number.

From a strategic standpoint, this particular BHAG has 3 implications:

  1. We want to aggressively grow.  Many of my competitors get to a point where they are pretty stable, and their growth is more about price increases.  10x revenue growth changes our trajectory and will require us to become a much different company.
  2. Capital Needs: This goal requires growth capital.  This cash comes from profitable operations, investors, debt, or a combination of the three.  We don’t plan on raising capital now.  We’ll fund the growth from cash from operations and debt financing for good acquisition opportunities.  This means we need to become increasingly efficient: relentlessly scrubbing unnecessary expenses from the profit and loss statement.  Cash is king and it starts with profits.

It also means that we start managing for the balance sheet.  Are we adequately capitalized so that we’re not reliant on a line of credit?  Is the equity in the company growing over time so that we can access bank financing when needed?  It’s not just about maximizing the P&L to maximize the owner’s personal income.  It also means building balance sheet wealth.

  • Organization: We’ll need to build a strong team to meet the challenge.  As a small company, we have the owner and one or two key individuals leading the company.  The small company doesn’t have a full contingency of specialized professionals leading key roles like marketing or finance or human resources. 
  • Think like private equity investor: Can we utilize debt to acquire a company or two over the next several years.  It will be hard to reach the goal through organic growth alone. 

Can the existing company become a platform company?  In other words, can I use it to take on new lines of business, which would then make the underlying business more profitable?  An acquisition or two may be the only way to scale the entity fast enough. 

  • Sales and Marketing:  This is the key.  We must improve our ability to sell services to new and existing clients. To 10x revenues, though, Sales and Marketing must operate excellently and repeatedly day in and day out.  It requires internal business development skills so that existing customers keep buying and don’t meet their needs elsewhere.

The BHAG focuses the mind.  We can reach the goal if we go in the right direction.  There are activities that we can do that will never lead us closer to the goal. 

What do you think of this BHAG?  Is it the right goal?  What else? Or should we be looking at a different BHAG.

Senior Helpers Town Center: Is it a good business opportunity?

In the article, I shared about the Glennar Town Square program.  I want to take a look at the Senior Helper’s franchise opportunity based on what I know about these centers and the industry.  This analysis is based on the limited information found on the various Town Square Web sites and on my own extensive industry experience. Here is some more information about the Senior Helpers Town Square Franchise opportunity.

First some observations:

  1. The web site describes the program as “an all-new, innovative alternative to an adult day care facility.”  But this is precisely, what they are and how they describe themselves elsewhere in the program. 
  2. The original program is in California.  This is significant because senior services in general are quite a bit more expensive throughout California than in other parts of the country.  Pricing models that work there may not work in other states.  From a private pay perspective, the difference might well be $30-50 higher than what you would find elsewhere.
  3. The Town Square payment sources are private pay, long-term care insurance, and Veterans Administration funding.  It appears that they will not accept Medicaid funding.
  4. I believe the centers are to be approximately 8-10,000 square feet.
  5. Glennar is a non-profit organization.  They obviously are trying to be innovative and create new models for the industry.  They have opportunities to raise operating funds and to partner with other organizations to reduce operating expenses. Because they are in California, they have some opportunities to provide services required by California licensing standards.  For example, they provide training for professional staff in residential settings.  There are additional opportunities in other states as well, but these services certainly support the mission.  It’s important to look at their experience through different lenses to ensure that a for-profit organization can effectively replicate the model. 

Here are some observations:

Revenue:

With 8-10,000 square feet, they are likely looking to be licensed for at least 120 daily participants.  In Georgia, we could be licensed for 150-200 daily participants.  This is the fundamental analysis for revenue generation.  According to the Genworth 2018 Cost of Care Survey, the daily price for adult day in San Diego is about $80.  That number is going to include pricing for Medicaid programs and private pay programs.  I’m guessing, but I bet they’ll be looking for close to $100 per day in California perhaps $120 for a premium product. If they can fill the center, the annual revenue will be in the range of $2.5-3 million per year.  If we used the Georgia licensing standards, we could be closer to the $4-5 million range.

These would be great revenue numbers for a center.  Is it possible to get these numbers?

Franchise systems are notorious for setting lofty goals.  I really don’t know what they are selling, but the size of the centers requires a large daily census.  If they are to attract a significant franchise investor, the opportunity needs to be large enough to justify the risk.  I question the underlying assumptions need to fill this size center. 

  1. Larger centers are almost always dependent on a significant Medicaid clientele.  There are just not many programs of that size that are private pay only.  The model requires Veterans Administration funding.  The challenge with VA funding is that the VA is not required to work with all comers who meet their standards.  Medicaid is.  The reimbursement rates for both the VA and Medicaid is all over the place nationally.  There is a pricing risk inherent in this model. 
  • Can they build a census that will fill such a large center?  It’s difficult, but not impossible to build a significant private pay census.  It hasn’t happened very often though.  This requires exquisite marketing and sales performance.  Can they reach 100 daily participants?  Most centers pull their private pay clientele from a rather limited radius around the center.  In urban areas, this is within a 5-10 mile radius, perhaps smaller.  The private pay prospect has home care, assisted living, and other options to consider for care options. 

As a prospective franchisee, I need to protect enough territory to fill that center daily.  This will be a challenge.  The franchisor’s incentive is to keep territories small in order to sell as many territories as possible.

There are only a few centers of equivalent size in Georgia.  Invariably, they are Medicaid centers specializing in a specific culture and language.  The main large centers are Russian, Korean, Vietnamese, and Indian.

Fundamentally, it will be very difficult to reach a census of that size in one location.  Given the dynamics of a franchising, it will be more difficult given the scale and the need to replicate across a large number of separately owned centers.

  • How fast can you build census?  The home care sales process differs from the adult day sales process if only because the owner has a big facility to support regardless of how many paying customers there are.  If the census or average daily attendance grows too slowly, the investment never ends or is too large to ever earn a return.  Assume that it will grow too quickly, and there won’t be enough cash to fund the investment.  Growing average daily attendance by 2 or more each month is an aggressive goal.  If my goal is 100, the center will require 50 months to fill completely up.  That increase is a net figure.  After a certain point, there is always significant attrition.  It’s a common issue with all senior care business.

Revenue Conclusion:  The franchisee is looking at an opportunity to generate a lot of revenue for the center; however, the sheer size of the center requires the investor to question whether the revenue goal is achievable, especially only with a private pay clientele.  Local demographics will restrict further the number of centers in this system that have a realistic opportunity of reaching the goal.

Expense Observations:

  1. The initial investment is large.  Senior Helpers will require an initial franchise fee.  Based on a scientific wild-*ss guess, this will be around $50,000 per territory.  The franchisee will need to build the center out to the Senior Helpers standard.  I would be prepared to spend $50-70 per square feet in tenant improvements (approximately $400-700,000) and perhaps more given the special buildout that is required.  New furniture that meets the systems standards and that is appropriate to a health care environment is likely a $50-100,000 investment.
  2. Franchise systems charge royalties and marketing fund fees based on revenues.  At a minimum, the franchisor will charge 5% of revenue.  I would expect that a large established franchisor like Senior Helpers would be looking for a higher royalty rate of perhaps 7-10%.  Whatever the rate, it’s a large chunk of cash due as earned on an accrual basis.  The fee is going to be due before collections are made and before other bills can be paid.  Most franchise systems also charge a marketing fund fee of 2-3%.  There will be a personal guarantee associated with the royalty fees.  Senior Helpers appears to know how to do marketing and was able to get tremendous coverage for the launch of the system.    Even so, it’s a lot of money taken off the top. 
  3. The investor will need start-up operating expenses to reach positive cash flow.  They will need to cover between 12 and 24 months of expenses.  It won’t be cheap either.  The lease will be expensive because the space is large requiring extensive utilities expenses.  There will need to be significant investment in sales and marketing personnel, highly compensated health care nurses, administrative staff, and front-line staff.  They will need to make a significant investment in technology as well.  State licensing boards require specific staffing models and ratios.  It will be easy to skimp on the sales and marketing personnel, but without an incredibly polished sales and marketing staff, the growth targets won’t be met.  I’d want to budget at least $20-30,000 per month in operating expenses even before any sales are made.
  4. The business owner in this industry will experience significant economies of scale as a center increases its census.  The center should be quite profitable after a certain point and certainly if it can reach 80-100 daily participants.

Final Thoughts

Will Town Center be successful?  I have three thoughts:

  1. For the Franchisor, I have no doubt that Senior Helpers will sell a lot of franchise territories.  They are large and have deep pockets to develop the market.  Time will tell if their expertise in home care will translate to adult day.  This will be harder to do than they think it will be.  Even so, I’m sure they will generate significant revenues from territory sales and royalties.
  • For the Franchisee, I believe this will be a tempting offer.  The product is attractive.  The opportunity sounds wonderful since it is based on tremendous demographic growth trends.  Yet, it is difficult to see that the opportunity will reliably and repeatable generate returns that justify the risk to investment capital.  It’s pretty easy to see the initial investment including initial franchise fee, tenant improvement, and initial operating expenses being north of $1,000,000.  (This could be lower with a smaller center).  The prospective franchisee should be cautious with revenue assumptions.  There is a wide variation of possible revenue outcomes depending on census growth.  It will be easy to be undercapitalized.
  • Again, for the Franchisee, I’d take a hard look at the exit opportunity.  What is a likely business valuation at exit? If you aren’t good at Excel and modeling, hire someone who is and can put together a good model based on the individual, local market characteristics.  I would then meet with business brokers to find out how to exit the business.  As a franchisee, the owner is captive and must sell the unit to someone who will stay in the franchise system.  This restricts the pool of possible buyers.  According to the Business Reference Guide.  The centers will likely go for approximately 2.5-3 times Seller’s Discretionary Earnings (which is basically EBITDA plus Owner’s Compensation plus any one-time expenses).  Depending on the margin assumptions, the exit valuation could be about what the investor put into the business. 

Final Thought: 

If I were new to this industry, would I buy a Senior Helper’s Town Center franchise?  Given what I know now (admittedly not many specifics), it’s hard to justify the business investment given the potential likely returns.  I like the Glenner innovation.  It really is pretty impressive with a lot to learn from.  I just don’t think I could write that big of a check or go into that kind of debt to pull it off.

Importantly, there are serious opportunity costs associated with this investment.  If I were able to qualify to invest in this franchise opportunity, I would also have the ability to purchase another business (even another adult day center) that would provide higher returns for less risk.

What do you think?  Clearly, it’s an interesting product, but what kind of return profile should I be looking for?  Is it a good investment? How should this opportunity be evaluated? Am I being fair or too harsh?

Senior Helpers Town Square: New Competition in Adult Day

I received a flyer recently about an elder care educational opportunity in Atlanta.  The speakers included Eloy Van Hal, Founder of the Hodeweyk (Dementia Village), The Netherlands and Scott Tarde, CEO of the George G. Glenner Alzheimer’s Family Centers in California.  On the flyer he is also billed as the “the innovator behind The Glenner Town Square featured in the Wall Street Journal and on ABC’s Nightline.”

The Hogeweyk (Dementia Village) in The Netherlands has received a great deal of attention.  It is a residential facility serving dementia patients. The innovative part is that the facility is built as a town and residents have significant freedom to explore the environment.  The videos are fascinating.

I have heard of Hodeweyk before but not the Town Square program.  So, I googled it. I learned that Glenner is primarily an adult day center provider with four centers in California.  They have four centers.  Three appear to be fairly traditional center, but the fourth they have branded as Town Center.   The concept is loosely modeled after the Hodeweyk Dementia Village in the sense that everything is geared to reminiscence therapy.  In this case, the center is modeled on 50s or 60s small town America.  There’s a diner, a post office, pool hall, theatre, and other attractions.  It does look pretty neat.  The theme is geared towards today’s seniors who were teenagers in the 50s and 60s.

The other thing I learned is that Glenner is in partnership with Senior Helpers to franchise the concept.  Senior Helpers is a large successful home care franchise system.  In addition to being an interesting new concept in the industry, it has the backing of a well-financed franchise system.  There have been several attempts at franchising adult day centers.  But, nothing has been a runaway success.  SarahCare is the only franchise concept that remains, but several other concepts have failed.  Even so, the number of SarahCare units topped out in the mid-twenties, so by franchising standards it hasn’t been a massive success on the scale of the most successful home care franchise systems such as Bright Star, Senior Helpers, or Comfort Keepers.

The Glenner Town Center has gotten me thinking about strategy, competition, and growth opportunities:

  1. Understand what the conference speaker is selling.  The event looks very interesting and informative.  It looks like I’m going to learn a lot.  Upon, a closer look, I’m sure that Senior Helpers is funding the speakers to promote the sales of franchise opportunities.  I’m not adverse to sales and marketing, but I like to know when I’m being sold to.  I’m more than a bit cynical about this learning opportunity.
  2. Is this a good business opportunity?  Franchising does not have a great history in the adult day services industry.  It initially appears to be a simple business, but really, it is complicated.  It doesn’t lend itself to easily replicable systems and processes.  That doesn’t mean that it can’t be done.  The largest company in the space is Active Day.  They have approximately 100 centers.  If it were easy, they would have significantly more.
  3. Is the market opportunity there?  It is easy to share statistics that demonstrate the amazing opportunity that is senior care.  Yet, it is also a very local business.  How big is the territory around a center?  Is it possible to recruit the number of seniors needing care to the center?  Sales and marketing is difficult.  In this space, it is also highly competitive.  There aren’t many adult day programs, but by the time we look at home care, home health, assisted living, nursing homes, and other senior facing programs, the space is crowded. 
  4. How sustainable is the focus underlying concept?  I’m impressed by the concept, but I can’t tell if it is something that is sustainable over the long haul or if it is gimmicky and the initial novelty will wear off?  The initial marketing appears to be focused on reminiscence therapy.  Presumably there will be other activities services offered, the focus might be a bit narrow.  It might be a good way to get families in the door though.
  5. What do I need to do to increase my competitive standing in the marketplace?  This is a future competitive threat.  It will be several years at least until there is a significant presence in Atlanta.  Yet, the opportunity to improve is great.  How do we present ourselves to our prospective customers?  How important are the visual cues to families when they come to visit? How important is it to make an immediate emotional connection with the caregiving family?  Clearly, there is an evolving standard. 

I certainly appreciate the innovation in center design.  It presents well.  I can’t tell from the video on the Web site if the concept really works well for the long term allowing for hyper focus on the individual needs and desires.

What do you think about this concept?  Take a look and let me know?  For my next article, I’ll do a back of the napkin analysis of this as a business opportunity. 

The Forgotten Middle: Possible Solutions for Middle Income Senior Care

There is a cavernous gap in senior care options for the broad middle class.  For the truly, low income and low asset senior, Medicaid provides significant options for the senior.  For high income seniors, they can afford the services they want and need.  The majority in the middle struggle to afford the services, forcing seniors and families to stretch to meet their care needs. 

There is a business opportunity in all of this.  The question is how to put it together.  It’s doubtful that the solution is one thing. 

The solution to the problem likely lies with home and community-based senior care whether funded privately, by the government, or a combination of both.  It’s likely to include in home non-medical care, volunteer/unpaid family care, technology, home modifications, meal delivery services, and adult day services.  These are services that supplement existing housing options whether single family or multi-family housing.

The NIC study suggests building assisted living services for this group.  I’m sure there will be some properties who are able to figure it out if only because as the buildings age, they lose competitiveness.  Yet, the underlying cost of the institutional care (even just looking at personnel expenses) suggests that this is going to be difficult. 

There will be many creative solutions.  I’m looking forward to finding them and writing about them.

However, this senior care entrepreneur is focusing on and investing in adult day services to be the core solution to this dilemma of the booming care needs of the middle-class seniors.  I envision adult day centers to be a hub of services empowering seniors to remain in their homes and in their communities.  The adult day experience supplements current housing options whether in a traditional single family home, an apartment, a condo, a townhome, or in an independent living community. 

Adult day is a platform from which to provide the senior care services seniors need.  The center is a community hub.  Services emanate from the center into the community allowing for superior experiences at a lower cost.  The more expensive senior living options can be a supplement towards the end of life rather than a multi-year housing experience that drains financial resources.

I’m still working on the particulars, but when I envision the adult day center of the future it includes: 

  • Social, Recreational, and Spiritual Programming
  • Significant Health Care services to include chronic care services and engaging in the post-acute care and post-rehab spaces
  • Reaches into the home with sophisticated and expert home care services
  • Leverages Medicare funded services such as physical, speech, and occupational therapy, and medical social work services
  • Professional care management resources.

I’m still exploring the strategy.  I’m still trying to understand product market fit.  It’s clear that the middle market won’t be able to afford senior living in 10 years because they can’t afford it today.  The  middle really is forgotten.  We need a solution.  I’m betting on Adult Day.

What’s the solution for the forgotten middle?  Is it residential?  Is it community-based? Or a combination? 

Middle Class Senior Care: Cavernous Gap In Affordable Services

The National Investment Center for Seniors Housing & Care released their study in the spring of 2019:  The Forgotten Middle: Middle Market Seniors Housing Study   I just recently became aware of the report as several news outlets covered it. 

The report looks at the ability of the fast-growing senior populations ability to afford senior living services in 2029.  Not surprisingly, the study finds that the majority of seniors will not be able to afford to pay the expected average cost of senior living of $60,000 per year even though they will need it and want the service. 

The study concludes that this inability to afford senior living will adversely affect governments as families are forced to spend down until Medicaid takes over.  This creates a substantial drain on state and federal resources.  It affects families who need to spend the resources of multiple generations to care for parents.  The headline conclusion from the study is that if the average expense could be reduced by $10-15,000 annually, the demand for senior living would increase dramatically. 

The study authors also conclude that the senior living industry needs to figure out how to develop a housing product for the broad middle class.  There appears to be a significant business opportunity for the right investors and entrepreneurs.  They identify a political risk by observing that if the industry is only seen as focusing on upper income seniors, then there will be push back from politicians as the majority are not able to find housing and healthcare to fit their needs.

As a senior care entrepreneur, I immediately found this article provocative.  The are not many senior services designed for the broad middle class.  What is readily available in the Atlanta area is either designed for the low-income seniors and is governmentally subsidized or it is expensive and designed for higher income seniors.

On the low-income side, there are several options.  There are low-income 55+ communities.  These are usually subsidized by the US Department of Housing and Urban Development or local housing authorities.  There do not appear to be many of these building under construction.  Many that exist in Atlanta are several decades old; although, some have undergone some recent renovations.  The Darlington, a fixture in Atlanta for decades and known by its sign with the Atlanta population numbers, recently converted from a low-income housing building to a market rate building.  I have seen some low income properties developed in the 55+ space using tax credits.  While all these communities serve a large need in the community, they do not offer extensive assistive services.  Essentially, these are apartment communities, for independent seniors. 

Another option for low income seniors are smaller personal care homes.  These are smaller, older buildings ranging in size from 2-3 rooms on the low end to 30-40 beds.  If the building is under 24 beds, the community can enroll in Medicaid.  These communities generally offer personal care services.  The services offered are generally lower priced, but very limited in services.  Staffing ratios can be higher.  Activities programs are limited or non-existent.  There are some small buildings that charge higher rents, but mostly, these rents are lower.

The vast majority of what is being built today targets the higher income seniors or high-income children who are willing to subsidize their parents.  These properties are financed institutionally.  These investors expect high returns to justify their investments. The primary focus of the assisted living industry is high rent for high income.

Most cost studies such as Genworth’s 2018 Cost of Care Survey peg the average cost of assisted living in the $3,500 to $4,000 range.  It’s misleading.  The average includes senior living aimed targeted for low income seniors.  It also includes the newer, fancier buildings.  For the lower priced communities, the pricing might be in the $1,500 to $2,500 range.  For the newer, fancier communities, rents might officially start in the $3,500-$4,000 range, but quickly increase.  The monthly rent increases once extra charges for laundry, utilities, medication management, housekeeping, and personal care services among others.  The actual monthly expense can quickly increase to more than five or six thousand dollars.  For memory care, the expense can go higher still.  In some cases, families are then required to hire a home care aide for 24×7 individual coverage, which pushes the costs still higher.  When the money runs out, the individual is forced to move out to find less expensive options or utilize Medicaid elder care services. 

It’s no wonder that most won’t be able to pay for senior living in 2029.  Most can’t pay for it in 2019 either.  The gap is real right now. This is a significant challenge for seniors and their families.  For many families it is a significant pain point.  They are solving the problem by dipping into savings, providing free labor, and quitting the work force. 

This is an opportunity for the entrepreneur.  The problem exists right now.  We need to identify the solutions now in order to meet the demand for care in 2029.

What do you think? What solutions are available for middle income seniors?

Strategy, Cash, and Value

When I was in business school, we spent a lot of time thinking about strategy.  I learned to analyze an industry using Porter’s 5 forces.  We talked about Judo tactics in business.  I really enjoyed the classes. 

I’m a small business owner now.  I own an adult day and home care business.  From an industry perspective it has a lot going for it.  The biggest is that we operate in the midst of a massive demographic wave.   Our niche is solving care problems for the broad middle class.  No other industry is doing this affordably and with high quality.  On the downside, there is a ton of competition.  It’s fragmented.  Adult day is typically reliant on government payments.  I can go on. 

Much of this doesn’t really matter for strategy and industry analysis.  I own the business.  I can’t easily quit and find a day job if I suddenly think the characteristics of my industry stink.  I can pivot and move in a different direction.  Over time, I can change, but not immediately.

I’ve been thinking about Skylark’s strategy over the last couple of years.  We survived a Medicaid freeze several years ago.  The strategy became simple: survive and diversify away from Government payments.  We invested in more modern sales and marketing programs.  We are growing in ways that we were not before the freeze.

I also have diversified my learning.  For a long time, I spent most of my time trying to understand our little world of adult day services.  I’ve read some great business books.  I started looking at some different blogs and observing companies in completely different spaces. 

One company I learned about was Navix Consulting.  They specialize in exit planning for the small business owner.  I also read a book called Buy, Then Build by Walter Diebel.  Neither offers a unique service, but they were the ones that introduced the concepts to me. 

There are two implications for strategy.  First, plan for the exit.  The CEO/Owner ensures that the company is in a position to be sold for a good price.  The company must be structured properly so that a buyer can take over without undue risk to their investment after the closing. 

Buy, Then Build is a book about acquisition entrepreneurship.  The main thesis is that starting a company from scratch is a risky endeavor with a high failure rate.  An acquisition greatly diminishes the risks of entrepreneurship assuming a fair valuation at purchase.  This book opened to me an entirely new avenue to growing Skylark.  In addition to organic growth, acquisitions fuel growth.

At some point, my business is going to be in someone else’s hands.  I’ll either sell it, pass it on to the next generation, close it down, or get hit by a bus (or something else equally unsavory).  Failure is not an option.  My wife, my kids, and my employees, and my customers depend on me.  (An important question for this conversation: could my wife step in as the owner if I’m suddenly incapacitated?)

That really means that the business has to be in a position to sell or have someone else assume its leadership at any time.  No matter what, I need to get the company in selling shape.  First, I’m building the organization.  There are not many multi-site adult day centers in the nation.  It’s a challenge to be an operator and build the structure and capabilities that are required.  We are determined to build a private pay business.  There are very few adult day centers who successfully attract a significant private pay clientele.  We need a great leadership team and repeatable business operations.

But, it’s not just about growing the organization.  I need to grow the business in a what that increases value.  What is it worth?  Can I sell it for what I need to sell it for?  Can I sell it for more than what I have in the company?

This is where understanding valuation is important.  First, it’s all based on cash.  The valuation for most small businesses are based on the documented (tax returns) from the last 3 or more years. The projections don’t mean much if the recent past isn’t very good.  It’s based on Seller’s Discretionary Earnings (SDE).  While there is a pretty definite equation for determining SDE, the main idea is that businesses sell for a multiple of all the cash including the owner’s compensation that is available to a new owner.

I had a wake-up call when I did a rough valuation of Skylark:  upon a sale, it won’t fund my retirement, pay for college, or fund future investments.  With a rough sense of Skylark’s current valuation, we can pivot our strategy in order to increase future value.  Some investments increase value; some don’t.  The Skylark Mission is very important to us, so the investments answer to the mission. 

For Skylark, we will meet our Mission while increasing the economic value of the company by:

  1. Building cash flow and an adequate cash capitalization.  This means we will be efficient and increase productivity.  We’ll need to learn to manage our line of credit effectively and maintain adequate cash balances.
  2. We need to grow.  Smaller companies receive a valuation approximately 2-3.5 times their SDE. As revenues and profitability increase, valuation multiples expand.  I don’t know that we’ll go for breakneck growth, but it would also be good to have the resources that come with a bigger budget.  When you’re smaller, sometimes the solution is: who needs sleep; we’ll get it done tonight.

What else?  This really is the beginning of my thoughts on business strategy.  What more should I consider?  How have you developed strategy?  How do you increase value while staying honest to the mission?

Why Write?

I’ve had this blog for several years.  I’ve not always been the most consistent blogger.  I know bloggers who write every single day.  I’m impressed by this, but it’s a daunting challenge.  As a small-business owner, I’m already moving in a million direction juggling business challenges not to mention family obligations and community interests. 

Ultimately, I suppose this blog is a new business venture.  It seems a bit crass, but for it to be worthwhile it needs to be different and add value to an audience.  That’s a challenge, especially considering how many web site are out there.  I’m not naturally inclined to write often.  It’ll be a challenge, so I need to make it relevant to and interesting for me. 

I’ve been thinking about this recently though.  I’m excited that I’ve got two articles this week. I’d like to focus on:

  • Exploring business: I am an entrepreneur.  I’ve been at this for about 13 years now, so perhaps it’s more accurate to say I’m a small business owner trying to lead my company to the next level. This is an opportunity to explore thoughts on strategy and certainly the questions I have moving forward.  Even though, I have an MBA from a great school, there is still much that I just don’t know about leading a business.  As we grow, the challenges are familiar, but different.
  • Family man: I really love being a husband and a father.  My boys bring me great joy, even when they are a bit whiney.  The stakes have increased exponentially.  It’s just not an option not to succeed.  My wife and my kids need my contribution to the family to pay for the home, daily needs and wants, college, retirement, and so much more.   
  • Faith: I’m a business man, but also a Christian businessman.  I earned a Master of Divinity degree at Princeton Theological Seminary.  This is an important part of who I am and helps explain why I’ve spent so much time in the world of elder care.  I’ve observed a couple things: the first is that there are many individuals who try to live out their faith in the work place.  The second is that I’ve seen many who try to explore what it means to marry faith and career, but are challenged to think deeply about it.  Sometimes the language is there to inform the effort, but often the theological understanding is not present. 
  • Serendipity:  At Skylark, we are in the process of opening our 3rd center.  It’s exciting.  According to my plans, I was probably a year or two away from doing this.  The opportunity came because one of our vendors had some space that had previously been used as an adult day center, and they approached us.  The opportunity arose from the business relationship.  I’m finding that as we get better, I’m becoming a resource for my industry, which also includes some fantastic business opportunities.  I hope that this blog will lead to more serendipitous relationships and who knows what.  I’m not sure what will happen, but more happens if I’m out there. 
  • Establish Expertise:  I’ve developed expertise in two main areas: the business of elder care specifically in adult day, home care, and understanding how to care for seniors in their home and community and in small and middle market business. 

This blog is an opportunity to share what I’ve learned.  It’s an opportunity to develop new tools that help make business easier.  I want to develop my toolbox and to improve what I’m doing.  I should explore issues and challenges and come up with better ways of handling challenges.  I want to refine the processes in my businesses, especially as I look to become more profitable.  From time to time, I think a great business opportunity would be to develop a chief operating officer service for small businesses.  In essence, how does a company move from revenues of $500,000 to $1,000,000 up to revenues of $2-4 million.  That’s an awkward stage to be in.  I don’t know if it would be a good business opportunity. But, it’s my challenge.  The challenges we have require the resources of a larger company.  I don’t have those resources yet, so we need to be creative. The challenge is get from here to there. 

Right now, this is where the blog is heading: Exploring business, faith, and family while finding the serendipitous in the midst of building expertise. 

Let me know what you think? Any thoughts on this writing journey?

Government Relations: Six Tips for Working With Uncle Sam

At Skylark, we work with the government. A lot.  You would think that our customers are our Seniors and those who love them.  You’d be right of course, but Uncle Sam pays us a lot of money each year.

We also work extensively with private individuals and insurance companies. 

There are some great advantages to working with the government: the business is relatively steady even during bad times and there is a steady flow of new clients.  We are also able to help individuals who would not normally be able to afford our services.

There are some disadvantages as well: payments are generally lower than what we receive from private clients, there are significant compliance issues, and the programs can be put on hold or discontinued.  Another big disadvantage is that they will audit your performance against a contract and ask for earned revenue back if performance isn’t properly documented or doesn’t meet expected standards.

Most of our government work is with Medicaid and the Veterans Administration.  We also work with local agencies at the city and county level.

Here are a few tips that we’ve learned the hard way:

  1. Competitive Advantage: Read and learn the regulations.  Many competitors don’t read the regulations and don’t know the rules of the road.  When working in a government contract, we’ll want to maximize the revenue opportunities as well as minimize expenses.  Without knowing the regulations, its next to impossible know what is possible as well as what is not.
  2. Find the government official who knows how to get things done:  Don’t expect special treatment, but there are individuals working in government who know how the system works and has the relationships to rise above bureaucratic red tape.  These individuals are awesome sources understanding how the regulatory environment is changing.  When you find these individuals treat them well.
  3. Government Relations: As a small business owner, you probably didn’t start your business to spend time with government officials.  Yet, as the CEO, I’ve found it vital to show up to speak at the state legislature to advocate for needed industry changes, meet government officials, serve on industry advisory committees, and the like.  As we grow, I will need to invest in professional government relations services (Lobbying) in order to stay abreast of our industry and advocate for our company and our industry.
  4. Compliance Program:  Develop your compliance program.  It’s for employees (are you ready for an immigration audit of your I-9s?); it’s for OSHA, the health department, state licensure boards, Medicaid, Medicare, the VA among others.  Compliance failures can bring down your company quickly.  Our best friend in compliance is the custom checklist.  We’ve also been working with our software provider to build compliance into the company workflow. 
  5. Join your industry association and make sure it has a great public policy arm:  This is intimately tied to the need to be involved in government relations.  Many state legislators do not want to just meet with an individual company.  They would rather meet with an association that represents many companies.  There are two many companies to meet with all of them, but if the association can consolidate an industry’s needs and communicate those interests professionally, there is an opportunity to impact public policy.  This is especially true the higher up in government you are looking.  It’s difficult but not impossible for an individual to make a difference at the city, county, or state level, but probably impossible to have an impact at the national level without that association backing.
  6. Long-term investment: A small-business owner needs to invest in their public policy efforts over a long period of time.  It’s not a one and done process.  In Skylark’s niche of the healthcare world, we woke up one morning realizing that our regulatory environment had changed.  It changed in an unfortunate and challenging way. 
  7. Be a good actor: It should be obvious, but be nice and polite.  Be a great resource to them. The employees, legislators, and staffers are often berated and not treated well.  Make it easy to help you.  If you yell, curse, complain loudly, and generally are a pain, your credibility will go downhill quickly.

Government work brings challenges and rewards.  Know the laws and the regulations.  There is a lot that can be accomplished by working through the system.  I didn’t quite understand the importance of government relations when I started the company, but it is an area of expertise that I spend a fair amount of my time on.

What else?  What involvement in government do you have in operating your business?  How do you manage the commitment?