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:
- 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.
- 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.
- 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.
- I believe the centers are to be approximately 8-10,000 square feet.
- 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:
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.
- 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.
- 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.
- 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.
- 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.
- 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.
Will Town Center be successful? I have three thoughts:
- 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.
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?