The profits method on one 70-bed home: from the reported year to fair maintainable occupancy and costs, FMOP, the multiple and the value per bed.
A trading care home is valued on the profits method: rebuild the accounts at fair maintainable occupancy and costs, deduct a notional management charge to reach fair maintainable operating profit (FMOP), then apply a multiple. An illustrative 70-bed home trading at 84 per cent, normalised to 90, produces an FMOP of 1,122,045; at 9.0 times that is 10.1 million, or 144,263 per bed, against 7.6 million if the reported year is capitalised as it stands.
Worked in full in Senior Living and Healthcare Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A care home has no lease to read. Its value is the trade a reasonably efficient operator could sustain in the building, so the valuation is mostly an argument about what is "fair maintainable": which occupancy, which staff costs, which one-offs. The multiple is the last and simplest step, and the one that gets the most attention.
| Input | Value |
|---|---|
| Registered beds | 70 |
| Average weekly fee | 1,400 |
| Weeks in a year | 52.1786 |
| Occupancy, reported year | 84% |
| Fair maintainable occupancy | 90% |
| Care staff cost per occupied bed | 33,000 |
| Non-care staff, fixed | 520,000 |
| One-off agency excess in the reported year | 120,000 |
| Other running costs per registered bed | 9,300 |
| Notional management charge, share of revenue | 5% |
| Multiple of FMOP | 9.0x |
Fair maintainable occupancy is what a competent operator would hold in this home in this market over time, here 90 per cent, not the best month on record and not a target in a business plan. The agency excess is a one-off from a recruitment gap that has been closed. Both judgements need evidence: occupancy history and local competition for the first, the rota and payroll for the second.
Step 1. Fair maintainable revenue
70 × 90% = 63.0 occupied beds × 1,400 × 52.1786 = 4,602,153.
Step 2. Fair maintainable EBITDARM
Revenue less care staff (63.0 × 33,000 = 2,079,000), non-care staff (520,000) and other costs (70 × 9,300 = 651,000), with no agency excess: 1,352,153, a margin of 29.4 per cent. The build-up of each line is in how to calculate EBITDARM for a care home.
Step 3. Deduct the notional management charge
5% × 4,602,153 = 230,108, so FMOP = 1,122,045. The charge is deducted even if the owner runs the home personally, because a buyer would have to pay someone to.
Step 4. Apply the multiple
1,122,045 × 9.0 = 10,098,404, 144,263 per registered bed. A multiple of 9.0 is a yield of 11.1 per cent on FMOP. In Excel, keep the four steps on four rows and end with =B14*B15, FMOP times the multiple.
| Reported, 84% | Normalised, 90% | |
|---|---|---|
| Occupied beds | 58.8 | 63.0 |
| Revenue | 4,295,342 | 4,602,153 |
| Care staff | 1,940,400 | 2,079,000 |
| Non-care staff | 520,000 | 520,000 |
| Agency excess | 120,000 | 0 |
| Other running costs | 651,000 | 651,000 |
| EBITDARM | 1,063,942 | 1,352,153 |
| Management charge at 5% | 214,767 | 230,108 |
| FMOP | 849,175 | 1,122,045 |
| Value at 9.0x | 7,642,577 | 10,098,404 |
The 272,870 of extra FMOP has two sources. Adding back the agency excess is 120,000. The other 152,870 is occupancy: 4.2 more occupied beds, each contributing 36,398 after its care staff and management charge. Because most costs are fixed, occupancy moves FMOP far faster than revenue: 7.1 per cent more revenue yields 32.1 per cent more FMOP.
A buyer paying for 90 per cent when the home is at 84 should be paid for the wait. If it takes 12 months to get there, deducting half the occupancy part of the FMOP gap for that year, 76,435 (the agency saving is already banked), takes the value to 10,021,969, or 143,171 per bed. For a home still filling from empty, the article on how long a new care home takes to fill prices the wait properly.
| Occupancy | FMOP | 8.0x | 9.0x | 10.0x | Per bed at 9.0x |
|---|---|---|---|---|---|
| 85% | 994,654 | 7,957,228 | 8,951,882 | 9,946,535 | 127,884 |
| 90% | 1,122,045 | 8,976,359 | 10,098,404 | 11,220,449 | 144,263 |
| 95% | 1,249,436 | 9,995,490 | 11,244,926 | 12,494,363 | 160,642 |
Five points of occupancy move value by about as much as one turn of multiple. The multiple is set by comparable transactions and is hard to argue; occupancy is set by evidence the buyer can test. That is where diligence pays.
The multiples here are illustrative. Whatever level you use, check it against the lease route: cover, yield and multiple are linked, and what multiple an investor is really paying shows how a rent cover and an investment yield imply one.
Each normalisation is a claim the vendor has to evidence. Occupancy: monthly figures for three years, the local supply pipeline and the referral pattern. Care staff: 33,000 per occupied bed assumes the rota is right for the dependency of the residents; if dependency is rising, it is not fair maintainable. Fees: the 1,400 average depends on the payor mix, and a shift towards local authority placements lowers it. Each of these moves FMOP, and every pound of FMOP is worth nine in value.
Applying an FMOP multiple to EBITDARM. Without the management charge the same 9.0 times gives 12,169,373, an overstatement of 2,070,969, 20.5 per cent, because EBITDARM is 20.5 per cent larger than FMOP here. State which profit line the multiple applies to every time; a multiple quoted without its denominator is not a valuation input. On the same line, 9.0 times FMOP is an implied 7.47 times EBITDARM.
Normalise occupancy and one-offs, deduct the management charge, then apply the multiple: 1,122,045 of FMOP and 10.1 million on this home, 144,263 a bed. The free workbook for this case builds the profit and loss from residents and care hours, and values the home by the trade and by the lease side by side.
Fair maintainable operating profit: the profit a reasonably efficient operator would sustain, before rent, after a notional management charge. Here fair maintainable EBITDARM of 1,352,153 less a 5 per cent charge on 4,602,153 of revenue, 230,108, gives FMOP of 1,122,045.
Value per bed is an output, not a method: divide the profits-method value by registered beds. In this example 10,098,404 over 70 beds is 144,263. At 85 per cent fair maintainable occupancy it would be 127,884 and at 95 per cent 160,642, so per-bed comparisons are only meaningful between homes trading alike.
On fair maintainable occupancy, with a deduction for the time it takes to get there. Valuing this home on its reported 84 per cent gives 7,642,577; on 90 per cent, 10,098,404. If reaching 90 per cent takes a year, deducting half the occupancy part of the FMOP gap for that year, 76,435, gives 10,021,969; the agency saving is already banked.
This article is one calculation from Senior Living and Healthcare Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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