What are the costs to start a home care business?

How much should you plan to invest to start an independent or franchise home care agency in the USA?  The variables and costs to starting a home care business can be complex. By the end of today’s article you should have decision-level estimates of the funds you’ll need to get started.

Business Investment Perspective

In terms of costs to start a home care business, let’s put the capital investment amounts into perspective.  A McDonald’s franchise currently runs about $1.06 to $1.8 million to enter. A bricks and mortar retail store fronts easily requires $150-$750,000+ for the selection of a retail location, remodeling and stocking inventory.  To open a car wash you’ll have to dig $350K or more out of your pocket to get started. Want to build the facility, figure $1 million or more! A hair salon investment will start about $150k, depending on how fancy the salon and where it’s located.

Are there businesses that cost less than a home care agency? Of course, however, very few have as much growth potential over the coming 20 years as in home care!

Home Care Business Model Options

There are a few options to getting started with a home care business.  The financial requirements vary between the options and the one you choose could make the difference between your ability to take the plunge or not.  We’ll discuss the following costs to start a home care business using the following options available:

Purchasing into a Home Care Franchise/Membership Organization

1. Creating an Independent Home Care Agency

2. Buying an existing Home Care Agency (Briefly)

1) Home Care Franchise Costs

For a current list of franchises price tags, please see the Entrepreneur Magazine current list of home care franchise organizations:

http://www.entrepreneur.com/franchises/categories/perssenior.html

The list from Entrepreneur is a fantastic tool for top level comparisons. However, what the list doesn’t include is the a breakdown of the costs, so let’s break them down:

• Franchisee Application

  During the application process, expect the home care franchisor to request proof of the prospective franchisees’ financial capability.  Expect to prove liquid capital amounts ranging from $35,000 to $150,000.  In addition, they’ll look for a total net worth of between $75,000 and $500,000+.  Vetting this financial stability helps ensure the franchisee will be capable of staying the course until the agency is profitable.

  Suddenly, the costs to start a home care business have just ballooned!

• Purchase of Franchise

  Once you’ve proven your net worth, franchise license will require an investment between $30,000 and $250,000. Although some franchises are willing to finance a portion, most non-medical care service franchises run the midpoint at $35,000 to $60,000. The upper end ($55k-$100k+) offer both non-medical and medical care services.  The franchise license grants you the ability to use the home care franchise name and operate in a negotiated territory in addition to using the operational systems to get you started and keep you going.  Keep in mind the territory limitation may impact the ability for long term growth and expansion.  In addition to the purchase price up front, plan on paying ongoing franchise royalties. We’ll discuss those in a bit.

• Franchise Training

  Training of “How To Start a Home Care Company” is often the first and primary attraction to helping new owners getting started in a franchise.  Typically, training is 5-7 days held at the franchisors’ headquarters with most travel expenses borne by the franchisee (you), not the franchisor. The education can feel like drinking water from a fire hydrant so bring your sponge of a brain, a notebook and copious note taking skills to absorb as much as possible.

• Business Setup

  The rubber meets the road when the training is over!  Upon returning from training it’s up to you to take massive action by using every bit of the education to put your business together!  During this time the cash burn rate will seem incredibly fast. Obtaining licensing, setting up the business entity, deposits & leasing an office, office improvements, insurance deposits, staffing costs, marketing and much more all require your cash investment.

• Royalty Payments

  One major consideration of ongoing costs to start a home care business using a franchise are the ongoing royalties, ranging from 3% to 7%. The average is 5.5%.

  Most royalties are calculated from an agency’s gross revenues, NOT NET PROFIT, for the length of your negotiated contract.  Royalty payments alone are worthy of careful planning 3, 5 and 7+ years down the road because each week or month funds will be auto-debited from your account.

  Regardless of what percentage is agreed to, ongoing royalties should come with ongoing benefits. In exchange for your first 5 to 9% of gross income, plan to negotiate access to ongoing business development support and clearly defined marketing assistance. Some franchises provide co-op marketing budgets which assist with your marketing and costs. Most importantly, the devil is in the negotiated details that actually make it on paper and signed.

• Royalties Comparison Example

  Consider the example below: a 5% royalty ($57,200) off your gross revenue calculates to roughly 20% of your gross profit!  Net profit will vary depending on how an any company is run and the expenses taken on, but the take away from this example is the 5% royalty payment from gross revenues calculates to an even higher percentage of what your actual net profit would be.

  In the following GP Table, we compare the top line financials of a home care franchise over time compared to an independent home care agency.

GP TABLE	Franchise Annual	Independent Annual
Clients	50	50
Average Hours/Client	20	20
Billing Rate	$22	$22
Gross Sales	$1,144,000	$1,144,000
Gross Margin	30%	30%
Avg Royalty %	5%	0
Royalty Payment	$57,200	$0
Gross Profit	$286,000	$343,200
Owner Pay	$114,400	$171,600

NOTE: Gross profit margin outlined in table above calculates the cost of care providers by way of the average Gross Profit Margin of industry operators.  Operational expenses like rent, utilities, vehicles, office and admin staffing are paid from gross profits. Remember, royalty payments are paid from gross revenue (and often auto-debited weekly or monthly) leaving far less to pay your operational costs right from the start.

Questions to ask when considering a franchise are:

• Is the name of the franchise so well known that it’s the McDonald’s of home care?
• Is the name recognition, training and ongoing support worth the upfront license fee and ongoing franchise fees you’ll pay over 10 years?
• What happens in 3-5 years when you’re ready to expand market territory?
• Will another franchise owner be in the neighboring territory that you want to expand into?
• Does the franchisor help with financing? Or help obtaining financing?
• If you get a lead in the area, or neighboring territory, how is it handled?
• Have there been any previous franchise owners that invested in this and neighbor markets?
• How long ago — for each past franchisees?
• Who will I deal with on an everyday basis?
• How long until I make money?

2) Buy an Existing Agency

Buying an existing home care agency provides many benefits vs starting from scratch, depending on what and how you buy it.  Purchasing an existing agency is buying an existing client base with an existing company reputation. Negotiated properly it should include positive cash flow assuming most clients stay after the sale. In turn, the costs to entry via acquisition requires significantly larger up front capital investment than franchise or independent agency.

Existing home care agencies can sell for as little as $75K to as much as $5.4M for a single office agency and much more for multiple office organizations. Unless you’re an experienced business owner who’s bought and sold before (ideally in the home care industry), buying an existing home care agency can be daunting. It is not for the faint at heart and is not the time for personal emotions even if feeling them!  I’ve been blessed to have completed numerous agency transactions in addition to helping others who sought expertise to doing the same.

Above all, when buying a home care agency be sure to work with someone you trust AND is experienced in the home care industry and is familiar with the process of buying and selling home care agencies.  Contact us if you’re interested in assistance with this.

3) Create an Independent Home Care Agency Costs

So what about the costs to start a home care business as an independent agency? $35K is recommended as the minimum available liquid capital to get started however I suggest $45k as a bare minimum for the business itself which does NOT include personal living expense requirements.

Where does that money go?

Setting up your company, obtaining licensing, entity setup (S-corp, LLC, Partnership, etc.), office location, office setup, insurance, staffing ramp up and marketing, marketing, marketing.

Plan to have enough living expenses for 6 to 12 months while you build the company to profitability. As an example, a household having $5,000 in personal monthly expenses you’ll need $60k for a 12 month cushion to become profitable.  Expenses include the essentials like mortgage, utilities, maintenance, vehicles, gas, insurance, groceries, and a cushion for unexpected events. (i/e: water heater fails on the holiday). If you have $30,000 set aside for living expenses, your business’ life line is just 6 months at which point you must be profitable and should be clearing $5000 to pay yourself. Do not over look this very important detail!  While it is technically considered personal expenses, it is still very much part of the costs to start a home care business.

Regardless of your choice, independent, franchise or buying an existing,  the other investment to be fully aware of is the tremendous amount of time, effort, focus and hard work you’ll need to put in in order to succeed.

HomeCareHowTo.com Can Help

If you’re exploring the options in depth, see my book Home Care How To – The Guide To Starting Your Home Care Business.  Having worked with and heard from thousands of readers, I’m confident you’ll find The Guide to be an excellent resource!  It also includes all the training, materials, and support needed to successfully start and grow a large independent agency! Whether you’re thinking about a franchise, membership organization or starting your own — read this book first!

HomeCareHowTo.com provides those same tools for you at a set cost and without an ongoing monthly franchise fee. We use an ala-carte approach to providing the training and tools that you need without a hefty franchise license and territory.   Apply franchise cost savings towards your marketing, marketing and marketing. Independent owners can be up and running on their way to profitability far sooner. All the forms, tools and support you’ll need at fractions of the cost to our Members . Or “try before you buy” the Basic Membership, it’s FREE!   What are you waiting for?!

To Your Success!

Brendan John

Updated 2018/09/10