Costs To Start A Home Care Business

One of the most popular questions when talking with prospective home care agency owners is “how much are the costs to start a home care business?”

Costs To Start A Home Care Business

Costs To Start A Home Care Business

Today we’ll discuss the variables and costs to start a home care business. By the end, hopefully you’ll have a clear idea of the funds you’ll need to get started.

It’s no secret the elder care and health care industries are at the beginning of 20+ years continual growth with the Baby Boom population beginning to hit the magic age of 65 back in 2011. That demographic alone makes the home care industry a very attractive business consideration.   In addition, when compared to other business start up requirements, new home care business owners have fewer obstacles to surmount because:

  • Home care is a service business.
  • Services are performed in the homes of clients.
  • Able to start and run from your home or small office.
  • There is little to no inventory for care services.
  • Formal training to provide basic eldercare services is small.
  • Regulations for non-medical are limited in many states …(at least for now).
  • Home Care is one of the fastest growing industries for new businesses.
  • Requires less capital investment when compared to other businesses.

When we speak of less capital investment in terms of costs to start a home care business, let’s put that 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-$500,000 after the selection of a good retail location, remodeling the space and stocking the store with inventory.  For a carwash you’ll have to dig $350K or more out of your pocket book to get started. A hair salon, $150k on the light side, depending on how fancy the salon.  Are there businesses that cost less than a home care agency?  Of course.  Few, however, have as much growth potential over the coming 20 years as home care.

There are a few options to getting started with a home care businessThe 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 costs to the following :

  1. Purchasing into a Franchise/Membership Organization
  2. Creating an Independent Agency
  3. Buying an Existing Agency (Briefly)

Franchise Costs

The purchase of a home care franchise or membership organization involves several steps.  Summarized: first is the application and approval process with a franchisor. Once approved, the purchase of a license takes place, followed by training and setting up of your business.  Once operational and gaining clients, the payment of ongoing royalty costs for the duration of the franchise contract.

In the application process, the franchisor will ask for proof of your financial capability.  With varying degrees of verification, expect to prove a financial net worth of roughly between $40,000 and $260,000 and liquid capital amounts ranging from $25,000 to $150,000. Suddenly, the costs to start a home care business have just ballooned!

Once you’ve proven your net worth, the franchise license is an investment of between $20,000 and $90,000. Some franchisors will finance a portion of this.  Most non-medical care service franchises run the midpoint at $35,000 to $48,000. The upper end ($49k-$90k) offer both non-medical and medical care services.  The franchise license grants you the ability to use the franchise name, assigns a territory that the franchisor and you negotiate. Keep in mind this could limit your service coverage area, a consideration for long term growth.

After you’ve signed the check, your license should also include  training for you and another business partner – typically 5-7 days held at their headquarters.  Travel expenses around the training is often at your expense. Then it’s up to you to use the training, take massive action to make your business happen.  The rubber meets the road when you return.

So, you’re up and running, signed your first clients — Congratulations!  The back end cost of your franchise is now the ongoing monthly royalties you’ll pay, ranging from 3% to 7%, average is 5-6%.  Most royalties are based on your gross revenues not net profit for the duration of the Terms of the Franchise Agreement typically between 5 and 10 years.  For this ongoing royalty, you should have access to ongoing business development support and some franchisors provide co-op marketing budgets which can assist with your marketing efforts.

The initial “How To Do It” training  of is often the biggest attraction to helping new owners getting started.  While the How To is important – it’s just as important you  look 3, 5 and 7 years down the road of your business (which will go far faster than you imagine!).  The Home Care Industry is not rocket science.  It’s a simple business – but it’s not necessarily easy.  It requires solid systems to operate, lots of hard work and dedication.  Do you still want to be paying a percentage of your hard earned gross dollars to a franchise after you’ve learned how to do it?  More than the franchise costs, this is added to the costs to start a home care business.

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’ve grown out of your territory?
  • Will another franchise owner be in the neighboring territory that you want to expand into?  What if you get a lead in that area, how is that handled?
  • How many other of your franchise purchasers have tried to open in this market?
  • How many didn’t succeed in this market with your franchise?  How long ago — for each of them?

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

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%

Royalty

5%

Royalty Payment

$57,200

 

Gross Profit

$286,000

$343,200

Owner Pay

$114,400

$171,600

NOTE: Gross profit outlined in table includes only cost of care providers and does not include operational expenses like rent, utilities, vehicles, office and admin staffing.

Consider the true home care business start up costs.  Since franchisors base their royalties off gross income, it doesn’t sound like much.  Consider the above example: a 5% royalty ($57,200) calculates to 20% of Gross Profit.  Your net profit will vary, depending on how you run your company and which expenses you take on.  The 5% royalty will calculate to an even higher percentage of Net Profit.

Find the home care franchise and membership organizations here:

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

 

Buy an Existing Agency

Buying an existing home care agency provides numerous benefits, depending on what you buy.  You’ll be buying existing cash flow and depending on the deal, positive cash flow. The flip side is it will require a larger up front investment than franchise or independent.  Unless you’re an experienced business owner, ideally in the home care industry, buying an existing agency can be daunting and is not for the faint at heart.  We’ll go in greater detail with a future article on how to buy an existing franchise.

Create an Independent Home Care Agency Costs.

Going into a business requires self discipline and being bluntly honest with yourself, your business and especially your finances.  Franchises hold minimum liquid capital requirement of no less than $25,000, most in the range of $50k to $85k, and for good reason.  The biggest killer of any business is running out of money before the business is profitable.

To launch your business as an independent, $25K is recommended as the minimum available liquid capital to get started.  I suggest $25k as a bare minimum for the business itself, ideally $30-40K.  So where does that money go?

Setting up your company

Forming Your Company

  • Obtaining proper licensing
  • Entity set up (incorporation, LLC, etc)

Setting up your office

  • Office Rent & utilities
  • Phones & communication tools
  • Computers
  • Internet connectivity
  • Back Office Systems
  • Forms Preparation

Staff Uniforms

Office Staff

Insurance Coverage

Caregiver Hiring

  • Advertising for Caregivers
  • Training of Caregivers

Marketing for Clients

  • Print materials – Brochure, business cards
  • Website development, hosting and marketing
  • Client packets
  • Advertising, sponsored events, promoting your company

You’ll also need living expenses for 6 to 12 months while you build the company to profitability. Using an example of your household having $5,000 in personal monthly expenses (mortgage, utilities, maintenance, vehicles, gas, insurance, groceries, and a some cushion for unexpected needs – i/e: the water heater goes out on the 4th of July holiday).   If you have $30,000 set aside for living expenses, your business’ life line is 6 short months, at which point not only must you be profitable, you’ll need to be clearing $5000 to pay yourself.

How many months are needed before becoming profitable? This answer differs for each individual company.  My first company was profitable four months after launching.  Coaching others, I’ve helped some businesses turn profitability in as little as 86 days where others took 14 months.  The differences in time hinge on a number of questions:

  • How driven will you be to grow your company?
  • Is your service area carry a market large enough to support your projected growth?
  • Are you a people person that can sell your services?
  • Will you employ the right person that can sell your services?

To help determine your timeline to profitability, careful budgeting and planning using proper tools is important.  HomeCareHowTo.com offers an excellent tool that helps you with this planning called the Break Even Analysis, which works in conjunction with your budget, business plan and growth projections.  Without financial planning, you increase the chances dramatically that you’ll run out of money far quicker than you ever thought.

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.  If you have a family, a good discussion with all affected should be had, because family will pay by way of the reduced time you can devote to them, at least initially.

HomeCareHowTo.com provides those same tools for you at a set cost and without an ongoing monthly franchise fee.  For what the initial license investment of a franchise costs, independent owners can be up and running on their way to profitability. We provide the forms, tools and support you’ll need at fractions of the cost.

If you’re still exploring the options in depth, I encourage you to pick up a copy of my book Home Care How To – The Guide To Starting Your Home Care Business.    An excellent resource and primer to the industry while providing all the training, materials, and support needed to successfully start and grow into a large organization. If you’re thinking about a franchise, membership organization or starting your own, you want to read this book first!

To Your Success!

Brendan John

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