One of the most popular questions when talking with prospective home care agency owners is “how much money to start a home care business?”
Let’s discuss the variables and costs to starting a home care business. Following our walk through of capital requirements you should have decision level estimates 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 home care agencies 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 car wash you’ll have to dig $350K or more out of your pocket book to get started, and if you have to build the facility – figure $1Million or more! 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 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
- Creating an Independent Home Care Agency
- Buying an existing Home Care Agency (Briefly)
1) Home Care 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 second step includes the purchase of a license, followed by training and setting up of your business. You’ll be confined to operate your business within the territory your franchise license grants you. Finally, 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 home care 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! One big consideration of ongoing costs to start a home care business using a franchise are 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. The question you need to ask yourself is “Do I still want to be paying a percentage of my hard earned gross revenue dollars to a franchise after I know how to do it and am doing it successfully? More than the franchise costs, this continually adds 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?
- If you get a lead in that area, how is that handled?
- Have there been any previous franchise owners that invested in this market?
- How long ago — for each of them?
In the following chart, we compare the top line financials of a home care franchise over time compared to an independent home care agency.
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. Those expenses are incurred regardless and since franchise royalties typically come out of your gross income, you’ll have less revenue to pay your operational costs right from the start.
Consider the true costs to start a home care business using a franchise. Most franchisors typically base the royalties you must pay off gross income, and it doesn’t really sound like much on the surface. But you must do a little deeper accounting to realize the true cost. Consider the above example: a 5% royalty ($57,200) off your gross revenue calculates to roughly 20% of your gross profit! Of course, net profit will vary depending on how you run your company and which expenses you take on but the point you need to 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.
The numbers used were as of the time of my writing this article and are only increasing with time. For current, real-time franchise cost figures, reference the following list of home care franchise and membership organizations here:
2) Buy an Existing Agency
Buying an existing home care agency can provide numerous benefits above starting from zero, depending on what you buy and how you buy it. You’ll be buying existing cash flow and, depending on the deal, positive cash flow. The flip side is your costs to start a home care business via acquisition require a much 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. Be sure to work with someone who has significant experienced with buying and selling home care agencies. Fortunately, I’ve had the opportunity to successfully complete numerous home care agency purchases and sales and truly enjoy assisting others with doing the same. Contact us if you’re interested in assistance with this.
3) 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. Non-medical Home Care Agency Franchises typically hold minimum liquid capital requirement of no less than $35,000, most in the range of $50k to $500k, and for good reason. The biggest killer of any business is running out of money before the business is profitable.
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. I suggest $40k as a bare minimum for the business itself (not including personal living expense requirements), ideally $50-75K. 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
- Internet connectivity
- Back Office Systems
- Forms Preparation
- 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
Marketing, Marketing, Marketing.
- Did I mention Marketing???
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. 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.
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 16 months. The differences in time hinge on a number of questions:
- How driven will you be to grow your company?
- Do you have what it takes to run your own business?
- 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?
- How much can you afford to invest?
- What amount do you need to break even? (i/e: What are your personal income requirements)
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. We use more of an ala-carte approach to providing the training and tools that you need without a hefty franchise license and territory. Apply those savings towards your marketing, marketing and marketing. For what the initial license investment of a franchise costs, independent owners can be up and running on their way to profitability far quicker. We provide the forms, tools and support you’ll need at fractions of the cost to our Members – and you can “try before you buy” with our Basic Membership which is FREE! Have you found a home care franchise that offers that?
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!