How to Evaluate the True Worth of a Business: Adult Day Care Centers

Business Evaluation Case Study – Adult Day Care Centers

Is the claim that there is big profit in Day Care Centers, too good to be true?

Are Adult Day Care Centers making the big money they claim?

Last year I was asked to do a business evaluation and financial review of an Adult Day Care Center in Ventura County and render an opinion as to the profitability and viability for a client wanting to buy this business for the full asking price or for any other price. I was told before I began, that it was clearing $50,000 per month profit, and the asking price was $3 million.

Up to that point I had never reviewed a Day Care Center, but I had prospective buyers that had been studying the industry, and telling me all about what they had learned in their investigations. They still wanted my opinion as to the viability and profitability of buying a Day Care Center. They wanted a second opinion as to what the risk factors are in buying a Day Care Center.  Business buyers rarely used to look at the risk factor of the businesses they want to buy.  I think now that has changed.  The risk factor being what is the likelihood of what is happening today will continue into the future at the same level.

What part does the state play in this?

One of the red flags in Summer 2007 for Adult Day Care Centers was that a very large number of them were for sale. Why were they for sale was the subject of my research project?  What I determined was, known to every Day Care Center owner, but was never mentioned.

The big risk factor for this industry is cash flow. Every year the State of California has to approve its budget. If the budget is not approved, all employees and vendors, which included ADCC, (Adult Day Care Centers) do not get any payments until the budget is signed.  Some years it is two weeks, but others have gone as long as two and a half months. Imagine having a $50,000 monthly payroll and $10,000 monthly rent and no income for two and a half months. Of course, once the budget is approved they receive all of their money instantly.

There was another problem in 2007.  Seniors who were qualified before 2007 were no longer eligible for the State of California to pick up the cost. The enrollment numbers in the centers took a drop at that time because of this, but now that change has settled out and so it is no longer an issue.

Of course, when you are dealing with Governments and Legislators, things change all the time. Your business can be outlawed overnight. This is one of the big risk factors. The other is that the State of California could go bankrupt in this current economy. We could say that is not likely, but can we say it is impossible? Remember when Orange County filed bankruptcy?

Lets get back to the ADCC in Ventura. My evaluation showed that the $50,000 profit the seller talked about was his projection for the month. We were in the middle of that month at the time. Up until the current month the business had been making $30,000 per month. Since my client’s resulting offer was at a substantially lower price, it was refused.

Six months later another client hired me to review the same business. This time I received more up-to-date financials, allowing me to understand what the business had actually made, rather than the projection I had received earlier. The business never reached the $50,000 level, but did reach $45,000 three months later. The profit, as calculated by the seller, was very creative but not real. I determined the correct lower profit. The asking price was reduced to $2 Million and my second client offered $1.2 Million, which was also refused.

I am waiting for the next price change and my next client. We will see what happens then.