Before Buying an Assisted Living or Skilled Nursing Facility, Please Define the Market Area

Before buying an assisted living for skilled nursing facility, acquirers need to define the center’s existing and potential geographic market area boundaries. When evaluating the purchase of a skilled nursing facility or assisted living community, it vital to examine the underlying market and population demand and need. Too often, purchasers of nursing homes and assisted living facilities concentrate singularly on the financial statements, for all it is all about making the deal. However, while making the deal is exciting and a nice payday for mergers and acquisitions advisors, it is important to underwrite the market fundamental to gauge current and client demand. I start with defining the current and potential geographic market area.

A health facility’s geographic drawing power depends on distance, driving time, topography and the availability of alternative facilities. However, by selecting a limited market area, we can evaluate population, income, socioeconomic, and competitive influences most critical to the facility’s future viability and success and for defining marketing and sale strategies.

However, at the outset is is important to recognize that a market trade area can draw demand from residents living beyond its primary market area boundaries. There may potential demand in the primary market area, but competition may also exist and if the market area is not densely populated it is critical to draw from a larger service area. This represents an opportunity to cultivate a reservoir untapped assisted living demand or skilled nursing facility bed need.

Typically in examining healthcare service areas, marketers look at concentric circles around a health facility. In an urban area, this could be a three- or five-mile radius. In a suburban area, the primary market area could be an five- to eight-mile radius. And in an exurban or rural area, the primary market area could be a fifteen- or twenty-mile radius, with the secondary market area extending to thirty, even forty mile ring.

In evaluating assisted living demand, including measuring income-eligible households and in projecting population-based skilled nursing facility bed need, a primary source of information is the Claritas Nielsen Senior Life Report, found at www.sitereports.com. These reports are considered the most accurate online product for U.S. demographics for senior healthcare and housing market studies.

Demand for nursing home beds is determined by surveying an area’s demographic and health status characteristics associated with increased risk for long-term care placement. The net difference between the estimated total number of persons at risk for nursing home beds and the existing number of beds is the unmet need.  Standards using historical nursing facility data are used to
predict the potential demand level.

I am always amazed by buyers’ misconceptions about a healthcare facility’s trade area boundaries and market area demographics. Typically, they are so locked into the evaluation of the financial statements, they neglect to do demographic and utilization studies and determine resident and patient flow patterns. Moreover, sometimes active acquirers of skilled nursing and assisted living facilities rely on superficial impressions about market area demographics and geographic service area boundaries, resulting in rejecting otherwise good deals. Just like buyers have to dial down into the financial statements, they need to analyze the market demand and need and geographic market areas. Too often, buyers rely on misconceptions, faulty assumptions or limited knowledge and fail to investigate this crucial part of the deal. It is quite a joy to dig through the market data and discover to one’s surprise that a lot more market potential exists than they first thought and that mining this would require minor adjustments of the sales campaign.

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