How to get the most when selling your nursing home.
During most of the '90s, I bought skilled nursing and assisted living facilities for a growing longterm care company. In total, I reviewed hundreds of opportunities and bought more than 75 facilities from all sorts of sellers, ranging from private, single-facility owner/operators to large, private multifacility operators, public companies and real estate investment trusts. As a buyer, I always felt best when the sellers were not well prepared for the sales process or when they were only "talking" to me. I was amazed at how poorly prepared some of them were. When the sellers were well prepared and when there was competition for a facility or group, the purchase prices were always higher; the competitive pressure meant that the terms we could negotiate were always less advantageous to the buyer and better for the seller.
Now I've gone to the "other side": I represent the owners of long-term care facilities who are seeking to sell. They want and are entitled to the highest selling price the market will tolerate. This article is intended to help them achieve that, drawing on my experience as a buyer.
It is convertible that the most well-prepared sellers get the most money for their facilities. The additional effort required to do the things suggested here will be more than justified by the returns. You worked hard for years to create a valuable asset - why not work hard for just a little longer to get the best selling price?
Because the ownership of nursing homes is consolidating, the buyers are nearly always more experienced at negotiation than are the sellers. If you are fully prepared for the sales effort and encourage competition among prospective buyers, you will get the most when selling your facility. What follows is (literally) an outline for achieving that goal.
I. Reasons for selling
A. You've worked all your life, and now it's time to realize on your investment.
B. The market for long-term care facilities is really hot.
C. You are convinced that your facility will never be worth more than it is now.
D. OBRA has finally become more trouble than it's worth.
E. Unanticipated changes in your personal circumstances are forcing a sale.
F. Another factor(?).
II. Getting ready
A. Assemble the following financial history information:
1. Income statements for the last full year and for this year to date, with:
a. Census information and patient days, by payer type.
b. Revenues by payer type.
c. Expenses by natural classification or department, in good detail.
2. Check statements for good business form and whether they're easy to read. (Audited financial statements are helpful, but not necessary.)
3. Include balance sheet, also in good form, disclosing all assets and liabilities. If you propose to sell the "building" only (the most common method) and to use the proceeds to liquidate any outstanding debts, do not include a balance sheet.
4. Identify expenses that will not continue with a change in ownership, such as:
a. Owner compensation and related expenses.
b. Charitable contributions made by the business.
c. Employment expenses for owner-related individuals who are not likely to continue their employment after sale.
5. Make current payroll run available for inspection, as well as a list of employees' accrued vacation and sick benefits (for use during the negotiations).
6. Make available the most recently filed Medicaid and Medicare cost reports.
B. Assemble the last 12 months of survey reports, including written (and legible) responses.
C. Address Medicare/Medicaid concerns:
1. If your building isn't Medicare-certified, I strongly recommend applying for certification, unless you know that your facility does not qualify for it. The possible attractions of post-acute care could be very considerable. Certification may not be granted before the sale is completed, but getting started now shortens the time for everybody, to your benefit.
2. If you have a certified Medicare operation, and have any doubts about whether you have maximized past reimbursements or can maximize reimbursement under the forthcoming Prospective Payment System, employ an experienced consultant to review your cost-gathering and cost-reporting practices.
3. If you are in a state with other than a flat rate Medicaid reimbursement system (Texas, for example), make sure you are maximizing Medicaid reimbursement.
D. Pay attention to building appearance.
Some sellers seem to be indifferent to the appearance of their facilities, perhaps because they think that it doesn't matter to a new buyer. Buyers form their most important impressions about your facility from the financial statements and a facility visit (and photos, if you elect to include them in your offering package).
Exterior details: landscaping, street signage, exterior walls, windows, roof lines and smoking areas (e.g., cigarette butts on the ground); and interior details: walls, floors, doors, ceilings and ceiling files, and bathroom tiles and drains - consider taking photographs of all of these areas and studying the photos as if you were seeing them for the first time. Photos reveal eyesores that are hard to see when you have lived with a facility for many years. If you are not prepared to take special care in taking and arranging photographs of your facility, though, don't bother taking pictures. Bad ones are worse then none at all.
E. Provide market area information.
Basic demographic information such as population levels, growth rates, age structure and the economics of the area served are helpful to buyers and will illustrate that you understand your business. The easier you can make it for buyers to answer their own questions, the more likely it is that your asking price will be accepted without significant challenge.
F. Cultivate your discharge planners. This is worth doing under any circumstances and may prevent a sudden case of unexplained cold feet on the part of a buyer as he/she checks out these important referral sources and hears a negative report or two.
III. Timing issues
If you have a choice, consider selling when seasonal occupancies are increasing or highest in your facility. Declining occupancy levels during the sales period may give the seller an opportunity to argue for a reduced purchase price.
IV. Financial management issues
A. Work hard to collect accounts receivable and to minimize bad debt expense.
B. If your building relies on registry - temporary nursing services - start now to reduce its utilization. Use of registry suggests several bad things to potential buyers, including a difficult employment market, poor senior nursing leadership and overall lack of attention by the owner.
C. Review your financial statements to identify unusual and/or nonrecurring expenses and address these, e.g.:
1. Special tax assessments
2. Fines and penalties
3. Unusual levels of travel and entertainment expense
4. High workers' compensation expense caused by unusual claims
5. Elevated salaries because of special bonuses or incentive awards
6. Seasonal expenses, such as high heating bills in the winter or air conditioning bills in the summer, snow removal or landscaping
If your year-to-date financial statements include these seasonal expenses at high levels, the buyer will be inclined to assume that these expense levels will continue throughout the year, resulting in assumed operating profits being lower than those that will actually be realized.
7. Legal fees
D. Do not contract away or "sell" your ancillary business, including especially pharmacy and speech, occupational and physical therapy. Buyers often have their own ancillary service subsidiaries and are counting on the margins to be realized from ancillary services to improve their return on investment. The availability of ancillary services allows for special pricing strategies.
E. Understand and be prepared to explain the Medicaid system in your state and any recent changes in legislation that have had or will have an impact on the operations or financial results of your facility.
V. The offering
A. Tell your employees. They will know whether you tell or not - especially when the "suits" start touring the building. If they are proud of their facility, their participation can really help get a better price.
B. Create competition for your facility to get the best selling price.
A comprehensive, professional offering package that is presented quickly and more or less simultaneously to many qualified buyers is key. (This is often the reason sellers elect to be represented by selling agents, i.e., real estate professionals or consultants who are experienced in the long-term care industry.)
C. "I want to sell to someone who will take good care of my employees and residents." Often said, and commendable. If you do not talk to multiple potential purchasers, you will never learn about their relative capabilities and attitudes.
D. The information described above in "Getting ready" should be made into that comprehensive selling package mentioned for multiple distribution. These packages are expensive and time-consuming to prepare but worth all the effort and cost. Print a lot there will be more demand than you imagine.
E. Be prepared to respond to the major objections you are likely to hear from potential buyers. Remember, good buyers will do good diligence and will almost always find the one thing that you had hoped they would miss. The most common objections include:
1. The roof/parking lot needs to be replaced/repaved.
2. Your Medicare rates look really high/too low.
3. Your survey history is very poor.
4. The Phase I environmental survey shows asbestos in the building.
5. The private census is too high (or too low).
6. I cannot pay you all cash - I want you to stay involved, so I can be sure that successful operations continue.
7. I'm worried about the impact state Medicaid changes will have.
8. Your occupancy levels are declining.
Develop responses to all these objections before you are asked.
VI. Managing the visit
A. Some don'ts:
1. Don't surprise your top managers with unannounced buyer visits.
2. Don't rely on top managers to conduct a buyer tour unless you are highly confident of their demeanor and attitude and have had the opportunity to brief them in advance.
3. Do not allow your maintenance man to conduct the tour alone. An artful buyer can learn all the "secrets" of your building in 15 minutes when left alone with the maintenance man.
4. Don't allow visits at irregular hours, on weekends or after the administrator has gone home for the evening.
5. Don't ask a potential buyer to pretend to be a banker or insurance agent.
6. Don't conduct tours during meal hours.
B. Some do's:
1. Do meet the potential buyers at the facility and accompany the tour yourself. If you are able, give the tour yourself.
2. Do have the lawn cut and trimmed and do plant flowers several weeks before the facility visit.
3. Do have keys to every door and do offer to open every one.
4. Do be prepared for the buyers to take photographs, and do allow them to do so.
5. Do introduce the visitors to your key managers, after having briefed the managers about the visit.
6. Do emphasize the key attributes of the building and its operation over and over again during the tour.
7. If you have an outside therapy provider, do have them present during the tour and ready to talk to the buyers.
8. Do have a full legible floor plan of the building available.
9. Do speak to the residents as you show the buyers through the facility.
10. Do "debrief" the buyers after the facility tour. Do try to find out if they have any substantial concerns or misunderstandings. Do ask what they like about the facility.
11. Do follow up quickly after the visit with a personal thank-you note and an offer to answer any additional questions.
12. Do offer to give the buyers a brief tour of the geographic area, and do be prepared to do so if they accept. Do ignore the comments from the buyer that "we are in a hurry." Do gently insist that an appreciation of the market area is important to understanding the market for your facility. Do plan the tour route in advance.
VII. Setting purchase terms
A. Are you selling the facility or the business?
1. Most transactions involve sale of the facility, not the business. That means the accounts receivable and cash will be kept by you, the seller, and that you will retain and pay off the current and long-term liabilities. Some issues that commonly come up in this type of sale include:
a. Selling your accounts receivable.
Some buyers view purchasing the seller's accounts receivable as a means of accelerating the early cash flows of the building after the acquisition, thus reducing the buyer's working capital requirements. It is not uncommon for a buyer to propose purchasing your accounts receivable for a discount, such as 75 cents on the dollar, and then to keep what they collect. It's also common for a buyer to offer to collect your receivables for a fee and remit the balances when collected. Because it's sometimes difficult for the seller to collect accounts receivable when he/she no longer operates the facility, these proposals require careful consideration.
b. As a seller, you do not want to be liable for accrued and unused employee benefits after the sale.
Sellers usually want their employees to be treated fairly, which often means that they want the new owner to assume and honor the accrued vacation and sick leave benefits and to continue seniority. Many buyers share this interest, because they want the employees to be comfortable with the transition. It is not unusual for a buyer to be willing to assume and honor the accrued employee benefit obligations and to ask for a reduction of the purchase price in exchange for accepting this liability.
c. The general assumption is that the purchaser of a nursing home gets the furnishings, fixtures and equipment contained in the facility and the inventory of supplies.
If your inventory is unusual in any respect - quantity, value, composition - you may wish to adjust your proposed selling price to reflect the greater value to be received by the buyer.
2. Selling the business - the operations, assets and liabilities - is more common when selling a larger group of facilities that have been commonly operated.
This entails a so-called "balance sheet" or "stock" transaction. Commonly, it means that the buyer will acquire the current assets and liabilities and will be obligated on any outstanding mortgage or other long-term indebtedness. Often the buyer purchases all of the common stock of the selling corporation. These types of transactions are common in states where changes of ownership are complicated by certificate of need or licensure regulation.
B. Pricing is the most complicated part of selling your facility - it is that part of the transaction in which you must express everything that you know about your facility in a number. Here are some things to remember:
1. The best asking price is that which is well supported by the information contained in the offering package. If a potential buyer can apply the data you have provided to conclude that your asking price is reasonable under the circumstances, your selling job is a long way toward being successful.
2. Unlike in the residential market, it is common for buyers in the senior housing marketplace to offer less than the asking price. Buyers reason that they will never know if you will accept less than your asking price unless they ask, and so it is rare for an initial offer to be at your asking price.
3. Once again, the best way to assure that you will get your asking price is to create competition among potential buyers for the purchase of your nursing home.
4. The industry commonly uses rules of thumb in evaluating the pricing of a facility for sale.
The most common is price per bed - and this measure is by far the most misleading. Imagine two 120-bed facilities of similar age, condition and occupancy that are for sale at the same time. If your 120-bed facility produces a net operating margin of 23% of revenues, and the other facility only yields a 16% margin, there should be big differences in the asking prices per bed - if the asking price for the lower margin facility were, for example, $25,000 per bed, the asking price for your facility could easily be $35,900, and potentially much more. I strongly recommend that you avoid price-per-bed comparisons in selling your facility (see below about the EBITDAR option).
Consider these factors in pricing your facility:
a. Earnings record and prospects. This is the most important element to just about every buyer. If the earnings of your facility will improve in the future, perhaps because of advantageous changes in reimbursement rates, projections of anticipated future results can be very important.
b. The state in which your facility is located: Medicaid payment system, the regulatory "environment" (how tough the surveyors are), the supply of facilities (beds per thousand population) and certificate of need.
Acquisitions professionals typically group states into such categories as "great," "okay" and "to be avoided," and the list changes from time to time. There is a lot of incorrect "conventional wisdom" about which states are "bad." If the senior acquisitions officer of a big public company or a REIT announces that a state is "bad," it often goes on many others' lists as such without further consideration. If your facility is in one of these states, be prepared for a very tough selling effort.
c. The condition of your building (as explained above).
d. Occupancy and revenue mix.
Two buildings that are similar in every respect and that are producing the same operating margins but have different occupancy and revenue mixes will sell for different amounts. Generally, higher occupancy is better than lower occupancy, more private-pay is better than less, more Medicare is better than less (unless the Medicare rates are unusual), and so forth.
e. Availability of ancillary services (as discussed above).
5. Price ranges:
a. The more sophisticated the buyer, the more likely it is that he/she will ask "What multiple of historic/projected EBITDAR are you asking?" EBITDAR means Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent. Operators know this as NOI - net operating income.
The formulas and calculations that lead to these numbers are quite complicated. However, based on real transactions that have been completed in the last few years, the multiples average between about 5 and 7+ times EBITDAR. There is a direct positive correlation between the NOI margin and the EBITDAR multiple. Further, the lowest selling prices are generally based on historical earnings, and the highest prices on projected earnings that are well documented. The sellers who have achieved the highest multiples are consistently those who give the best and most complete explanation of their facilities.
There are, however, exceptions, caused by several factors:
1. Facilities in "great" states (see above) exceed these multiples because of buyer demand. The reverse is true in "bad" states (if sellers can find a buyer at all).
2. Well-maintained and well-groomed buildings sell at higher multiples than average.
3. The size and age of the facility. Newer, larger facilities sell for higher multiples than smaller, older facilities.
4. Private-pay mix. Facilities with high private-pay mixes usually sell for higher multiples than those with average or low private-pay mixes.
5. Medicare certification. Facilities with active Medicare programs usually sell for higher multiples. Buildings that are not currently certified, but which meet the requirements for certification, can also bring higher multiples.
How long is all this likely to take? If your facility is priced right, if you create competition by communicating with many potential buyers, and if you are prepared to work hard to advance the transaction to closing, it will usually take three to four months from distribution of your offer-to-sell until closing. If your facility is overpriced, it will take a great deal longer - perhaps several years (and it is rare in my experience for a seller who is asking too much to get his/her price by waiting). An overpriced facility will discourage serious buyers, extend the time it takes to sell and make it very difficult to get the attention of real buyers when you finally reduce your price. On the other hand, underpricing your facility doesn't make it easier - it just attracts "bottom fishers."
The buyer has at last accepted your price - but there is still much to do: facility inspections; Phase I environmental studies; a Purchase and Sale Agreement, which includes warranties that you will be asked to give the buyer; loan agreements; financing documents; successor employment matters; personal property inventories; documents related to the change of licensure; equipment lease agreements; collateral release documents; agreements regarding the collection of accounts receivable and third-party receivables; settlements regarding inventories of supplies - and more.
These matters are just as important to a successful sale as is negotiating the best price and terms. Unless you are very experienced, they can be difficult to work through, and the chances of making an expensive mistake are considerable. My best advice is get professional help - an attorney, real estate broker, or both. The cost of these professionals is more than recovered in the contribution they can make to a successful transaction.
Jerry M. Walker is an agent with Marcus & Millichap, a real estate brokerage and investment company based in Portland, OR. For further information, (503)220-2333; fax (503)220-2155.
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|Author:||Walker, Jerry M.|
|Date:||Apr 1, 1998|
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