A guide for “mom and pop” owner-operators looking to divest their seniors housing properties
By Humair Sabir
Over the past few years, I have spent a lot of time in the field working with “mom and pop” sellers, delivering my sales pitch on why they should sell their properties. Getting to know them, hearing their experiences and understanding their motivations has shown how our industry works on a basic level.
Mom-and-pop owner-operators tend to be very entrepreneurial, strong-willed and passionate. These traits come from the fact that most owners, with their families, have developed their properties from the ground-up and have worked extremely hard to build a successful business over many years. Further, mom-and-pop owners are very compassionate, nurturing and caring, which are some of the essential qualities required to be a quality operator in the healthcare industry.
Needless to say, these owners have a very strong attachment to their properties. Not only do they consider the property their “baby,” but also provides services within their community and creates jobs for their staff.
Based on these factors, it is easy to see why selling a seniors housing business is an extremely emotional and sensitive decision. Unfortunately, I have seen too many mom-and-pop owners struggle to get the most value out of their lifelong investments.
From my transactional experience in seniors housing, there are a handful of suggested steps and some common hazards for the mom-and-pop owner-operators to avoid as they develop and execute an exit strategy:
• Hire only advisors that specialize in the industry. Healthcare is a very unique, large and evolving industry. There are numerous sub-sectors within the industry that are even more unique and have, for all intents and purposes, become their own industries. Seniors housing is its own sector and many attorneys and brokers have never worked in other healthcare sectors. It is important to hire brokers, consultants, accountants or attorneys that are industry veterans within your sub-sector so that they understand the intricacies of your business.
• Stay tuned to trends in the industry. Whether you are an assisted living, independent living or skilled nursing owner-operator, it is important to keep track of macro trends within your sector and determine how they may impact you. Even if these trends don’t directly impact you in your market, it is key that you have an understanding of the overall market and environment as this will help you to determine the best time to exit.
• Take the time to plan and calculate. While this may seem like a very obvious point, I’m always surprised by the lack of time spent evaluating a decision to sell. Many owner-operators decide to sell when they ran into a broker who convinced them that selling their property was the right thing to do. This, in my opinion, is a conflict of interest. You should ensure that you are really the one making the final decision for your interest.
• Consider your motivation. Although timing the market is extremely important, it is equally as important to know what you are trying to accomplish. As you plan for your exit strategy, spend some time thinking about why you are looking to exit and ask questions like: Am I looking to retire completely to focus on other things? Do I still enjoy operating the business? Do I want to be actively or passively involved after the sale? What will happen to the residents, patients or staff members when I leave? Is my current business too challenging for me? Perhaps the most important question: Do I still have a competitive advantage in this market, and do I expect that advantage to continue?
• Prepare quality financial statements. This goes back to the first point on this list about hiring qualified people that understand the industry. Buyers are going to value your facility based on the cash flow it generates, which will be a huge focus during the sales process. Some financials I’ve seen are squeaky clean and others were handwritten on a piece of paper. The quality of the financials are usually an indicator of the sophistication of an operator and it’s important to use this to your advantage by making a strong impression. Nothing sets off red flags for buyers more than a set of financials that are poorly prepared.
• Consider all options before making the decision to fully exit the business. Unless you are looking to retire outright for health or other reasons, there may be other options available to you to consider. For example, if you enjoy operating but want to take some money off the table, consider a sale-leaseback or sale-manageback scenario. Alternatively, you may choose to stay involved in only the real estate as a landlord and lease the facility to another operator in exchange for a steady and stable cash flow.
• Prepare for a complex, time-consuming transaction. Healthcare transactions involve regulatory approvals from government agencies, which adds uncertainty to the equation. Most seniors housing transactions can take three to six months from definitive agreement to closing. There are a lot of changes that can happen within that time period both in the macro environment (reimbursement cuts, overall economic struggles) and in the micro environment (operational issues, poor regulatory survey).
• Beware of notorious re-traders. It can be extremely exciting to receive an offer during the marketing process that is much higher than the rest. Temptation to accept such an offer is understandably high, but an outlier offer is risky. It may be a sign of a buyer who has not properly underwritten the deal and is just motivated to tie up the sale and figure out the details later. This is where researching the background of the bidding firm and the reputation of the buyer plays a key role. A qualified, experienced, industry-focused broker can be valuable in this regard, and can guide you in the right direction on which offer to select. Since most brokers are compensated entirely at closings, they’re highly motivated to steer you in the direction that offers certainty of execution.
To be clear, not all firms that have had “re-trades” in the past are bad actors. In fact, sometimes a re-trade shows willingness and flexibility on the part of a buyer to maneuver through challenges that may arise during the various stages of a transaction. In many cases, a seller is very willing to take a lower price instead of allowing the buyer to completely walk away from the deal. This is especially true if the new information has come to light during the due diligence phase which was materially misreported (intentionally or unintentionally) in the marketing phase, in which case it should not create a negative perception of the buyer.
• Keep your eye on the ball. Having a signed letter of intent, or a purchase and sale contract, is hardly a guarantee that your deal will close. Most deals are priced on recent financial performance and it’s important to maintain that performance through closing. Contracts in our industry generally have a generous due diligence period and contain termination rights for the buyer, with very little or no penalty. Therefore, it is critical that you maintain oversight of the facility and maintain its current standing with regards to operations and financial performance to ensure a smooth closing. This also preserves the value of the property in case the buyer is unable to close on the deal.
• Involve staff only on a strict need-to-know basis. Rumors about a potential sale can spread quickly and can cause panic within your staff. This can have a devastating impact on your operations as workers tend to head towards the exits when they believe new management is going to take over the facility. Therefore, you should only involve staff members that you trust in a strict confidential manner so that you won’t have to play damage-control later. A simple way to disguise the activity and visits to your facility is to tell the staff that this is all related to insurance or refinancing of the property. Also, you should inquire about the buyer’s due diligence process upfront, so as to not disrupt your staff and operations at a later point.
In conclusion, take a step back and reflect on whether you still maintain a competitive advantage in this industry. Once you have made your decision to sell, prepare a well-thought-out exit plan and execute it effectively by leveraging quality, industry-specific advisors.
Humair Sabir is vice president of acquisitions at Granite Investment Group. He has been involved in reviewing and closing billions of dollars in seniors housing and skilled nursing transactions.