Cover Story

by

Adam Heavenrich

When Jackie Dolliver and her sister Pat Garrison were approached by an operator to sell their assisted living company, the idea of spending more time raising their horses and traveling appealed to them.  They had built and expanded their company for the last eight years. The offer turned out to be different than what was initially proposed and the sisters backed out. They still liked the idea of pursuing other interests, but what was the next step? They decided to hire a merger and acquisition specialist in the assisted living industry. Through national industry contacts and valuation expertise, the specialist priced the offering and engineered the sale of their company to a regional operator who happened to be looking for a platform acquisition in New Mexico.

 

Nationwide, there were nearly 90 publicly announced senior care transactions in 1999[1].  While the public companies were less active acquirers in 1999 than in 1998 because of recent stock price volatility, the acquisition market remains brisk. Because of tightness in the credit markets and fear of overbuilding, many of the public and private operators have changed their focus from new development to acquisition of existing facilities. The assisted living market remains very fluid, with smaller investment and operating companies entering and exiting the market almost daily.

 

Sooner or later, most owners must address the many issues, both large and small, related to the sale of one or all of their facilities. To do this, you as an owner need to know the right questions to ask in order to develop a game plan. A well thought out and executed game plan will include selecting the right advisors, having your company’s financial statements prepared and addressing operating, marketing, strategic, legal and tax issues.

 

Here are some basic “do’s and don’ts” for putting your company on the market:

 

>    Stay focused on the operations

      For many operators, once a letter of intent comes in, they assume the sale is done.  Operators can get so caught up in the sale process that they allow operations to slip. If occupancy rates fall, or you lose some key referral relationships, you can severely erode the value of your company and put the transaction at risk. Until the transaction is closed, assume you are and will remain the operator.

 

>    Do select the right team of advisors

      Assembling a good team of advisors will help you avoid costly mistakes as well as ensure that you receive the best terms for your company. Ask your most trusted business confidant(s) for referrals to both legal, and merger and acquisition specialists. Select an experienced transaction attorney.  The transaction attorney will negotiate the purchase agreement, non-compete, employment and other legal agreements. Don’t assume that your corporate attorney specializes in transactions. You will also need to select a merger and acquisition specialist who will value the organization, prepare a marketing plan, develop an offering book and negotiate the financial terms of the sale. Make sure the specialist you select has completed transactions in the senior housing sector in your price range.  Interview several candidates to determine how many of these companies they have sold, the transaction price ranges and the marketing plan. Once you have identified a merger and acquisition specialist, check references to see how satisfied the customer was with the process. Your CPA will also be an important part of the process. Alert them that you are undertaking the process and that you will need your financial statements in good order. They also will be able to assist on structuring the transaction to meet your particular tax situation.

 

>    Don’t assume that the more facilities you have the better price you will receive

      Talk to your merger and acquisition specialist to determine if you might be better off shutting down some facilities and consolidating your operations before you go to market. In some cases, it is more important what you exclude from the offering, than what you include.

 

>    Don’t make last-minute major capital expenditures that alter your core business

      For example, don’t buy the vacant land across the street for the purpose of throwing it into the sale. Many buyers want stable earnings. Some buyers like the ability to expand on an existing site but few want to acquire existing facilities and purchase a developable piece of land. For the same reasons, don’t try to open a brand new facility within a few months of selling your company. Chances are good you won’t receive the full value of the investment. It may make the transaction much more difficult to finance. Lenders prefer to make an acquisition loan with at least 12 months of stabilized operating statements.

 

>    Don’t commit to new financing prior to the sale that has breakage fees or lockout provisions

Lenders may have costly fees associated with terminating the loan on the facilities (“breakage fees”). It is very likely that buyers will need to seek their own financing and you will have to pay off your loan. In some cases, lenders may not permit you to pay off a loan (“lockout provisions”) prior to a certain date. Subsequent to that date, you may pay it off, but still may be subject to breakage fees.  Therefore, if you do need to refinance a facility before a sale, search for a lender who will not have lockout provisions or charge breakage fees.

 

>    Don’t make salary or bonus promises to your employees that will take place after a buy-out

      It will decrease the value of your company, cause transition problems and may cause a good buyer to walk away from a transaction.

 

>    Do talk to your tax and legal advisor as to the best corporate and sale structure

      While a stock sale is usually preferable for a seller, most buyers will insist on an asset sale.  With proper planning and negotiations, you will minimize the tax bite at the time of sale.

 

>    Don’t hold off on cosmetic repairs and maintenance on your facilities

      During the sale process, it is tempting to defer needed expenditures.  The facilities should continue to show and operate smoothly, no matter how close the sale date is.

 

Whenever and for whatever reason you decide it is time to sell, it is important to assemble the best team of advisors and ask good questions throughout the process. The advisors will guide you through the financial, operational, marketing, tax and legal hurdles that are a part of any transaction. It is likely the single most important financial transaction you will ever make.

 

 

Adam Heavenrich is principal in Heavenrich & Company, Inc., a Chicago-based advisory firm leading strategic acquistion and divestiture transactions for the senior living industry.  Adam can be reached by email at adam@heavenrichco.com.