Thinking of Selling your Nursing Home?
With the number of people over the age of 65 expected to more than double over the next 25 years, demand for nursing homes is steadily growing. It is no surprise, then, that investment in the nursing home sector is rapidly growing in order to increase supply to satisfy demand, with a number of international funders entering the market.
Until 2017 there was a notable disconnect between the weight of investor interest in the Irish nursing home market and the number of transactions taking place. However this was principally driven by the uncertainty over the Fair Deal combined with shortage of scaleable opportunities, with 64% of nursing homes in Ireland being single-home owners. Following the acquisition of Carechoice by Infravia there was a notable increase in M&A activity with both local and international funders coming up with new structures to facilitate sales.
Another driver of M&A activity in the nursing home sector has been the lengthy planning delays & increasing development costs for new-builds. In our previous Healthcare Blog, my colleague Brian Haugh highlighted the indicative values of Nursing Homes are trending between 7-10x EBITDAR depending upon the location, with some Groups attracting even higher multiples as Investment funds seek to gain platform entry into the market. This compares to build costs ranging from €120-€170k per bed resulting in much higher effective EBITDAR multiples not to mention the development risk.
So if you have been waiting for a healthy environment to sell your nursing home, then now may be a great opportunity to realise best value. But, as with many aspects of business life, having a plan of how you are going to exit your business and executing that plan over a period of time generally leads to a better outcome rather than trying to deal with a sale in an ad hoc manner.
There are 5 key areas that a Nursing Home owner needs to consider before commencing a sales process:
1. Realistic valuations
For many vendors the first challenge is understanding the basis of valuation. Some owners come to the process with a historical focus - believing that their company's value lies in the historical trading; others sell on the future prospects, looking for a sale price that is based on aspirational growth and potential synergies. The truth is that neither reflects where a serious buyer will be coming from. The valuation is driven by multiple of maintainable EBITDAR to arrive at an Enterprise Value which is then adjusted for cash and any debt/debt-like items.
While Value per Bed is still relevant, it is generally more relevant to newer homes where occupancy levels haven’t ramped up. From a vendor’s perspective the focus should be on ensuring the best Fair deal rate is secured, the occupancy levels are maximised and the direct costs are in line with benchmarked norms.
2. Understand the buyer market
Establishing a credible buyers list at the outset and understanding their acquisition criteria will be key to a successful sales process. For many international funds they are already partnering, or seeking to partner, with a local operator who assists in the clinical due diligence and operational review. Propco-opco structures are being reconsidered from a funding perspective while joint venture arrangements are alternative structures that seek to ensure the reputational risk remains with the operator.
Many acquirers are focused primarily on the Leinster region due to the higher Fair deal rates and perceived demand. However there is plenty of opportunity for consolidation of nursing homes right across the country and the key to unlocking the value is in identifying the right buyer.
Be sure to check that the buyer credentials at the outset of any process to ensure that (i) they have the ability to fund a transaction and (ii) they understand the market. Unfortunately there has been several instances where nursing home owners have entered into extended periods of exclusivity in order to facilitate the buyer to raise finance or conduct lengthy due diligence without fully understanding the nursing home sector. These extended processes are not only frustrating but can also be disconcerting for staff and residents.
3. Be Prepared
One of the common pitfalls we see is a business owner jumping into unstructured sales process, often on the back of an unsolicited offer. By not preparing the company for the sales process, value can be leaked throughout the due diligence resulting in lower price and potentially damaging the business.
It is important that all of your financial and operational information is accurate, up-to-date and presented in the best possible light. Understanding the strengths and weaknesses as perceived by a potential buyer can be different to the image the owner has built up over the years. Any projections provided need to be robust and based on credible assumptions that will stand up under scrutiny, while sensitive information should not be released without necessary protections in place.
Engaging with your lawyers early to help you prepare the relevant documentation for the property and legal due diligence will also help ensure a smooth process.
Another common issue is where the business owner holds back on a key piece of information that emerges late in the process and becomes a deal-breaker. For example, where capital investment may be required or potential tax issues arise, it is important that these are identified and considered at an early stage, to assess the potential impact on the overall deal structure and value.
4. Consider tax at outset
From a tax perspective, there are many aspects to consider, including Sale of Assets or shares, Capital Gains Tax, Entrepreneurs’ Relief and Retirement relief. The structure of the deal may vary should you choose to sell to a financial or trade buyer, or you may wish to restructure the business in order to gain advantage of a potentially more beneficial tax position.
For many nursing homes who availed of the acclerated capital allowance scheme, the property may still be held within the tax partnership. When the option to buy-back the property is due to be exercised, it is important that this is completed in the correct manner in order to ensure no tax clawbacks and that marketable title to the property is secured/obtained.
5. Don’t forget the business
Apart from the financial and tax preparation, it is important to consider the full spectrum of business issues when selling a nursing home, including Management and staffing, HIQA compliance as well as marketing, administration and internal controls and systems. The success of the nursing home depends upon the people and its systems upholding the best standards of care so be sure that the sales process does not disaffect the staff or the residents.
So whether you plan to sell now or in the future, the key to unlocking value is to get organised early and put yourself in the buyer’s shoes. This makes the sales process more efficient, cost effective and secures the best sale price – you often only get one chance to get it right!