KEY POINTS FOR SELLING YOUR SENIOR OR ADULT RESIDENTIAL FACILITY
We cannot stress it enough: a well-presented set of financials will help you sell your business. Usually for a business of this type, the income statement is sufficient to ascertain the profitability of the enterprise.
Capital expenditures for new assets are typically presented on a balance sheet, and include such items as a new roof, water heater, A/C and heating unit. These capital expenditures and any other significant balance sheet items, such as an increase in accounts receivable, should also be noted.
The profit and loss statements for the prior 2 years plus the current year-to-date will provide vital information about the financial performance of your senior or adult care facility. Financial statements are the tool your real estate professional will employ to determine the value of your business.
Income statements assist the buyer in analyzing the profitability of your business. An accurate income statement is crucial to the evaluation of the financial status of the facility and will help buyers determine whether your home is a wise investment decision.
INCOME STATEMENTS (Profit and Loss, P&Ls)
Net Operating Income
Net Operating Income, or NOI, is also known as the “Bottom Line.” It represents revenues less expenses, exclusive of taxes, depreciation, amortization and rents. Your best strategy as an operator is to maximize your NOI, and it is one aspect of the business operation within your control. Effective management of expenses is one way to maximize the profitability of your business because every dollar you save will drop down to your bottom line and will yield a return of 8-18x in a senior or adult residential business sale.
Keep track of your monthly resident census and your monthly revenues. If you charge a base rate for rent and a separate fee for services, break this out separately in your monthly income statements. This applies only to senior care facilities. For adult residential facilities, there is a negotiated rate with Regional Center for services provided depending on level of care required for a given resident. Value-add services are a very attractive feature of a senior care home.
Buyers are looking for homes that show regular annual rent increases. If your census is low, invest in a killer marketing program to attract new residents, or use a referral agency to gain new clients. As much as 60-70% of additional revenues from increasing your census flows through to the bottom line.
Use a consistent accounting approach. If you are using the cash basis of accounting, don’t suddenly switch to accrual in the year before the sale. Potential buyers won’t go through the process of reconstructing your income statements. Consistency is key.
Unnecessary expenses that can be eliminated will greatly improve your bottom line.
If you have unusual or extraordinary expenses, break these out separately and itemize those expenses for valuation. Buyers can adjust for such expenses and look to see that there is a consistent trend of expenses from year to year.
As a supplement to the financial statements, it’s important to include a rent roll with unit descriptions (private vs shared room) and separately break out base rent and additional services income.
For most single community sales, the balance sheet is not as necessary for the buyer to evaluate the suitability and profitability of the purchase. Some buyers may ask to see debt information, but such data is considered a sensitive issue and is not required to be revealed to a new buyer. This is because each buyer must obtain their own financing, with the rate and terms available for their particular credit worthiness and financial condition.
Some items to note from the balance sheet:
1. Increasing amounts of accounts receivable. This indicates that residents are not paying their monthly rents on time, in contravention to the requirement that resident rents are due on the 1st of every month. Significant increases in accounts receivable could be suggestive of a deeper problem with the facility because it begs the question as to whether rents are being withheld due to substandard care.
2. Increases in capital expenditures. This may be quite advantageous for a potential buyer. If capital expenditures are being made to keep the facility in perfect operating condition, then the buyer won’t have to finance significant deferred maintenance out of future cash flows.
Regular periodic expenditures to install assets like a new roof, A/C and heating units, a bigger-capacity water heater imply that the seller has regularly updated the facility and will mean fewer expenditures for such assets by the new buyer.
Significant deferred maintenance will decrease the amount realized by the sale, since buyers will detract their estimated costs to repair and update the home from their final offering price. In the year prior to sale, it is advantageous to correct all items of deferred maintenance and to install new assets as needed so that a potential buyer has a minimum of repairs and capital expenditures to be completed.
3. Increases in accounts payable indicates that the seller is not adequately controlling the timing and amount of expenditures and may possibly be unable to pay out of cash flow. This may be a harbinger of a greater problem and calls into question the profitability of the business and accuracy of the income statements.
Subscribe to our newsletter.