After grappling with the COVID-19 crisis for the past year, senior living and care facilities are waking up to some stark financial realities that are starting to push a new wave of consolidation in the sector.
One recent analysis found that the long-term care industry expected to lose $94 billion over 2020 and 2021, a result of a surge in costs related to COVID and a drop in resident occupancy. The report estimated that about 1,600 facilities would have to close this year without financial assistance — a 10-fold increase over 2020.
At the same time, many exhausted executives at facilities are ready to call it a day and step down rather than face what promises to be a prolonged, challenging period of recovery over the next few years.
This adds up to a promising opportunity for potential buyers who are looking to either make an entry into the sector or expand their existing footprint to become bigger regional or national providers.
They can provide a lifeline to struggling facilities while adding breadth and scale to their own operations, putting them in a strong position to benefit from the recovery.
Through smart hiring for key positions, including from outside the industry, acquirers can inject much-needed new thinking into senior living and care and find ways to streamline operations while improving resident experiences.
The COVID crisis exposed just how many facilities lack strong technology platforms and innovative thinking around tools such as telemedicine and social media, key areas where acquirers can improve performance.
In addition to traditional merger and acquisition deals, established players in the industry are opting for affiliations or combinations through member substitution agreements to effectively take control of facilities. These deals can yield all the synergy opportunities of an M&A takeover but with lower transaction costs.
Lifespace Communities is one example of a senior living and care operator that has been adding new C-Suite talent and acquiring communities to expand its footprint and position itself for growth. The Des Moines, IA-based non-profit provider has expanded into several other states, including Texas, through affiliate partnerships with complementary assets.
Even though this is an exciting time for potential acquirers in the industry, plenty of minefields must be avoided. Many facilities desperate for a lifeline are, unfortunately, beyond the point of no return, facing entrenched problems such as an excess of beds or units, outdated facilities, high staff turnover and high agency costs that could be symptomatic of a deeper cultural malaise.
Potential buyers need to tread carefully and not get carried away by the prospect of a new acquisition. Here are five key areas that acquirers need to pay particular attention to in deciding whether a target operation is a good fit:
- Facilities. It’s crucial to understand how well maintained and up to date a target’s facilities are. A facility may look good on paper but have underlying liabilities, such as deferred maintenance or capital shortfalls, that would require millions of dollars to make it competitive, casting the deal in a very different light.
- Market conditions. Potential acquirers need to perform a detailed analysis of local market conditions to understand the facility’s true potential. It’s important to understand who the competitors are, hospital referral relationships, whether local demographics are working in its favor and whether the adult child influencers are staying in that area rather than moving away.
- Financial health. A forensic analysis of a facility’s finances is crucial to get a full picture of its financial health and uncover any hidden problems. This analysis may unearth problems with the facility’s revenue cycle, such as shortfalls in collecting for services that result in a growing accounts receivable problem.
- The workforce. Is the facility’s workforce stable, or is it suffering from high turnover and relying heavily on staffing agencies, with higher wage costs that will shrink margins? The latter issues can signal deeper problems with the company culture that can be difficult to fix.
- Are you in your lane? A common, and costly, mistake that acquirers make is to overreach into specialties or geographies that are beyond their areas of expertise. A skilled nursing provider might purchase a facility in the assisted living space without having the operational flexibility to deal with the very different requirements of that specialty, for instance. Others buy facilities in remote locations without putting in place the organizational changes needed to deal with the distance and not being prepared for regulations that vary widely from state to state.
With a careful due diligence process taking into account those five themes, senior living and care operators can minimize their risks and position themselves strongly for an eventual rebound in the industry.
Patrick McCormick, CPA, is a partner in Plante Moran’s senior care and living practice.