Divestitures, mergers and acquisitions-the words evoke an image of Wall Street and corporate wheeling and dealing, which seems like a far cry from the world of nonprofit senior living.
There are many reasons that a nonprofit makes the decision to sell (divest) a senior-living facility. Often, there are private companies or larger nonprofits eager to buy (acquire). But unlike these groups, which tend to be more experienced in mergers and acquisitions as part of their business strategy, independent nonprofits are likely doing this for the first time.
According to the Senior Care Investor Acquisition Report, the senior-care market really started to improve in the second half of 2010 after two very slow years. There were 110 publicly announced deals in the long-term-care acquisition market in 2010—a 22% increase over 2009. Of the these transactions, 11 were nonprofits selling to private companies, six were nonprofits selling to nonprofits and four were private companies selling to nonprofits. In 2011, the demand for quality properties continues to be strong.
How can a nonprofit go about finding an appropriate acquirer, either nonprofit or for-profit, and how can both parties come to a mutual understanding about the senior-living property being sold? It’s important to know what goes on during a sale and what a nonprofit board can do to help assure a positive outcome for all involved.
Know the Divestiture Process Step by Step
While working with an advisor on a sale, one of the first steps is to create a profile of the property being sold. This typically consists of: a description of the physical plant or plants; historical and projected operating performance; staffing analysis; market position; and valuation. It also is beneficial to identify opportunities to improve the operating performance of a facility. By working with financial and legal advisors experienced in the senior-living industry, a thorough profile can be assembled highlighting the strengths and opportunities associated with a facility, increasing its desirability.
Early on, it’s important to identify qualified potential buyers to whom the request for proposal (RFP) should be sent. The search should include nonprofits and businesses on a local, regional and national level that would have an interest in the potential acquisition. A nonprofit seller may want to specifically target other nonprofits or organizations it feels could be a good fit with the facility’s culture. Be sure to work with advisors with established contacts in the senior-living industry, both regionally and nationally, to ensure there are a sufficient number of potential acquirers.
When marketing the property to potential buyers a confidentiality agreement must be in place. Other considerations include specifying and maintaining a controlled flow of information between the advisor, the seller and the potential buyer. Early in the process, communications should be kept confidential and limited to those directly involved with the deal.
After assessing the proposals, the seller enters into a letter of intent (LOI) with the potential buyer with the most attractive offer. The LOI includes financial consideration and allows a buyer a timeframe of exclusivity to complete additional due diligence regarding the acquisition. During this time the seller also completes due diligence on the potential buyer. The LOI typically includes several key provisions that will be binding on the parties, whether or not they execute a purchase agreement.
The LOI needs to strike a balance between certain key terms while assuring that the buyer is sufficiently committed to the transaction and maintaining a relatively simple document that does not become a protracted point of negotiation. Key terms that should be included in the LOI are: time period and process for extending the time frame; buyer’s deposit; overarching principles; confidentiality; purchase price and/or methodology for determining adjusted/final purchase price; term/termination; timeline for transaction process; exclusivity; and expenses. Depending upon the complexity of the transaction, additional due diligence time will need to be built into the purchase agreement as well.
When considering a potential buyer, the nonprofit seller should review issues, such as financial strength, access to capital, experience in the senior-living industry, any required approvals for licensure or certification with a change of ownership, and overall fit for the facility’s culture. During the divesture process, other considerations include: deciding if the full board will be involved in negotiations or if it will appoint a sub-group to make decisions within approved parameters for final board approval; and establishing a coordinated communication plan with the buyer to inform stakeholders of the sale.
Finally, provided both parties perform and are satisfied with the results of their due diligence, the outcome of the LOI is the purchase agreement, which may or may not be contingent on being able to obtain financing. If there is a financing contingency, there should be financial consideration for the seller if the sale is not completed. The parties will agree upon the form of other sale documents (bill of sale, assignment and assumption of leases and agreements, deed, etc.) at the time the purchase agreement is negotiated.
Time to Clean House
Much like having a home inspection to address any issues before selling a home, a seller’s legal and financial consultants should assist the seller in preparing for the upcoming transaction. Such preparation may include: ensuring that corporate documents, including meeting minutes, articles of organization and bylaws and appointments of trustees and offices, are current and correct; ensuring all filings are in place necessary for obtaining corporate and tax good standing certificates; reviewing and organizing resident and vendor agreements to assure they are current, complete and orderly; and assuring all licenses, permits and approvals are up to date and, if any are soon to expire, making arrangements for renewals.
In many ways, the sale of a nonprofit’s assets to a for-profit buyer progresses in much the same way as the sale of a nonprofit’s assets to a nonprofit. However, additional complexity results as such conversions are generally subject to approval by the state, often through its attorney general. This may be a formal process that is limited to the attorney general’s office or may result in the attorney general’s recommendation to a state court. A public notice and comment period, which may include public hearings, is often a feature of such proceedings. These activities may be coordinated with the review process undertaken by the state agency, if any, that may regulate the facility.
Generally, such a review is based on common-law principles applicable to the trustees of nonprofit organizations, who are required to exercise their fiduciary duty, specifically the duties of loyalty and care to the entity. In some states, statutes have formalized these common law requirements. This review process may present the opportunity for negotiated conditions to the transaction as part of the attorney general’s or court’s approval of the transaction. In such cases, the buyer may agree to certain conditions, such as the commitment to maintain the facility or certain services for a period of time. The attorney general may be in a position to enforce such conditions long after the seller entity has left the scene.
These conditions may also be included in the purchase agreement, which may need to be modified to reflect new or modified conditions resulting from the governmental review process. This gives the seller the ability to enforce the conditions following the closing, either through money damages for breach of contract or by seeking injunctive relief, separate from any enforcement through the governmental process.
Sellers must realize, however, that any buyer’s tolerance for post-closing conditions will be limited and certainly will chill the transaction if the buyer views them as unreasonable or likely to adversely affect financial viability of the facility going forward. For this reason, the seller’s RFP should include any post-closing conditions that the seller considers an essential part of the transaction.
Written by By Mike Ashley of Lancaster Pollard and Daria Niewenhous, J.D., of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
Reprinted with permission from Lancaster Pollard’s ‘The Capital Issue’ at www.lancasterpollard.com