Over the past several years, the senior housing market has seen meaningful consolidation as national and regional providers seek to acquire market share and gain efficiencies. Indeed, large portfolios have traded, and in 2013, there were a record number of non-portfolio transactions, as acquirers focused on the highly fragmented markets of regional and local senior housing providers.
As local operators sense that it may be a “seller’s market,” it is important for those sellers to be aware of how to be best prepared for an increasingly rigorous due diligence process by prospective buyers. Healthcare legislation uncertainty coupled with increased competition for quality assets has led to heightened diligence by buyers whose aim is to evaluate, mitigate and price the perceived risk attendant to health care transactions.
Although skilled nursing homes may seemingly bear greater risk because of the related health care elements, buyers are equally diligent during acquisitions of independent and assisted living facilities. Of course, each facility brings its own particular diligence challenges, but sellers can contain diligence, save time, and limit associated expense with a strategic diligence action plan before going to market.
Sellers should expect buyers to conduct the same types of diligence that are associated with the sale of any ongoing business, such as real estate (title, survey and environmental), personal property (tangible and intangible), contracts, insurance, human resources (i.e., employees), taxes, litigation, financial statements, and public record searches relating to liens or claims.
A well-organized physical or virtual data room will further seller’s goals by minimizing surprise, and demonstrating to the buyer the path to value.
A few of the more common, and vexing, diligence issues are as follows:
1) Real Property: A seller’s real property can be fertile ground for diligence issues. Although it seems elementary, a seller should be aware of the extent and nature of its real property holdings. It is not uncommon for operators to acquire adjoining parcels over time, sometimes using different title holding entities. The seller should be prepared to provide evidence of its ownership (such as a deed or title insurance policy) and a survey. The seller needs to be aware of any environmental issues, such as underground storage tanks or asbestos, that exist on the property and be prepared to address any associated buyer inquiries. Buyers will request multiple site visits to inspect the property and its physical plant, and its component systems, like the roof, foundation, HVAC systems. Seller should develop a plan in advance as to when it will allow such visits and who should accompany buyer on those visits in order to minimize disruption to daily operations.
2) Personal Property: The personal property is also an important subject of the diligence. A seller should compile a detailed schedule of fixed assets and inventory. Identify whether any such assets are leased or subject to liens, and if so, provide the underlying lease or debt instruments. Make sure that original certificates of title for any vehicles are available. Also identify which assets may not be transferred to the buyer because they are owned by other parties, such as a manager or third party operator, or because transfer is restricted, such as licensed software. Determine ahead of time the availability and transferability of intangible property such as websites, phone numbers, and property name.
3) Licenses and Permits: Sellers should be prepared to provide all information relating to licenses and certifications relevant to its operations, including health care licenses, certificates of need, and local business licenses. Be aware of the change in control provisions for each to avoid any delays in closing.
4) Payor Information: Information concerning identity and mix of payors is important, especially if the seller’s facility receives governmental reimbursement. The seller should be prepared to identify and produce all provider agreements, demonstrate compliance with billing and reimbursement and payment regulations, or show what remedial steps will be taken to resolve any issues prior to closing. To the extent that there are any ongoing governmental audits, seller should make all reasonable efforts document and conclude same as soon as possible.
5) Regulatory Compliance: Compliance with all laws and regulations (e.g., patient records, privacy, infection control, emergency preparedness) is an important area of diligence. Sellers should be proactive in demonstrating that its compliance policies and procedures are sound, and any breaches are reported and addressed. Government investigations, even if presumed to be “confidential” should be disclosed, as should all litigation concerning regulatory compliance.
6) Litigation: Confirm that all ongoing litigation is covered by insurance and that anticipated liability is within policy limits. While buyers understand that litigation, especially in certain geographical areas, are a normal cost of doing business, there is greater impetus to settle and clean up the docket for sellers that are serious about selling.
7) Labor: Sellers need to understand their obligations to employees under applicable laws relating to sale of businesses. Additionally, the buyer will need to review any collective bargaining agreements that cover any employees. Selling a business in the midst of negotiating a collective bargaining agreement is complicated so, if possible, all agreements should be finalized prior to marketing a facility for sale.
Protracted diligence time will cost sellers money. One important way to expedite the diligence process is to anticipate a buyer’s information needs. A well-organized data room, either virtual or physical, speaks volumes about the seller’s seriousness of purpose and professionalism. It demonstrates pride of ownership and value, and mitigates the risk that a seller will “leave money on the table” because of sloppy diligence protocols.
George Mesires is a Partner with Faegre Baker Daniels LLP and leads its Chicago finance and restructuring team. George represents both non-profit and for-profit senior housing operators in financing, acquisition, and governance matters, including operators in financial distress.
Michael Viner is a Partner with Faegre Baker Daniels LLP in Chicago and represents senior housing operators in real estate, finance and acquisition matters.