By Sam Pirutinsky Consider this scenario: A skilled nursing facility (SNF) is on the market, and you\u2019re interested. If you\u2019re a seasoned nursing home administrator ready to move into an ownership role, a successful SNF owner interested in expanding your portfolio, or an entrepreneur seeking investment opportunities, you\u2019ve taken steps to minimize the risk. After a careful review of the historical financials and some number-crunching, you\u2019re certain that with diligent attention to increasing the census and cutting expenses, you can project a healthy profit in year one. So now it\u2019s time to trust your intuition and move quickly to capitalize on the opportunity, right?<\/p>\n Not so fast. After more than a decade on the front lines of SNF acquisitions, we\u2019ve learned why some acquisitions succeed while others struggle to realize their goals. Here are some key points:<\/p>\n Those historical financials paint a pretty picture of a nice little \u201cfixer upper\u201d that just needs some TLC. Sure, the margins have tended to be slim, but with some decent marketing and ancillary contract trimming, this facility has real potential.<\/p>\n Or does it? Don\u2019t let the numbers they provide be the only story you see. Unfortunately, there\u2019s plenty of creative accounting in SNF operations that can mask or minimize significant issues. Add a few strategic management or corporate allocations here and there, and a money pit looks like a reasonably manageable turnaround candidate with great prospects. It will take robust, skeptical due diligence during the underwriting process to break through the fa\u00e7ade and reveal the truth.<\/p>\n In pursuit of lower rates on those critical terms and A\/R loans, ambitious plans to slash expenses in the first year will certainly impress lenders. But you can count on unexpected challenges, and daily operations will almost certainly be a distraction from your turnaround strategy.<\/p>\n Don\u2019t get tripped up! Setting projections that will make the bank happy while still being practical and achievable is an art form. Close coordination with your mergers and acquisitions advisor before closing can help you set realistic covenants and ratios, and it can also assist you in negotiating terms that will satisfy all parties and ensure uninterrupted cash flow.<\/p>\n Planning for your strong A\/R line of credit to cover your startup costs? Even the most generous lenders don\u2019t want to be on the hook for more than 60 to 75 percent of total A\/R, after factoring in collectability and advance rates. It\u2019s easy to overestimate the collectability of your receivables, and your projected profitability may be months out. Are you ready to meet the shortfall?<\/p>\n Bottom line: A realistic cash flow projection will help ensure smooth operations until revenue stabilizes.<\/p>\n Maybe you\u2019ll find some breathing room on the AP side. But remember\u2014you\u2019re the new kid. Your track record isn\u2019t established yet, and your leverage is limited. Squeeze vendors too hard and they\u2019ll terminate, leaving operations in turmoil and investors heading for the exits. That\u2019s a recipe for disaster.<\/p>\n Strike the right balance. Your advisor can provide realistic strategies for astute management of AP, and tough negotiations with suppliers can deliver significant results if handled with care.<\/p>\n The payroll looks pretty bloated on paper. It\u2019s a classic strategy: cut your way to profitability. Trim some nursing positions here, pay a few department heads less there, get rid of deadwood\u2014and bingo, hundreds of thousands in savings. Works every time, right?<\/p>\n Actually, there are many obstacles to this approach. This is a people business, and that overpaid supervisor who\u2019s been here forever could be the heart and soul of the operation. New ownership makes everyone nervous, and if morale crashes, hundreds of disgruntled employees may suddenly decide to shop their resumes around. There are plenty of opportunities in the current highly competitive labor market, and new minimum wage rates in many states will make new hires significantly more expensive. Good luck replacing them without significant onboarding and incentive costs. And what will high turnover do to your facility\u2019s reputation?<\/p>\n What\u2019s more\u2014this is a highly regulated industry. State-mandated staffing ratios need to be maintained if you want to survive past the first survey. Star ratings, Medicaid reimbursement, and simple resident satisfaction are all directly related to both staffing ratios and costs.<\/p>\n There are savings to be had, but cuts must be made with a razor, not an ax. An accurate staffing analysis can provide a cost-effective solution to optimum staffing.<\/p>\n
\nManaging Partner, LTC Finance and Advisory Services<\/em><\/p>\n\n
\n
\n
\n
\n