One of my readers recently asked this question (thanks Richard). When we’re thinking about buying an existing assisted living facility, what documents and what information do you need to help find its value?
The bigger question some of you might have is what’s my facility worth? I answered that question in an earlier blog post – just click the link to check it out.
In this post, we’ll talk about the information you need, or your advisor needs, to help you find the value of an assisted living facility.
Valuation vs Due Diligence
First, I want to share an important distinction on this topic. The information you need, in my opinion, to find the value of an assisted living facility is not the same information that you’ll need for the due diligence you’ll perform before closing.
Yes, the due diligence process might uncover one or more issues that will impact value and purchase price. But finding the market value of an assisted living facility to set an asking price or to make an offer doesn’t normally require the same amount of detail.
Some buyers may push for more information than is really needed to complete an initial valuation, stepping into the due diligence process earlier than necessary. In my view, a buyer and seller should come to terms on price before moving into detailed due diligence information, which will likely include even more confidential and proprietary materials.
With that said, sellers can also be reluctant to share information that is essential to coming up with a reasonable valuation. Sellers might be fearful that a buyer will somehow use their information to compete with them or otherwise cause some sort of harm. That fear and the resulting tight grip on information can cause some buyers to pass on a deal before ever getting started because of concerns that a seller is hiding something negative about their property or that the seller will be too challenging to deal with during due diligence. The seller’s own caution can backfire on them.
All of those fears, from both the buyers and sellers, are based on some legitimate concerns. Those concerns can be managed when the right information is provided at the right time and when steps are taken to manage the disclosure and non-disclosure of important property information.
Non-Disclosure Agreements
In the case of a sale, owners should protect themselves by sharing private information only after a buyer has signed a non-disclosure agreement (NDA) or some other form of a confidentiality agreement. A quick Google search will reveal plenty of templates that may work for an assisted living facility transaction.
Income Approach vs Replacement Cost Approach
Before jumping to the list of information you need for a valuation, let’s review what goes into a valuation.
Valuations, or appraisals, often use a few different approaches to help determine the right market value for a property. These include the Income Approach, Replacement Cost Approach, and Comparable Sales Approach.
An owner or seller usually provides information needed to come up with the income approach and, to a lesser extent, the replacement cost approach too. For example, the income approach will require financial statements and supporting documents, and the replacement approach may require building plans and specifications.
Essential Information for Valuations
Appraisers, investors, and others will each have their own list of things needed to determine the value of an assisted living facility, but here is my list of the essential things a buyer needs and a seller should be ready to provide:
- Income statements. Or, sometimes called profit & loss statements, for a) monthly for the most recent 12 month period, b) the current year-to-date, and, c) the prior two calendar years. Why all the different time periods? Simple, to spot trends over recent months, and year over year, so that projections of future income are more accurate.
- Income statements by facility. If there is more than one facility involved in a transaction, there should be income statements for the periods noted above for each facility, as well as income statements for the combined portfolio.
- List of discretionary, non-recurring, or extraordinary items. What’s this? It’s things like owner’s compensation in excess of market salaries, major repairs or replacements that may have been expensed rather than capitalized, or asset sales or purchases the were included in operating income. In other words, it’s items that might not be applicable to a new owner and shouldn’t be considered in the valuation.
- Resident census or rent roll. Why? A few things. First, it’s important to back up the revenue amounts in the income statement with an actual list of paying residents, even if the actual names are left out for privacy concerns. Second, it’s important to confirm actual occupancy rate to find if there is room to improve occupancy or if some potential vacancy should be considered in the analysis. And, third, the payor mix is important for assisted living facilities because a property that is 100% private pay will almost always be viewed more favorably than one with a high public pay mix.
- Property plans and specifications. A walk through the building may be all that’s needed but the plans and specs can help confirm details. A valuation should consider the size, capacity, unit mix, amenities, quality, layout, functionality, efficiency, expansion potential, condition, and more about a facility.
- Property history. When was the facility built? Remodeled? Was it purpose-built for assisted living or was the facility developed from a repurposed building? Age of the building, it’s competitiveness is the current market, and its remaining useful life are all key factors in valuation.
- Deferred maintenance. Is there any? An owner might not see things the same way that an appraiser, property inspector, or potential buyer sees it. But an owner should be honest with themselves and consider whether the roof is at the end of its useful life, whether the parking lot needs to be repaved, or anything else needs to happen to keep the building functional into the future. If an owner is keeping track of these items, they won’t be surprised when a buyer notes the same items in their valuation.
Each property is unique, and so each valuation is unique as well. Some valuations will need additional information for their situation but most can be completed with these seven pieces of information.
Are you an investor, appraiser? What else do you look for in your valuations? Leave us a comment below.