When determining the price a buyer is willing to pay for a Senior Living Community, they look at many things. Ultimately, though, every operating asset is worth the future cash flow it will produce and future sale price, discounted back to today’s value. One of the best ways to predict future cash flow is by analyzing what the community is currently producing and what it has produced in the past. The more consistent a community has produced cash flow over the past several years, the more confident a buyer will be that it will continue to do so and willing to pay more for the community.
However, often times a community, or any business, will go through some struggles. If an owner fixes the problems and increases cash flow over an extended period of time, most buyers will give the owner credit for its current higher cash flow and base the purchase price on the new amount. However, when there is not a long track record of consistent cash flow, the potential buyer is going to try to determine if it is realistic that the new, higher cash flow will continue. There are several key questions they will ask and analyze:
1. Is the community’s new rents and occupancy similar to the market?
2. Does the physical structure warrant market rate rents and occupancy?
3. Did the community increase occupancy via Medicaid or by offering steep incentives/temporary discounts?
Typically, a minimum of three months of consistent cash flow is needed to maximize the price. 12-24 months is ideal. However, if a seller can clearly demonstrate what they did to fix the problem, sometimes even a shorter amount of time is needed. Though, the new cash flow will HAVE to continue through the marketing, due diligence and closing timeline, which could take 3-6 months.
If a potential buyer determines that the new, higher cash flow will realistically continue, a higher price is warranted. However, if the new cash flow is just a cyclical event or was achieved by using Medicaid or steep discounts, it will be difficult to achieve the higher sales price and a longer track record may be required.
For more information on what your Senior Living Community might be worth, contact Jason Punzel at 630-858-2501 x 233 or punzel@slibinc.com.
