February 18, 2019
Jason Punzel

How does trending cash flow determine the value of a Senior Living Community?

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How does trending cash flow determine the value of a Senior Living Community? – by Jason Punzel

When determining the value of a Senior Living Community, a buyer will look at many factors including location, age, size, acuity type, etc.  However, the most important factor is cash flow.  Many sellers may wonder, “how does trending cash flow determine the value of a Senior Living Community.”  An asset is worth its future cash flow plus its future sale price, discounted back to today’s value.   One of the best ways to predict the future is by analyzing what the community is currently producing and what it has produced in the past.   The more consistent a community’s financials 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.

Challenges:

Often, a community will go through some financial struggles.   If an owner fixes the problem 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 most recent history.  However, when there is not a long track record of consistent cash flow, the potential buyer will analyze if the 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.  However, 12 months is ideal.  If a seller can clearly demonstrate what they did to fix the problem, sometimes even a shorter amount of time is needed.  Additionally, the new cash flow will have to continue through the marketing, due diligence and closing timeline.  This typically takes 3-5 months.

Conclusion:

If a potential buyer determines that the new financials will realistically continue, a higher price is warranted.  However, if the new financials are just a cyclical event or was achieved by using Medicaid or steep rental 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.