Selling Seniors Housing Communities – Pro Forma vs. Actual Financials – by Jason Punzel
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 the exit sales 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 because they will perceive it as lower risk (thus a lower cap rate).
However, often times a community, or any business, will go through financial ups and downs. If an owner fixes the problem and increases cash flow over a period of time, most buyers will give the owner credit for its current higher cash flow and base the purchase price on the new, higher amount of cash flow. However, when this is the case, the potential buyer is going to try to determine if it is realistic that the new cash flow will continue. There are several key questions they will ask and analyze:
- Is the community’s new rents and occupancy similar to the market?
- Does the physical structure warrant market rate rents and occupancy?
- Did the community increase occupancy via Medicaid or by offering steep incentives/temporary discounts?
Ideally, a community will have a 12-month track record of consistent cash flow. However, if a seller can clearly demonstrate what they did to fix the problem, often times we can use a short as 3 months of trailing financials. However, the new cash flow will HAVE to continue through the marketing, due diligence and closing timeline, which could take an additional 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 firstname.lastname@example.org.