Distressed Care Business - Exit Management

When your care business is struggling, especially if the regulator has given it a low rating, you may decide you’d like to explore selling it.  Whilst some things are the same regardless of the health of a business, there are some key differences.  We’ll explore those differences and how this might impact your business (and your decision) in this article.

Businesses are valued based on three main scenarios. 

The Royal Institute of Chartered Surveyors (RICS) defines these as:

MV1, or Open Market Valuation.  This is the value of the property sold in the open market with the benefit of at least three years’ trading accounts, together with any goodwill associated with the business.

MV2, or Open Market Value Closed.  This is the value of the property sold in the open market, but with a business that has closed or with no available accounts.  The valuer will work off projections as to what they believe to be the fair maintainable trade levels.

MV3, or Vacant Possession/Closed Value.  This is the value of the property closed, with no trading accounts.

When a business is in distress, even with full accounts, a view is likely to be taken as to its market value. How the business is operating, what problems it might have and what the future might reasonably be expected to hold, all contribute to the value assigned to it.

Key Performance Indicators:

Income: Has it dropped?  Can it recover?  What investment might be needed to maximise recovery?

Costs: What are the main costs? Can they be addressed or are they fixed (or increasing) to such an extent as to be a major ongoing issue? Has the business addressed its carbon neutral journey?

Staffing: Does the business have enough staff? Are they the right people? Has the business appointed an external consultant to review staffing and reduce any reliance on Agency?

Compliance: Care homes with ratings of Requires Improvement or Inadequate fare less well than those with a rating of Good or Outstanding.  Has the business developed a turnaround action plan, potentially with an external consultant?

Environment: Does the property need capital investment or a high level of repairs and renewals that cannot be funded through cash flow? 

Finance: Preparing a Business Plan with profit & loss reports, Balance Sheet and forecast cash flow will highlight where the funding gaps are and where additional lending or equity finance may be required.  Revisit the business finance function to ensure monthly management information is available internally or with external accountancy support.

All these factors are pieces of a jigsaw puzzle that help to form the bigger picture of the home, its viability and likely open market value.  In the case of a distressed business, the reasons for the current situation would need to be fully understood.  It may be that the home could improve its fair maintainable trade (FMT), but there may be a significant gap between FMT and the current position. 

Key areas for consideration when calculating (FMT):

Occupancy

Care Home occupancy is a key factor, along with the main cost a home has:staffing.  If occupancy is in a temporary dip, understanding the reasons for that helps to see if that temporary issue is short term or longer term, and what impact that has on the business. 

Having a visual, easy to navigate website, assists a care business to create a positive message which helps to encourage private referrals and enquiries in addition to reaching out to new staff.  Internal and external branding should never be underestimated.

Rooms cannot be easily added to a business and a home carrying a high number of vacancies would do better to focus on filling those rooms before adding more, but it may be possible to improve rooms, by adding en-suites where possible. 

Care seekers and care home valuers often ask “is there a lift” now considered to be of added value for care home occupancy and when selling the business,

However, there are costs associated with these improvements and if a home already has limited funds, covering basic running costs has to be the priority. 

Staffing

By far the biggest expense for any care home, staffing can easily overstretch a business, especially if agency is needed to fill roles.  The impact of minimum wage is not just those on the lowest wage, as wage differentials usually need to be maintained, and with the current cost of living crisis staff recruitment and retention continue to be one of the biggest challenges for many care homes and supported living businesses.

There is no doubt that a successful care home and supported living business can afford to pay staff more competitive remuneration combined with a benefits package which in turn attracts new staff and increased staff retention.

Utilities

Utilities are an area of considerable concern with rising costs impacting care businesses, who run a 24 hour operation.

If a business is in some distress, talking with funders would be the first step in looking for options moving forward.  Business restructuring advisors can also be a great help, providing advice on what options are or how to manage an exit, be that through an operational sale, or a closure. There are buyers seeking turnaround projects, so engaging with an agent is also worthwhile. 

As an expert in healthcare agency, Alison Willoughby has provided viability reports for banks, to help them understand the challenges and the opportunities that a care business might face.  This can help a care provider make that all-important decision about increasing care home and supported living sustainability as a long term operational business, improving to sell, or selling straight away.   Either way, knowledge is power.