Saturday, June 25, 2016

The Philosophy of Emergence and the Practice of Mergers & Acquisitions


This essay will attempt to merge a complex philosophical concept with the practice of mergers and acquisitions. The philosophy of emergence is in few words is that the sum is greater than the whole of its part because as parts aggregate a new order of complexity and composition is engendered. So it is not so much about the quantitative summation itself but that the larger amount evolves into a new pattern and properties indiscernible from the sum of the parts and their constituent properties. Understand? The Stanford Encyclopedia of Philosophy says: “Emergent properties are systemic features of complex systems which could not be predicted (practically speaking; or for any finite knower; or for even an ideal knower) from the standpoint of a pre-emergent stage, despite a thorough knowledge of the features of, and laws governing, their parts.” Or also, from the Stanford Encyclopedia – “Emergent properties and laws are systemic features of complex systems governed by true, lawlike generalizations within a special science that is irreducible to fundamental physical theory for conceptual reasons. The macroscopic patterns in question cannot be captured in terms of the concepts and dynamics of physics.”

What does such high-minded thought and concept have to do with the mundane transactional world of mergers and acquisitions? I would argue that the difficulty of completing and financing transactions does not simply increase linearly as the dollar amount or the number of facilities increases.  For example, in healthcare mergers and acquisitions, when a deal hits the $100 million market, it is essentially a whole new organism. That is, the issues are more complex, the caliber of the M&A and legal teams are better and the sophistication of the seller and buyer are all at a high level. When someone is selling $100 million or $200 million business, apodictically they are smarter and more capable to begin with to achieve that level of success. Similarly, if a buyer is going to successfully close a transaction of that magnitude he needs to have or assemble a M&A, financing and legal team that is able to swim in that arena. This is not just an order of magnitude question, although that is important too, this is order of complexity and capability that is much higher, for instance, than the sum of ten $10 million deals. The air is very thin at the $100 million level and even thinner at the $200 million to $300 million levels.  I am also confident that the same is try and even more acute at higher hundred million dollar or billion dollar levels.  Trying to finance a $250 million deal is not the same as trying to arrange financing and equity for twenty-five 10 million dollars. All of this consistent with the philosophy of emergence, which is not just a philosophy, but a phenomenon observed in nature.

In conclusion, my advice is to know that deal, professional and resource requirements need to calibrated to the size of the transaction and this is not just a function of numbers alone. In order words, to do a big deal, M&A actors need to assemble a major league experienced team to conduct the deal and also to critically recognize the all-important financing of the transaction is much tougher, demanding and more complex in this stratosphere and there are fewer financial players in this rarified air. What happens is M&A players do not appreciate the philosophy of emergence and expect a larger deal to be no more than the sum of multiple small deals. It is not.  Unfortunately, this is specious and faulty reasoning.  Knowing this philosophical concept in advance can save a lot of time, money and aggravation in mergers and acquisitions and perhaps even close your deal sooner.

Tuesday, May 17, 2016

100-Bed Skilled Nursing Facility for Sale in Kentucky


Healthcare Transactions Group is pleased to offer a 100-bed licensed Skilled Nursing Facility in Western Kentucky for sale.

Highlights:

• 2015 Revenue was $6.53 Million; adjusted EBITDARM was $1.025 Million
• Occupancy has averaged about 75%
• Medicare accounts for 19% of patient days. CMS proposed 2.1% Medicare increase starting 10/1/16
• Receives patient referrals from local Hospital and Hospitals in a 25-mile Radius
• Non-Union Facility
• One-story Building with Private and Semiprivate rooms
• 2016 Nursing Survey was Deficiency-Free

Kentucky’s restrictive Certificate of Need program projects no need for more skilled nursing facility beds in the service area. However, the market contains a higher concentration of elderly than the State or the U.S.

A public company owns and operates the SNF. They are selling it because it is not in one of their target geographic clusters.

If you are interested, please contact Mark Davis at 410-902-2450 or at msd@healthcaretransactions.com.   If you reply by email, we'll forward the Confidentiality Agreement to you. Your email should also provide the name of the corporate entity that will sign the Confidentiality Agreement and its state of incorporation.

Since 1996, Healthcare Transactions Group, Inc. has been a leading mergers and acquisitions advisory firm in the sale of skilled nursing facilities.

Friday, August 28, 2015

Maryland Assisted Living & Independent Living Facilities for Sale

Healthcare Transactions Group, Inc. is pleased to offer for sale -

  • 61-Unit Assisted Living Facility licensed for 85 beds
  • 16 Cottages with 24 Independent Living Units
The opportunity in Denton, Maryland in the heart of Maryland's Eastern Shore, in freestanding buildings on a shared 28-acre wooded campus with a Lake. Together, with a unaffiliated skilled nursing facility also on the campus, the combination forms a continuum of care community, within a market area where nearly twenty percent of the population is age 65 and over.

The Facilities are owned and operated by separate religious nonprofit entities, Healthcare Transactions Group has been engaged to conduct a competitive bid sale of the assets, including real estate and operations. The facilities may be purchased singly or together.

2014 EBITDARM (Earnings before interest, income taxes, depreciation, amortization, rent and management fee) was about $550,000, or about a 19% margin.



If you are interested in exploring this opportunity, please contact us by clicking here or call us at 410-902-2450.

Thursday, July 16, 2015

Snapshot of Drivers of Healthcare Mergers and Acquisitions Activities

Healthcare Mergers and Acquisitions activity and resulting industry consolidation is surging.  Why?

Below is a snapshot of the drivers of healthcare mergers and acquisitions activities, particularly real-estate based services.
  • Low Interest Rates and Availability of Capital
  • Favorable Demographics/Need-based Industry
  • Cost Pressures as Public & Private Insurers Increasingly Contain or Reduce Provider Reimbursements:   - Network Formation/Bundled Payments Model Rewards Integrated Healthcare Systems that Lower Costs and Improve Quality
  • Fragmented Industry Ripe for Consolidation:  - Consolidation Increases Revenues, Economies, Efficiencies and thus Profitability; Diversifies Revenue Mix & Strengthens Balance Sheet (lowers borrowing costs).   Single-site, Standalone facilities cannot attain the economies of scale necessary to survive and compete.
  • Ability to Leverage the Real Estate – (enables low blended cost of capital and high collateralization)
  • High Regulatory, Reimbursement & IT Compliance Hurdles Cause Consolidation
  • Sellers’ Market Conditions
  • Mergers and Acquisitions is Contagious

Thursday, July 2, 2015

Using Essential Oils in Skilled Nursing and Assisted Living Facilities

Using Essential Oils in Skilled Nursing and Assisted Living Facilities
by Tammi Davis, MD

Essential oils are aromatic volatile compounds that are found in many plants. In nature, plants use these oils to ward off pests, protect against viral, bacterial and fungal infections, and to attract insects for pollination. Essential oils have a very strong aromas that interact with our olfactory system to influence the part of the brain responsible for mood, emotions, and memory. Different oils have different chemical constituents that activate the brain in various ways For example, citrus essential oils such as orange, grapefruit, lemon, and bergamot can be very uplifting to the mood. Lavender essential oil is often used to create a feeling of relaxation and may be beneficial to aid in sleep.

Generally, in order to affect mood, the essential oils are diffused into the air with a small ultrasonic or nebulizing diffuser that distributes the particles into a fine mist. The use of aromatherapy is becoming more common. Many hospitals offer aromatherapy as a complementary treatment especially in oncology centers, and they have been used in hospital ERs to reduce the stress level of the staff. Many of the oils have antiviral and antibacterial properties and act to purify the air. The oils can also be added to a carrier massage oil and offered as a massage to induce relaxation.

Unfortunately, we often find people in nursing homes that are agitated, depressed, anxious, or suffering from insomnia. Diffusing various essential oils could help uplift the mood of some of the skilled nursing facility residents, may help calm agitated residents, and could promote relaxation and sleep. Many elderly have decreased hearing, sight, and taste. Aromatherapy can add another dimension to their daily routine of a skilled nursing or assisted living facility by awakening another sense. Some patients with dementia may have decreased sense of smell and they may benefit from massage with essential oils, particularly in the new emphasis on development of "memory-care" assisted living facilities.  Many essential oil companies test their oils with gas chromatography and mass spectroscopy to ensure that there are no adulterants or impurities in the oil. Oils that are not pure are associated with a higher risk of skin irritation and skin sensitivity when applied topically.

It seems very logical to me that a nursing home that smells of wild orange, lemon, bergamot, or lime would be very pleasing indeed! In addition, this could be a very effective marketing tool in attracting new residents and patients. Furthermore, improving the quality of care can improve the health outcomes and contribute to a better bottom line and business valuation for skilled nursing and assisted living facilities.

Tammi Davis, MD, is a Board-Certified Family Physician, based in Baltimore County, MD, whose practice include alternative medicine, medical acupuncture, supplements and aromatherapy.   Her website is http://www.tammidavismd.com.

Wednesday, May 6, 2015

Skilled Nursing Facility Sale Prices Hit New Highs in 2014


According to Irvin Levin Associates, sale prices in the post-acute and senior housing market set a record of the high prices paid:

  • $76,500 per bed for Skilled Nursing Facilities, a 4.4% Increase over 2013 ($73,300/bed)
  • $188,700/unit for Assisted Living Facilities, a 25.3% rise over 2013 ($150,600/unit)
  • $246,800/unit for Independent Living Communities, 28.6% increase over 2013 ($191,950/unit)
Graphs of the average price paid for skilled nursing facilities per bed, respective CAP rates and corollary multiples are below:

Friday, January 9, 2015

Intermediary Fee Structures for Skilled Nursing Facility Sale Transactions

The common commission or fee structure for brokers or intermediaries for nursing home sales is 2% of the selling price, applied to the purchase price and paid at closing. If the transaction involves a single facility, then the fee can vary from 2% to 4%, although 2% is most customary commission percentage used in the nursing home industry. If the transaction involves multiple facilities, that is a portfolio deal, a sliding scale fee model is typically used, consistent with the Lehman Formula concept. Thus, in the nursing home sales industry when a multiple facility transaction is involved, for sellers’ to pay a 2% or higher commission, without resorting to use of using a sliding commission schedule or a maximum commission fee paid, is rare. Sometimes in multiple facility nursing home sales deals up to $25,000,000, a flat 1% fee is used. Beyond that the Lehman formula and variations thereof is customarily used.

The Lehman Scale is an industry accepted formula used by investment banks, M&A advisory firms, and business brokers to calculate the commissions or transaction fees on sell-side engagements. The Lehman Scale is calculated based on a percentage of Purchase Price as follows:

·       5% of the first $1,000,000, plus
·       4% of the second $1,000,000, plus,
·       3% of the third $1,000,000, plus,
·       2% of the fourth $1,000,000, plus,
·       1% of the remaining total.

As a practical matter, the exact percentages set forth in the Lehman model are not generally used for nursing home transactions, as indicated above.  However, the principle of a sliding scale formula in multiple facility transactions unquestionably prevails in the nursing home industry.   Thus the basic concept underlying the Lehman formula that the broker charges a smaller percentage for each certain dollar amount that the transaction is worth is prevalent and used in the nursing home sale transactions in the U.S.  Accordingly, the size of the deal dictates how negotiable the percentages used in a sliding scale formula.  Usually the seller will have more negotiating room on fees the bigger the transaction value potentially gets, and as a function of the attractiveness of the business for sale and underlying industry and credit market conditions.

From our experience, reasonable brokerage or finder commissions or fees used in the nursing home industry, as percentages applied to the purchase price, would be in the following ranges below, although we recognize that the transaction value and corresponding fee breaks can vary.  However, we would argue that this variation is usually found under the $25,000,000 value threshold.  In transactions in excess of $25,000,000, the declining fee percentages kick in.

 
In my opinion, because of current low interest rate conditions and high demand for ownership of nursing home facilities, combined with the constrained and diminishing supply of nursing facilities, it is currently a highly robust “sellers’ market” for nursing home facilities. According to Irvin Levin Associates data, nursing home selling prices are at their highest level. Therefore, given these very seller favorable market conditions, it is perplexing why sellers should agree to a fee structure that includes an incentive fee for the intermediary? Moreover, given these highly favorable market conditions, the seller has the leverage to probably lower the commission because of the size of the transaction, as indicated in the foregoing, and the lower market resistance and difficulty in selling skilled nursing facilties. Lastly, under these propitious market conditions, it is also not totally uncommon for sellers to set a “not-to-exceed” cap on the brokerage or transaction fee earned.