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.

No comments:

Post a Comment