7 steps to divestiture every nonprofit should follow

In today’s nonprofit senior-living environment, there are many reasons why a provider makes the decision to sell (divest) a facility─ailing finances or changes in mission focus, to name a few. Not only is it a difficult decision for a nonprofit’s board of trustees to make, most are uncertain how to go about it.

Not so for private companies or larger nonprofits that are eager to buy (acquire). These groups tend to be more experienced in mergers and acquisitions as part of their business strategy. In 2010, of the 110 publicly announced deals in the LTC acquisition market, only 11 were nonprofits selling to private companies, six were nonprofits selling to nonprofits and four were private companies selling to nonprofits.

How can a nonprofit go about finding an appropriate acquirer, either nonprofit or for-profit, and how can both parties come to a mutual understanding about the transaction and the future of the senior living property being sold? Start with these seven important steps to divestiture.

1. Develop a property profile

While working with an advisor on a sale, one of the first steps is to create a profile of the property being sold. This typically consists of a description of the physical plant or plants; historical and projected operating performance; staffing analysis; market position; and valuation. It’s also beneficial to identify opportunities to improve the operating performance of a facility.

By working with financial and legal advisors experienced in the senior living industry, a thorough profile can be assembled highlighting the strengths and opportunities associated with a facility, increasing its desirability.

2. Establish procedures

During the divestiture process, a nonprofit must make certain decisions as soon as it makes the decision to sell its facility. Should the full board be involved in negotiations or should it appoint a sub-group to make decisions within approved parameters for final board approval?

Don’t forget a communications plan to inform stakeholders—residents, families, employees, volunteers, donors—of the sale. This plan should be developed and eventually coordinated with the buyer.

3. Identify potential buyers

Early on, identify qualified potential buyers to whom the request for proposal (RFP) should be sent. This search can include both nonprofits and for-profits, and should target businesses on a local, regional and national level that would have an interest in the potential acquisition.

A nonprofit seller may want to specifically target other nonprofits or organizations it feels could be a good fit with the facility’s culture. Be sure to work with advisors who have established contacts in the senior living industry, both regionally and nationally, to ensure there are a sufficient number of potential acquirers.

4. Use confidentiality agreements

When marketing the property to potential buyers, a confidentiality agreement must be in place. Other considerations include specifying and maintaining a controlled flow of information between the advisor, the seller and the potential buyer. Early in the process, communications should be kept confidential and limited to those directly involved with the deal.

5. Assess potential buyers

When considering a potential buyer, the nonprofit seller should review gating issues, such as financial strength, access to capital, experience in the senior living industry, likelihood the potential buyer may easily obtain any required licensure or certification associated with the change of ownership, and overall fit for the facility’s culture.

6. Devise a letter of intent (LOI)

After assessing the proposals, the seller enters into an LOI with the potential buyer with the most attractive offer. The LOI includes financial consideration and allows a buyer a timeframe of exclusivity to complete additional due diligence regarding the acquisition. During this time the seller also completes due diligence on the potential buyer. The LOI typically includes several key provisions that will be binding on the parties, whether or not they execute a purchase agreement.

An LOI needs to strike a balance between assuring that the buyer is sufficiently committed to the transaction and maintaining a relatively simple document that does not become a protracted point of negotiation. Key terms that should be included in the LOI are: time period and process for extending the time frame; buyer’s deposit; overarching principles; confidentiality; purchase price and/or methodology for determining adjusted/final purchase price; term/termination; timeline for transaction process; exclusivity; and expenses. Depending upon the complexity of the transaction, additional due diligence time may need to be built into the purchase agreement as well.

7. Enter into a purchase agreement

Finally, provided both parties perform and are satisfied with the results of their due diligence, the outcome of the LOI is the purchase agreement. If there is a financing contingency, there should be financial consideration for the seller if the sale is not completed.

The parties will agree upon the form of other sale documents (bill of sale, assignment and assumption of leases and agreements, deed, etc.) at the time the purchase agreement is negotiated. Any agreed-upon conditions by the seller and purchaser or resulting from the governmental review process should be included in the purchase agreement.

In a continuation of this story, click here to learn how the nonprofit provider should prepare for the sale after following these seven steps.

Mike Ashley is a vice president with the Kansas City, Kan., office of Lancaster Pollard, a financial services that specializes in providing capital funding to senior living providers nationwide. He can be reached at (785) 841-3700 or mashley@lancasterpollard.com.

Daria Niewenhous, JD, is a member of Mintz Levin's Health Law Practice in Boston. Niewenhous has extensive experience with the merger and acquisition of hospitals, skilled nursing facilities and assisted living facilities. She can be reached at (617) 348-4865 or dniewenhous@mintz.com.

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