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A disciplined approach to growth capital

February 22, 2016
by Lisa McCracken
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The United States is on the cusp of one of the most dramatic demographic shifts this country has ever seen. Over the next several decades, the number of individuals age 65 and over will increase substantially with U.S. census projections of nearly 84 million seniors by the year 2050. This explosion in the number of older adults is a driving force behind many senior living providers’ planning efforts and growth initiatives.

Organizations that are systematic about their growth also should be highly strategic and disciplined in their approach to growth capital so they will have the resources to grow in a healthy, sustained way. 

Growth = evolution

Organizations seek to grow and evolve for a variety of reasons. First and foremost is the general sentiment that healthy organizations are those who are growing, enhancing services and constantly building upon their existing strengths. A stagnant organization is a dying organization. In order to attract future consumers and talented staff and compete in an increasingly complex line of business, organizations must always be growing and evolving.

There are five main drivers of growth:

  1. Mission enhancement is often the board’s moral compass when evaluating growth opportunities, particularly for not-for-profit senior living organizations. How can the organization do more to further cultivate its mission to serve older adults? This may include partnerships with others or expanding into new geographic areas.
  1. Service expansion is another very common motivation for growth, particularly in today’s environment where providers are shifting their focus to services beyond their four walls to diversify revenue streams.
  1. The senior living sector is going through a consolidation phase to achieve operational leverage and economies of scale, much like the rest of healthcare. The ability to spread overhead costs and benefit from purchasing economies can save organizations significant funds. Additionally, larger organizations are able to benefit from greater negotiating power with other healthcare organizations and payers, which is incredibly important post-healthcare reform.
  1. Growth initiatives can also be defensive tactics to ward off competition. Organizations should examine their local market for gaps in services for seniors. While hasty growth initiatives don’t benefit anyone, it is important to be nimble and have governance models that allow providers to move quickly on growth opportunities.
  1. Access to capital is another reason for seeking growth. Without a doubt, organizations that have greater scale and an increased ability to spread risk across multiple assets benefit from an enhanced ability to attract capital.

Effective resource planning for growth

Any type of organizational growth, whether it be service expansion, developing a new community or engaging in new partnerships, requires organizational resources. A simple gap analysis that compares available resources to needed resources is a valuable initial exercise. Careful, advanced planning is the key. The critical word is “advanced.” Organizations that have done their due diligence ahead of time are much more able to act on growth opportunities than those that have not.

Below are key questions an organization can use to discuss future growth plans:

  • What resources will be needed for growth?
  • How do growth initiatives align with mission, vision and values?
  • If partners are involved, what alignment criteria does the organization have for those partners?
  • Is this a proactive move or a defensive one? Why?
  • What is the organization’s risk tolerance? Does this vary across stakeholder groups?
  • What is the competitive landscape for the various types of growth?
  • Is everyone clear on what we would say “no” to and walk away from?
  • How does this growth initiative position the organization for long-term success?

Capital planning for growth

The majority of meaningful growth initiatives, particularly those focused on brick-and-mortar models, require significant funds, are likely to yield greater revenue and will entail a greater capital outlay. So, how should providers prepare to access capital to fund their strategic growth initiatives?

The ability to grow often can be stifled if the organization does not have the appropriate corporate structure. Certain organizational structures are more conducive to accessing capital than others. This largely revolves around managing the risk of growth and borrowing additional capital. For example, if an organization would like to build a new campus or grow through affiliation, the ultimate goal will be for the risks associated with that to be separate from the stabilized organization.

Organizations with more sophisticated corporate structures also generally have an enhanced ability to borrow capital because of the managed risk associated with those structures. Larger organizations with strong metrics can develop new projects or undertake major repositioning initiatives inside their obligated group without a rating impact at a significant interest rate savings—one of the benefits of being a strong system.