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Preparing to retire: Exit strategies for senior care owners

February 26, 2009
by Michael S. Collins, CPA
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The two best options beyond an outright sale

There are likely a number of reasons you went into business in the first place: independence … the pursuit of a dream or passion for caring … financial security. Regardless of the individual reason that led you down the path to business ownership in the senior care industry, owners share a common long-term goal: They depend upon the future sale of their business to generate retirement income.

One of the proven ways to accumulate future wealth is to build, grow, and eventually sell a business. Have you considered yet how to obtain the best deal when it is time to retire? Exit planning is a customized process that should be tailored to your specific circumstances. Once you understand the choices, you can make the decision that best meets your needs for long-term financial security.

In addition to an outright sale or passing the business on to other family members, owners should consider two other potential pathways to leaving the business: sale manage-back and sale lease-back.

Sale manage-back

In the sale manage-back scenario, an owner sells the property but agrees to sign a long-term management contract to continue managing it. Such contracts are often five to 10 years in duration, but can be shorter. The contract will be similar to other real estate contracts: The management company is responsible for day-to-day operations and receives a management fee that is typically a percent of revenue, plus bonuses for reaching profit goals. The buyer, or new owner, then receives any net income generated by the property. Normally, in these cases, the buyer is an investor without expertise in operations.

Sale lease-back

In a sale lease-back situation, the seller enters into a lease arrangement with the new owner. Generally, these are structured as long-term leases, often of 10 years or more, and the seller—now the tenant—is responsible for daily operations and all expenses related to the property. The seller receives any profit after lease payments are made to the owner.

Why these options instead of an outright sale?

The two options described above may prove more attractive to owners under certain conditions that include:

· If the facilities are performing well, a sale manage-back or sale leaseback may garner a higher price than a conventional sale. Because there is a track record of proven performance, the buyer assumes a lower risk and thus might be willing to pay a higher price if you agree to continue operating the facility.

· If the current market demand for facilities is strong, it helps to elevate the sale price for an operation that is run profitably.

· If you are seeking to grow or expand your operations, a sale lease-back or sale manage-back can be used to raise capital for the expansion.

· If you are not ready to step away completely and want to stay involved with the facility despite not owning it, you can continue to derive additional compensation for doing so and apply that to other investments. You can stay involved with the business that you’ve grown but still be able to pull much of the equity out of the property and move it into another investment that can generate and build even more retirement income when you are ready to step away from the business completely.

Financial strength through diversification

Many senior care facility owners have their entire net worth tied up in the business. This is not unusual in American enterprise. A 2007 survey by Laird Norton Tyee noted that 93% of family businesses have little or no diversification.1 As a private entrepreneur, you are probably self-reliant by nature, and have continued to reinvest in the business rather than diversify.

However, as you approach retirement, you may want to diversify, and pull equity out of the business and move it into other investments or business opportunities. A recent client, for example, owned and operated a number of senior care properties for more than a decade. The business and the physical locations increased in value significantly, but the value was trapped in the buildings. The client sold to an investor and used the cash to build several new buildings, and then stayed on to manage the operations.

Another recent client had developed a number of nursing homes in the Midwest. They sold all of them to a real estate investment trust and continued to operate the homes for some time. Later, they sold the operations to another nursing home company and put this money to work elsewhere.

Which is the best option for you?

Begin your deliberations by asking a few important questions: