Advice about possible deal structure for residential assisted living

June 27, 2024

by a searcher from Northwestern University - Kellogg School of Management in San Francisco, CA, USA

As the title states, i'm exploring buying an owner/operated residential assisted living facility with 10 rooms, but currently 50% occupied given the current resident licensing (essentially long term acute care).

The owners is looking for $1.2M for the property + business which is currently generating ~$740K in income. NOI was 30K last year but has generally been close to zero in prior years (I assume they juiced it to get ready for sale)

We're contemplating proposing following deal structure

1) Purchase the property using seller financing
2) Create a separate entity for the business, use a NNN lease and have the business pay rent to the property
3) Implement an earn out, with targets / milestones based on increased occupancy and NOI###-###-#### %) and top line

I would appreciate perspective on this approach, and specifically whether we should explore seller equity (the couple are looking to retire but i think we could offer equity to them or an existing staff member)

What other aspects should we be aware of? Does this deal structure make sense?

Thanks in advance!

Dan

Reply by a searcher
from Northwestern University in San Francisco, CA, USA

thanks Brad. We're thinking about splitting out the opco and propco...ie. offer to buy the property at FMV, then setup a separate company for the OpCo that will pay rent to the propco under the NNN lease. the earn out will apply to the OpCo, and de dependent on increasing net margin to ensure sufficient cash flow to then purchase the business. We'd make any purchase decision based on 1) confirmation of continued licensing 2) the ability to find a sufficiently qualified equity partner to step into the role of the current owners (who are both contributing operationally to the business)

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

The approach you have sounds solid. I think the biggest issue you are going to run into is from a financing perspective. Most lenders are not going to want to finance a business that does not have adequate cash flow to support debt service. The second issue is going to be licensing. You will need to be sure you can maintain the licensing at closing. Happy to discuss financing options at any time at redacted Good luck in negotiating the deal.

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