Transaction readiness in the aged care sector

21 February 2024

Many aged care providers are experiencing financial instability, and this trend is predicted to continue throughout 2024. McGrathNicol Advisory has assisted an increasing number of providers with divestments, including community-based organisations and those in regional areas. Through this work, we have identified four areas of improvement that can help providers become transaction-ready:

1. Outsource management and Board capability

Strong leadership and engagement from the Board and senior management is critical to transaction-readiness. Stability in the CEO and Director of Nursing roles is also key for service delivery and staff retention. Providers in regional areas are well aware of the challenges in attracting and retaining suitable staff. It is critical to the success of divestment for a provider to have a quality finance team in place, particularly those experiencing financial instability. Where a provider is unable to attract quality personnel—for instance, in regional areas—it may be appropriate to outsource some of the finance function to an external consultant with specialist capabilities.

2. Improve financial performance

A key aspect of transaction readiness is the development and execution of a financial management improvement plan (FMIP).  The scope of a successful FMIP may incorporate greater oversight of and improved governance, a comprehensive review of costs such as kitchen and allied health costs, a strategic review of rosters and ways to reduce agency staffing costs, improved financial reporting and forecasting, including reporting of actuals against budgets, and the implementation of regular AN-ACC reassessments to uplift revenue.

3. Actively manage stakeholder relations

There should be careful consideration of how much information is provided to key stakeholders and at which stages of the transaction process.  Where it is known or suspected that a provider is experiencing financial instability or undertaking a sale process, engaging with all relevant stakeholders is critical. Written communication to residents, families and employees such as a regular newsletter can help to control messaging effectively and encourage positive engagement. An experienced public relations consultant may also assist with the development of an ongoing stakeholder communications strategy.

Particularly for regional providers, the broader community should be treated as a very important stakeholder with the ability to positively or negatively influence the performance of an aged care provider and a successful sale outcome. It is critical to engage with affected stakeholders, community organisations, groups, and spokespeople early in the process, providing timely information, answering questions, acknowledging concerns, and fostering trust within the broader community.

4. Operational areas to consider for a future sale

There are a range of factors that may influence a potential buyer’s decision to purchase an aged care provider business. Any transaction-readiness activities should be undertaken in the context of a possible new owner, and with consideration of the following factors:

  • Layout and design of the facility: An inefficient design is likely to increase costs such as wages and meals.

  • Occupancy and revenue: Strong occupancy levels and revenue are clearly preferred, however purchasers will formulate their own view on their future ability to generate income from a facility.

  • Cash and Refundable Accommodation Deposits: A higher proportion of cash held against RADs will be attractive to an incoming purchaser.

  • Expenses: Whilst cost reductions are likely to improve the appeal of a facility, incoming purchasers will have their own metrics for expenses and will likely implement new strategies for improving financial performance. Disruptive and significant transformational projects are unlikely to be helpful in the lead up to a transaction.

  • Additional operations: Health centres and in-home care for example, are unlikely to be particularly appealing to purchasers unless they are producing very strong cashflow outcomes. Potential buyers may see additional services as a distraction to the core business of residential aged care.