The most important thing for borrowers to understand is their own expertise and strengths. Turning around properties isn’t a hobby, and it isn’t easy. If an investor has a particular expertise and can apply this skill set to a struggling business, he or she often can turn failure into success.
Identify The Problem, Check Compatibility
Properties in need of a turnaround are faltering for reasons that can vary dramatically from property to property. A facility may suffer from a bad reputation, or it may be outdated and seem unappealing. Other properties may be too expensive or in an undesirable location. In some cases, the property could be inefficiently managed.
Banks will conduct extensive due diligence on the target property before providing funding. But smart borrowers should do their own due diligence and research to identify specifically why a property needs a turnaround.
Once a property’s strengths and weaknesses have been evaluated, an honest assessment is needed to see if the property and investor make a match.
Present The Plan
As previously noted, good lenders will do their own due diligence. However, even if research indicates the investor’s target has good potential, lenders will want to see that the borrower has done his or her homework as well with a coherent, thorough presentation.
Many turnaround properties can be made into viable, successful facilities by the right investor with the right plan. However, some red flags make lenders (and perhaps even investors) think twice about investing:
■ Major deferred maintenance. Construction time and costs can be notoriously difficult to project. Keep in mind that construction will often disrupt normal operations. For instance, if a wing needs to be rebuilt, then all of the patients in that wing will need to be relocated or discharged. This could result in added costs and a loss of revenue. In order to succeed, make sure that the company has capital set aside for those leaner cash flow times created by the construction schedule.
■ A poor clinical reputation. Unlike many investment factors, reputation cannot be easily measured, predicted, or controlled.
Some low-performing properties suffer from bad reputations that may have been caused by poor quality of services over a long period of time. Whatever the cause, once a facility has developed a bad reputation it can be extremely difficult to change the opinions of prospective clients. Rebranding efforts, such as name and logo changes, may be ineffective.
Most business is generated locally for health care facilities such as these, and a name change, new tagline or logo, or a fresh coat of paint won’t make prospective clients forget a bad reputation. Partner up with local hospital systems and prominent physicians in the local market before undertaking a turnaround of this kind.
■ Valuation exceeds cost of a new build. The cost of a new build is not a complicated formula, but it is a critically important one. There is rarely ever a reason to buy a turnaround property at a valuation that would actually exceed the cost of building a new facility (provided land is available and a borrower doesn’t need a Certificate of Need for the project). Most patients will opt for a newer facility over an older one.
An investor who pays more for an existing facility than the cost of a new build will have to demand higher prices than the market is willing to pay. If an investor is offering something unique in the marketplace such as urban location or amenities that would be hard to duplicate, then it might be a good fit.