09/03/2011

Turnaround Management Association: East Midlands Region

A Focus on Healthcare – Presented by: Berryman and Fennell Financial

09/03/2011

Welcome from John Roddy

John RoddyStrategy and Funding

DD 0115 945 3731M 07540 737848E john.roddy@berryman.co.uk

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Current Position

•Large increase in numbers of distressed homes

•Banks responding with sector specialists

•Very mixed bag of specialist turnaround capability

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What do lenders require?

•Clear picture of issues and operator

•Already a problem  -  but caused by what  -  management

•Opinion required on management before financial clarity

•Support or exit

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Determinants of decision

•Security position/operator ability

•Secured + good operator      = Support

•Unsecured + good operator  =  Support

•Unsecured + poor operator   =  Support (BUT)

•Secured + poor operator       =  Exit

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Valuation Metrics

•EBITDA multiples 5.5x - 10.00x

•FMT valuation

•Discount for period to reach FMT

•Closed value (usually a disaster for lenders}

-Compliant home. 60% of FMT -Non-compliant home. B&M / Alt use

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Lenders Actions

•Up to date valuation + operational review

•Decision - support or exit

•If support. Can operator achieve turnaround?

•If not. What support / who from?

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Berryman Healthcare Operational Support

•Former group ops director of 30 home group. 65% 3 Star

•Full range of experience in developing this group

•Latest case

-Operational review + action plan

-Investment case

-Ongoing close support

-Budgetary control•Operational capacity enhanced via Fennell Financial

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Turning Around Distressed Care Homes

Presenter: John Fennell

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Contents

•Introduction•Methodology•Case Study 1•Case Study 2•Questions

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Introduction

•Financial Intelligence

•Intelligent Marketing

•Compliance Reviews

•Consultancy•Operational

Management

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Methodology

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Methodology

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Methodology

•Virtual Head Office Accounts Team [90% Care Homes]

•Integrated Forecasts•Regular Visits•Detailed Reporting

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Case Study 1

•Group of 3 Care Homes Midlands•1 Elderly

▫Old Conversion▫22 Reg – 17 Bedrooms▫Owner Operator

•2 LD▫Recent Conversion▫12 Reg and 6 Reg▫Mangers In Place

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Case Study 1 cont.

•Business moved to Business Support in August 2009

•Could not service debt•Regular Overdraft Excesses•No MI•Not paying Crown

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Case Study 1 cont.

•Approached in February 2010 by Hazelwoods to assist operators with Financial Management

•First Bank Meeting (March 2010) IBR as Bank had lost confidence in the operators

•Phase 1 Short Term Cash•Phase 2 Medium Term Forecasts•Appointed 1st April 2010

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Case Study 1 cont.

•Income▫Funded Residents▫Private Residents

•Staffing Costs▫Owners increased hours worked▫Weekly Payroll Reporting

•Creditors•HMRC

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Case Study 1 cont.

Phase 1•13 Week Cash flow

▫1 Expected Excess – Bank Agreed Temp Facility

•Creditors Identified•No bounced cheques during phase 1

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Case Study 1 cont.

•Gas Supplier £25k+•Previous Bank Overdraft £5k+•HMRC £100k+•Finance Agreement £40k+

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Case Study 1 cont.

Phase 2•Medium Term Forecasts•Integrated Model•Financial Restructuring

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Case Study 1 Conclusion

•Forecasts Exceeded•HMRC repaid in Full•Creditors Paid•Additional Funding will be repaid within 5

years•Businesses have been returned to

relationship manager

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Case Study 1 conclusion

•Why was this a success▫Provided Clarity▫Worked Closely with Owners▫Sector Knowledge

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Case Study 2

•Group of 3 Care Homes – Midlands▫42 Registration – Home A▫24 Registration – Home B▫19 Registration – Home C

•Unable to service debt•Low Occupancy•High Cost Base•NO CONTROL•£2.5 Million Debt (Hedged) + £150,000

“Top-Up Loan”

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Case Study 2 cont.

•Why was the home failing?•Homes Registrations

▫Home A - 42 Reg – 13 Double Rooms▫Home B - 24 Reg – 3 Double Rooms▫Home C - 19 Reg – 3 Double Rooms

•Financial Records•Knowledge About Own Business

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Case Study 2 cont.

•Temporary Funding Required•Bank Taken Double Interest In Error•Overdraft put in place to allow time for

plan

•Why aren’t homes trading to valuations?

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Case Study 2 cont.

•Valuations for Security▫Home A – 85% Occupancy – Wage Costs

£290,500 [Actual 13]▫Home B – 95.83% Occupancy – Wage Costs

£202,600 [Actual 14]▫Home C – 98.5% Occupancy – Wage Costs

£157,500 [Actual 17]•Total Value – £3.35 Million•Fair Maintainable Trade - £460,000

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Case Study 2 cont.

•Action Plan▫Reduce Doubles

Home A – 30 Available Spaces Home B – 21 Available Spaces Home C – 17 Available Spaces

•Occupancy/Fees▫Increase Occupancy▫Increase Average Fees

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Case Study 2 cont.

•Cost Base▫Payroll Reporting?▫Creditors?▫HMRC?

•Budgets▫Cost per Residents per week

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Case Study 2 cont.

•Detailed Forecast for 3 Homes•P&L

▫Income Sequences▫Payroll Budgets Applied

•Balance Sheet•Cash Flow

•What needs to be done to achieve the plan?

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Case Study 2 cont.

•Refinanced (1 Year Interest Only)•Implemented Plan•Paid off “Top-Up” Loan in fall by month 9•Full Debt Servicing•Home A

▫Valuation x2▫Average Fee £650+ [Gold Standard]

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Case Study 2 cont.

•Conclusion▫Normal Banking Conditions▫Top-Up Loan Paid off 4 years early▫Capital and Interest serviced▫Group Value Increased▫Planning Permission at Home C for extra 6

rooms (£120k Net Profit and double value)

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Fennells

•Financial Control•Operational Expertise•Hands On Support

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Care Home TurnaroundPresenter: Fred Fennell

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The interesting parts

•Researching the case-prior.•Getting the complete picture. •The full story from the inspectors and L/A.

•Are there any Safeguarding issues?•Any complaints or whistle blowing?

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What exactly are the problems?

•Start with the owners/directors.•Then the managers.•Then work through the staff as needed to find out•Liaise with the L/A’s and CQC•What is the quality like?•Does it need closing?

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•All this may only take one visit and some time in preparation and preparing a report

•It may take a couple of visits + o/work•It could need a weekly visit + •We may need to take over immediately if

the Registered Manager walks out

•I may need to become the Nominated Individual

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•Once we know the problem/s we decide on a plan to bring a swift conclusion

•Report on the options

•Take immediate action and turn it around

•Let’s look at some real examples

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Real life example 1:

•100 bed care home (+-) Midlands

•Second Poor rating – Low occupancy – Complaints & Safeguarding issues – preclusion on placements from Local Authorities – Whistle blowing issues

•The owners (small group) called us in

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Real life example 1: 100 bed – Midlands

•De-brief with owners •De-brief with Registered Manager•4 weeks CQC inspection & LA Monitoring •12 weeks CQC inspection & LA

Monitoring•New Manager •Ex Manager- Tribunal

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Real life example 1: 100 bed – Midlands

End Result

•New Manager•Good rating•Good occupancy – good EBITDA•AQA•Not Essential Standards – not financial up

to now

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Real life example 2:

•Midlands Care Home, one of a small group of three.

•This was a medium sized home but 50% occupancy, It was loss making and a real problem. It needed to be closed due to HMRC and effect on the group

•Will have two homes left in same LA’s area

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Real life example 2:

•My first visit - Break time•Liaised with:•Manager •Staff•Service Users Families/advocates•LA’s •CQC

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Real life example 2:

Result:

•Home closed in 10 days •Every service user found accommodation•No deaths•CQC & LA’s delighted•No animosity with the two other homes•These two homes now using John Fennell -

Equivalent of their own Financial Director•First month considerable savings

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Real life example 3:

•A small to medium sized Care Home was about to be wound up by HMRC for typical non payment of NIC etc in the Midlands.

•FF closed the home in just over a week•All the service users were found suitable

accommodation, nobody died !•LA’s & CQC were happy and it is fair to

say the Bank ended up better off.•Interesting reasons for failure.

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Real life example 4: •Two very profitable care homes run by the

owner with one rated Good and one Adequate at the moment, but does not have a registered manager (application in)

•On paper nothing is wrong and they are trading full with a waiting list

•But the owner is now ill

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Thank you

Any questions?

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Berryman Park House Friar Lane Nottingham NG1 6DN

T 0115 945 3700 F 0115 948 0234 W www.berryman.co.uk