In this guest post, Bruce Bailey, Managing Director at Pride Living Group shares some useful insights from the conversations his business is having with aged care operators, including those that are confronting difficult decisions to do with solvency.
I’ve been in and around the sector for well over 20 years, so I’ve seen quite a lot of change in the operating environment. In recent times I’ve commented that from a Govt funding perspective the sector has moved from one of universal entitlement to a safety net system where Govt funds only the most basic of services.
At the same time media focus on failures in the delivery of quality care and the recent Royal Commission into quality and safety combined with the increasing number of older people in Australia have highlighted people’s desire to have high-quality care, whether this is delivered at home or in a residential aged care setting – so now we have a gap between capacity and expectation.
While it is right for providers and the industry peak bodies to lobby Govt for appropriate funding and we applaud the recent interim decision by the Fair Work Commission, there is also a need for providers to understand and respond to the implications of the underlying change in the sector. We’ve recently undertaken a number of organisational reviews for operators across the spectrum of size and location.
The CFO of a religious-based organisation recently commented on our findings and recommendations saying, “so what you are really telling us is we need to be more commercial”.
So, what does being more commercial look like, well I’d say it involves:
- Strong governance – which requires skills-based boards
- Commercial managers – who can balance clinical and financial outcomes in the short and long term
- A strategic focus – knowing your strengths and weaknesses and deciding on a market position
While being commercial does not exclude operators of any size or structure, organisations that have not embraced commerciality as defined will continue to struggle in terms of clinical and financial sustainability. We see this struggle in the increasing number of clients who are approaching us to discuss the opportunity to sell or merge their operations. Consolidation within the sector has been discussed for years, however, the rate of this has been modest until we emerged from the pandemic.
Declining occupancy, partly caused by COVID and partly caused by the significant increase in home care packages over the last 3 years have represented additional challenges as consumers have more choice, which will continue to increase as the impacts of the removal of the Aged Care Approval Round (ACAR) works through the system.
In the past, we would probably be having a discussion about a merger or sale with one provider at a time; In the current year we are talking with multiple parties and there are more transactions in the public domain.
Currently, we’re working with six providers who are seriously contemplating an exit, these providers range in size, ownership and location. We recently worked with Autumn Lodge a community-based aged care and retirement living operator in Armidale that merged with Uniting and what we found in that process was that potential merger partners had many opportunities presented to them.
In a sense, there are more sellers than buyers.
Unfortunately, many governing bodies are slow to acknowledge that they cannot operate commercially, and this can mean they are slow to make a decision to change the status quo to the detriment of all stakeholders.
Editor: Inside Ageing (IA) put some questions to Brendan Moore, CEO at Autumn Lodge in Armidale NSW, who recently negotiated an acquisition by Uniting NSW.ACT.
IA: Congratulations on the successful merger with Uniting NSW.ACT. Can you tell us a little about the due diligence process and what you were looking for from the acquiring entity, especially given the 100-year history of Autumn Lodge.
Brendan: The long history of the organisation was certainly a heavy burden to bear in arriving at the decision to pursue a merger. For this reason, it was really important to be able to run a process that arrived at a good outcome for the Armidale community for many years to come. Together with Bruce from PrideLiving and Rohan from Russell Kennedy, the Board developed a range of criteria for which they felt were important to seek responses from interested organisations. This included: culture, values, financial strength, commitment and evidence of delivery to regional areas, M&A experience, and capability to redevelop the sites in Armidale. A number of NFPs were approached by Bruce and invited to respond in writing. From these responses, a shorter list was then invited to make a presentation to the Board, myself and Bruce. Uniting emerged from this robust process as a unanimous selection.
IA: It has been reported that you raised the flag when you noticed the business was operating at a loss. Can you tell us about the steps you took once this was identified?
Brendan: Like 60% of regional providers, Autumn Lodge was operating at a loss and had been for two years. Fortunately, the previous 100-odd years had been better and there was net equity of $12 million and total financial assets of over $35 million. This financial health was something we believed would make Autumn Lodge very attractive – and it was! The bigger issues for the organisation were in securing Directors and Executive leaders, regulatory compliance, asset and IT investment and upkeep, and the perennial challenge for most providers of sourcing and retaining a workforce to deliver care and services. ACSA consultants had been to Autumn Lodge three times throughout 2021 and identified many long-standing non-compliance concerns. I arrived as the 4th CEO in 9 months with no finance manager or clinical lead. I was able to have conversations with the Board to confront the brutal truths facing the organisation and presented a range of strategic options to the Directors. It was not an immediate decision to pursue a merger/acquisition. The Directors needed to get comfortable with the enormity of what they were doing as well as feel comfortable that it was the best decision for the residents, staff and broader community of Armidale.
IA: I suspect many other regional providers have or will experience similar circumstances and would benefit from your wisdom from having successfully managed such a transition. Feel free to share anything you feel is important, including but not limited to staff, community consultation, due diligence and pricing, using an adviser (pros and cons) and anything else you feel somebody in your position would benefit from learning.
Brendan: The times are certainly not favourable to the small, community-based providers throughout Australia, of which there remain hundreds. My advice is shaped by having just completed the AICD Company Directors course and reflecting on my 9 months with Autumn Lodge. I would encourage Boards to do 3 things: confront brutal truths openly and honestly; take a long-term view and make decisions in the best interests of your primary stakeholder. If they do this and come to the reasonable conclusion that another provider is better placed to deliver care, services and accommodation in their locations, then engage an external advisor to support you through the process. It is a very emotive and sensitive time for all so get help from someone who has done it before to help you make good decisions and avoid mistakes. Given the many years of losses that the aged care industry has racked up, I would also encourage Boards to not leave it too late and you have no cash or investments, and/or you are eating into your non-current resident liabilities to offset losses. You may find that larger organisations won’t take the risk of assuming responsibility for a provider in such dire financial circumstances.
Updated 7th December, 2022: Pride Living Group has published a case study outlining how they assisted with the Autumn Lodge acquisition by Uniting – Read it here.
As we look to the future, we see continued higher levels of transactions leading to further consolidation and the development of a more segmented market based on clearly articulated customer propositions and a further period of destabilisation as non-viable operators are absorbed by other organisations or simply go out of business.
Beyond this we see the fundamentals of supply and demand continuing to support commercial operators who embrace a co-payment model that supports consumer choice as to the level of services they wish to receive. Pride Living has built our consulting on the platform that supports operators to develop and operate commercially focused operations, this includes PASS – our Additional Services consulting, ROAR – our opportunity management and accommodation service and our Clinical Governance practice that ensures care is not compromised in the pursuit of financial sustainability.