Katherine: Hello, everyone. And thank you so much for joining us on This Needs To Be Said. Our friend, Paul Contris, is joining us again. And we’re going to talk about mergers and acquisitions. And as you’re listening to this show, and every time he comes on, he’s given us some other nuggets, not necessarily specifically related to his business, but because of his business knowledge, and what he’s acquired over the years, he’s able to come back and share with us. And today, I asked him if we would able to talk about things to look out for with mergers and acquisitions. So get your pen and paper out, because class is in session. Welcome, Paul, how are you?
Paul Contris:I’m well. Thank you. How are you, Katherine?
Katherine: I am doing fabulous. I got my pen and paper out, too, Paul. I’m ready to take notes. So, as we’re talking about mergers and acquisitions, that’s something that a lot of small business owners, we read about in the paper. And, oh, this bank took this bank, or this fast food merger or this one, what does that really mean? So can we get into the definition? What is a merger and acquisition? Is that together, or are they two separate things? What are they?
Paul Contris:Well, right. For, I guess, accounting purposes, they’re a little bit different. There’s actually some very, kind of, complex rules under the FASB rules about what constitutes a merger, what constitute an acquisition. I mean, there’s reverse mergers. There’s all sorts of complexities when you get into that. I mean, in general, there’s pooling mergers, when you bring two companies together, into a new company. And then, acquisitions are more like, when one company acquires another company, and maintains its existing structure and ownership. And the acquired company just becomes part of the existing company.
So I don’t want to go down that rabbit hole, because that gets kind of complicated. I think, basically, I can kind of expound on today as just straight acquisitions, where … and that’s how I grew my company, Welcov Healthcare. I started with one acquisition in Grand Rapids, Minnesota, in 1998. And now, we have 55 properties in seven states, up in the Midwest. And basically, we just acquired those existing properties. We have built a few things in my business, the long-term care business, nursing homes, assisted living, independent living.
Kind of the two main ways you can grow and expand are acquisition of existing facilities, or construction of new facilities. And the bulk of our growth has been through the acquisition of existing facilities. It’s less risky, in the sense of, you’ve got a facility that’s already full of patients, you’ve got history. And so, when you take it over, it’s just a matter of kind of tweaking the systems in the management, and that type of thing.
If you build a new facility, then you start with no patients, and you have to fill it up. And that’s a pretty big risk. Now, the big reward is, you have a brand new facility. And, of course, then you have a competitive edge in the market. Now, in the skilled nursing sector of the nursing home business, there’s not a whole lot of new construction going on. Because skilled nursing occupancy is very challenged right now, and there are a lot of different headwinds that are basically trying to push people out of nursing homes, into independent and assisted living, or home health.
And so, that’s kind of keeping’ a lid on any new construction for skilled nursing. But independent, and assisted, that’s where all the growth is, the new construction is. So there’s a lot of that coming online. And that’s creating some occupancy challenges for those entities, for those types of facilities. And, actually, right now, everybody’s kind of in a survival mode, because of the, what’s going on with occupancy, in general. Because the age wave really hits in 2020.
I think we’ve talked about this in past interviews. Right now, there’s been kind 0f a lull, or actually, decreasing in occupancy in senior care facilities across the board, for the last, maybe, two years now. And so, people are kind of adjusting, and doing what they have to do, and getting ready for the big age wave that hits in 2020. I’m getting off the track here, as far as acquisitions, but … So, there was a lot of new construction in independent and assisted. But, like I say, that has an added element of risk, when you build something new. That’s why we’ve done mostly acquisitions of existing facilities, to grow, expand, the local healthcare.
But, in the future, we may do some new construction, also. I think, when you’re acquiring an existing facility, the key is, to kind of have that knowledge of the industry and operations to be able to make an assessment of the historical financial statements of the facility, and the existing marketing position that that facility’s in. And, really, to have to knowledge, you have to have been in the business for a while. And so, I know, in general, not just in long-term care, the people can hire public accounting firms and that type of thing to do analysis, where they want to do an acquisition.
And that’s kind of a hit or miss thing. I mean, it depends on who you get doing the analysis. Obviously, the old way is to be able to already know that business. And then, you look at what’s going’ on with the historical financial statements, in the regulatory history, and surrounding market. And you’d be able to make a good assessment.
So, and I think that’s part of the same, for any business. Maybe you’re buying’ a restaurant, or whatever you’re doing. I think one of the keys is to have whoever it is that’s doing the analysis of that acquisition have the experience, to really understand what rocks you need to turn over, and what will you need to look at? So that’d be one of the, kind of the key pieces of advice I’d give anybody who’s looking at acquiring any kind of business is, unless you yourself are very familiar with that business … and have years of experience, operating in that industry, or that business … you need to probably align yourself with somebody who does have that experience, to help make you make that analysis, and assessment.
Katherine: Tell me this, Paul. You’ve answered a lot of questions, before I was even able to ask them, so thank you so much. But when you’re thinking of acquiring the other business, or another unit, or another facility, for what you do at Welcov … what, I guess, I want to know, what’s happening in the meeting that you’re having, or one of your brainstorming sessions? Are you thinking of growth, are you thinking of diversity in your services? What makes a company want to acquire another company?
Paul Contris:That’s a good question. It’s kind of a case by case situation. Obviously, we would like to grow in areas that we already have a presence in, that, because we’ve already got the infrastructure and the regional personnel available to service that area, so, one of the main considerations is, is this target acquisition in our service area right now? So, we’re in the upper Midwest, our headquarters in Minnesota. We’re in Minnesota, South Dakota, Montana, Nebraska, Iowa, Wyoming.
And so, obviously, looking at acquisition in Florida probably wouldn’t make sense for us. Unless we really wanted to start a hold, and go in whole hog, and started a region in this Southeast. Which, we don’t plan on doing. So, I mean, number one is probably geographical. Is it in one of the market areas that we’re already in? Or, maybe, we may want to expand into another state that’s kind of in our area, or contiguous. Maybe we’d go to Kansas, or go to Idaho, or something like that. But even that would be, we’d have to really think, “Okay, are we going to be able to service this with our existing regional offices and people?”, and that type of thing, so …
That’s probably one of the, number one consideration, is just, location-wise. And then, the other big consideration is, is it a good opportunity? I mean, is it a facility that we’re comfortable with, physical plant-wise? And is it, has a successful financial history? And does the price that the existing owner is asking, does that make sense? If we buy it at that, and our future property costs will be in line with what that facility can support.
So those are kind of the … Can we fit in with our operational footprint? Does it make sense financially? And does it have potential, where we can go in, and kind of tweak the operations to make it run more efficiently, and enhance the profitability?
Katherine: And it sounds like, a whole lot of homework needs to be done, before someone wants to make that move, and to consider takin’ on someone else’s property, cause there’s a lot of things, like you said, to consider … if we don’t know, then we could put ourselves in a risky situation. It may not make sense. It may not be beneficial, and it may hurt the business, instead of helping it. So, definitely getting help in areas where we don’t have an expertise. So that’s good. Paul, tell the This Needs To Be Said audience, how to get in touch with you, outside of our interview.
Paul Contris:Best way is our website. It’s www.welcove, W-E-L-C-OV, dot com.
Katherine: Thank you, Paul, and until next time, have a wonderful day.
Paul Contris:Thank you, Katherine.