Focus Management Group

Focus In-Sights

Turnaround of a Healthcare Company: Community Eldercare Services

Published in the June 7, 2007 issue of the M&A Advisor Newsletter‘s “Anatomy of a Deal” section.

The company, a nursing home operator, was bleeding red ink. Creditors were knocking at their door, including some whose claims were based on doing business with a family member of one of the owners. Cash flow was negative. Credit was tapped out. Then, things got worse.

The company needed to be fixed, and quick. They called Gerry Paez, managing director of Focus Management Group, a turnaround management and asset recovery company headquartered in Tampa, Fl.

“Our first action was to address discrepancies in the company’s financial reporting system and determine its true cash position,” said Mr. Paez. (Focus’ client, which currently operates 20 nursing homes in three southern states, as well as a management company and a physical therapy clinic, would not allow its name to be used in this report.) “Focus immediately determined that the company would lack adequate funds to continue to operate” unless its lender increased its revolving credit facility. Instead, the banker imposed additional reserves.

Mr. Paez and his team soon realized they faced a hornet’s nest of problems, including:

  • Negative cash flow. The company was operating at a loss on a consolidated basis. Trade creditors were getting strident. Cash reserves? Gone. Credit? Tapped out.
  • Liabilities. Current and former residents had named the company in a slew of personal injury claims.
  • Tangled contracts. Before Focus came on board, the company had paid approximately $15 million to creditors of the father of one of the owners. Those creditors claimed the company owned them more money still. That owner’s father had signed questionable leases with other landlords for 14 facilities, putting the company’s claims as lessees in doubt.

“To further complicate matters, ten of the properties subject to the master lease were facilities subject to leases between the father’s entities and unaffiliated third parties,” Mr. Paez said. “Those third parties were challenging the company’s asserted leasehold rights.”

As financial advisor to the company in its bankruptcy case, Focus Management handled courtroom scheduling and reporting mechanisms, designed rolling weekly cash flow models, implemented reporting mechanisms for the lender and provided expert testimony and financial planning advice to counsel. The financial reporting structure of the company was also streamlined to more effectively monitor cash inflows and outflows.

Focus began scrutinizing the company’s payables, and concluded the company was not responsible for debts incurred by that owner’s father. “Focus advised the company to cease paying any obligations of the father or related entities,” Mr. Paez said.

Focus reviewed each of the company’s locations and businesses, restructuring some and closing others. The restructuring met resistance from several owners of the company’s various locations, which Focus addressed in court with careful financial records that documented the losses.

Digging further, Focus found a bloated head office. It cut 15 administrative positions out of 55, reducing payroll by nearly a quarter.

In August 2005 Hurricane Katrina struck, impacting all the company’s properties and requiring residential evacuations to safe facilities.

“Due to Focus Management Group’s leadership, the company emerged from bankruptcy in October 2006 as a restructured entity with positive cash flow and access to appropriate financing to support its ongoing operations,” Mr. Paez said. The owners agreed to pay off their creditors in full over an extended schedule. The confusion over the leases was addressed in court, and resolved in the company’s favor. Substantially, all the personal injury claims were resolved. The owners held onto their property.

At the M&A Advisor’s Turnaround conference in March, Focus Management Group won Services Deal of the Year.

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