I started my first RCFE in La Quinta, California, in 2011. But when it came time to sell, I found challenge after challenge. It was difficult to find a buyer with enough experience in the industry. Then, even once I did, I didn’t understand the intricacies of transitioning my RCFE to the new owner, let alone the liabilities there.
I thought I found the perfect solution: I had an attorney create an Independent Management Agreement, allowing the buyer to work under my license until they were approved for their own. Only then did I learn about the risks in that move.
Ultimately, I decided not to sell my RCFE, largely because of the daunting challenges I only discovered once I started the process. But I think if I had better understood those risks — and how to mitigate them — from the outset, I could have had a successful sale.
I want to pass what I learned on to people interested in buying or selling their own residential care facilities. Here are the top four risk considerations to help smooth the transaction — and transition afterward — for you.
#1: The biggest seller-side risk: Licensing
As a seller, you shouldn’t hand over the keys to your RCFE until your buyer has their own license and insurance. It’s a common assumption (obviously, I thought the same thing) that a buyer can simply work under your license. That’s not the case.
In fact, insurance policies specifically exclude third parties like buyers, instead extending covering only to the policyholder, any other RCFE owners, and employees.
It’s critical that you wait to hand over operations until your buyer has the proper licensing and insurance in place. Otherwise, their exposure to liability could quickly become your exposure.
#2: The biggest buyer-side risk: History
Don’t consider buying a residential care facility unless you know all about its past. Here are some questions you can ask the seller to get a better feel for their facility’s history:
- Why are you selling?
- What do your previous inspections and reports look like? What about the reports from years ago?
- Do you have any complaints or deficiencies against you?
If the RCFE’s record isn’t clean, it could have a reputation in the community. And that can make it harder to get new clientele, despite the fact that the facility will be under new management.
Just as importantly, you might face a challenge in getting the insurance coverage you need if there are unresolved issues from the previous owner.
#3: The biggest risk with lease-to-buy agreements: Timelines
Lease-to-buy agreements are fairly common in RCFE sales. They seem ideal, allowing the buyer to assume operation of the facility while they wait for their license to come in. Simultaneously, the buyer gets to pocket some money from the lease.
The issue is that with lease-to-buy, the seller still has all the risk. They still need the license and insurance. And it’s very common for buyers to take much longer to get their licensing in place than the seller would like.
My recommendation is to make sure that if you enter into a lease-to-buy agreement, you include a hard-and-fast date by which the buyer must have their license/insurance and assume full ownership of the RCFE.
#4: The biggest transaction-detail risk: “Furniture”
RCFE transactions are fairly unique in that they essentially buy or sell people. That’s because each resident represents a certain amount of revenue generation for the facility. So any existing residents might get “sold” with the RCFE.
Of course, you can’t buy a person. To basically hand the rights to these residents over to the buyer, the seller will often create a separate contract for the RCFE’s “furniture.” For example, if the facility has five residents representing $10,000 of value each, the furniture contract could be in the amount of $50,000. This adds a whole extra layer of complexity to RCFE transactions, particularly because the number of residents could change at any time.
Ultimately, if you’re a buyer, take any propositions for furniture contracts with a large grain of salt.
Managing these risks
In the end, I decided not to sell my RCFE because I wasn’t confident I could manage all of these risks. Instead, I helped my residents relocate, closed my license, and sold my facility for $50,000 more than market price because it was already fitted as a turnkey, Fire Marshal-approved RCFE.
That said, the path I chose isn’t going to be right for everyone. Successful RCFE transactions that benefit both the buyer and the seller are possible, but both parties need a way to mitigate the risks they face.
That’s why our team here at InsureMyRCFE developed an insurance program to offer protections for the liabilities at play in an RCFE sale. The risks we just highlighted still exist and require your consideration. But from an insurance perspective, we can help to make sure you’re covered.
Specifically, we recommend that sellers continue to carry their insurance until after the transaction has fully closed.
At the same time, we quote the buyer for their potential license under their new entity name at the facility address. This way, the seller can have this quote at the ready, a requirement to get licensing in many cases. We also work with the seller to make sure their policy goes into effect when they need it, whether that’s the date their loan funds or the date they accept their first resident.
If you’re considering an RCFE transaction as a buyer or a seller, don’t hesitate to reach out to us to discuss. With our experience in the field, we can help you navigate the risks ahead — and mitigate them with the right insurance coverage.
We also offer online quotes. If you’re a seller and you need a new liability policy, you can use our quoting portal to get a quote for your coverage in just a few minutes. It’s fast and easy, and it fits all new RCFEs and many current licensees who have a solid record.
Don’t go into your RCFE sale with serious risk exposure. Talk to us to get the protections you need.
