One of the consequences of COVID is likely to be acquisition opportunities for those organisations looking to enter into, or increase their presence in, the residential care sector, whilst other organisations (including privately owned businesses) may see this as an opportune time to divest of some or all of their care portfolio to interested buyers.
This article highlights some of the key legal and structural considerations to bear in mind at the outset of any care home or care business acquisition and to help the process run as smoothly as possible. These considerations are borne out of our experience of assisting numerous clients to plan and navigate what can sometimes seem like a daunting process particularly if not embarked upon before.
Many care homes are operated by those who also operate in the social housing sector and we have specialist expertise on the additional considerations which a Registered Provider or charitable provider would be concerned with. We also have experience of transactions involving funders who have a particular set of (sometimes rigid) requirements.
Structure of Transaction: Shares or Assets?
The structure of the transaction is of fundamental importance. Both parties will need to consider whether the transaction is to be structured by way of the transfer of the properties and business assets as a going concern (an Asset Purchase), or a purchase of the share capital of the trading company which owns and operates the care business (a Share Purchase).
The chosen structure is commonly influenced by tax considerations for both Buyer and Seller, so tax advice should be sought at an early stage. Owner-managed businesses would typically prefer a sale of the shares in their company which can mean a more favourable tax treatment for the individual owners by way of a capital disposal.
If structured as a Share Purchase, this will mean the acquisition by the Buyer of a new trading subsidiary which may require a Buyer (in particular those in the charitable sector) to obtain consent from its lenders. The new subsidiary will also require its own board of directors and appropriate governance protocols.
Register with the Care Quality Commission (CQC)
Registration with the CQC will be required if the business provides one of the regulated activities which include personal care, nursing care and accommodation for persons who require nursing or personal care.
For buyers who are not currently registered with the CQC, registration can often take up to 3 months providing there are no queries with the application. Therefore if a quick acquisition is required and the Buyer is not already registered with the CQC it is advisable to make the application sooner rather than later. It is possible (and often the case) that the legal agreements are exchanged with completion occurring at a later date conditional upon such registration being granted.
Where an existing company which is already registered with the CQC is acquired, such that there is a change of control of the company, the CQC will need to be informed. The CQC will closely monitor any new care home owner and inspect and regulate the standard of care at the home. As part of its due diligence, a Buyer should ensure that it has an understanding of the prior track record of the business and that it has reviewed the results of the latest inspection(s).
A similar position applies in relation to care homes in Wales where the Care Inspectorate Wales (CIW) is the regulatory body. Furthermore, whilst in England the CQC requires that the care provider’s board members are fit and proper persons for the purposes of carrying out their roles as directors, the CIW expects that the care provider’s designated “responsible person” (having suitable care qualifications) is also a board member.
Due Diligence: Preparation and Planning
The due diligence process can often be lengthy due to the number of care contracts which may be in place, whether with local authorities and/or private funders. On an Asset Purchase, each contract will also need to individually assigned or novated to the Buyer as part of the transaction, whereas on a Share Purchase a key part of the due diligence process is to check for any change of control provisions which may affect the contract.
Where the care home has contracts in place with local authorities these are typically for a fixed initial term; but it is often the case that the contracts then continue beyond their initial term without always being extended or varied in writing. A Buyer will want to ensure that appropriate documentation is in place confirming the current contract term and any variations to the original contract.
The same principles apply for supply contracts – the care home is likely to have numerous contracts in place with various suppliers including utilities providers, clinical waste disposal and maintenance providers. The business will also need to collate records of fire and resident risk assessments, data protection policies and food hygiene reports that will need to be reviewed by the Buyer from a compliance perspective to ensure they are adequate and up to date.
Apart from the legal house-keeping, it is also crucial that financial accounts and records are correct and up to date, supported by well-substantiated business plans and financial projections. It is important that the Seller collates all relevant due diligence documentation early on in the process, including standard CPSE replies in respect of the properties, and that the Seller is able to disclose these in an organised manner to the Buyer to allow for an efficient due diligence process and to pre-empt the Buyer’s own due diligence requirements.
The due diligence process should not be underestimated – with enquiries often collated amongst the various specialist consultants employed by a Buyer amounting to several hundred questions. This will require resource from the Seller to answer these and provide back-up documentation.
For Sellers, managing information requests and enquiries can be time consuming so before sharing information agreeing an organised process with a Buyer as to how information will be organised and relayed at the outset can be helpful. In addition, ensuring that confidentiality and data protection requirements will be respected should be considered and the Seller will typically require a confidentiality agreement / non-disclosure agreement to be entered into with the Buyer at the outset of the transaction, prior to releasing information.
Get to know existing staff
If you are buying a care home it is recommended, where possible, that you meet with key staff before the purchase as they will be fundamental to a successful transition. A care provider is also required to have one or more “Registered Managers” registered with the CQC (or, as noted above in relation to care operators in Wales regulated by the CIW, should have a “responsible person” on its board), and it is particularly important for Buyers to meet with each such Registered Manager or responsible person.
Buyers should ensure that they receive full particulars of all staff. It is common for care home staff to be engaged under a variety of different contracts, for example part time or zero hour contracts. It is therefore important that Buyers are aware of their liability for all members of staff, regardless of what contract they are employed or engaged under. Buyers should request full details of salary, pension contributions and any other contractual benefits including bonuses. Arrangements regarding sleep-ins and holiday pay accrual for overtime and call-outs are also particularly relevant within the care sector.
In the case of an Asset Purchase, each of the Seller and the Buyer must comply with their respective duties under TUPE including duties of informing and consulting with employees (or representatives) within the required timeframes. Note that TUPE does not apply on a Share Purchase since there is no change of employer in such circumstances (ie., the existing company remains as the employer).
Buyers should also enquire as to the extent to which the business relies on self-employed contractors in respect of certain services (e.g. repairs and maintenance).
Property due diligence
In addition to the usual property due diligence and searches on the properties, a key aspect for the Buyer is to ensure that each property has the relevant planning permissions for use as a residential care home and that there are no restrictive covenants which restrict the use of the property. If there is such a restriction then the purchase of a defective title indemnity policy may provide protection. If the Buyer plans to increase capacity it would also be prudent to check the likelihood of obtaining planning permission for any extensions required.
The care contracts should also be reviewed to determine the tenancy rights of individual residents and service users within the homes and in the case of an Asset Purchase whether those residents agreements will be terminated by the Seller and new agreements put in place by the Buyer and consideration of how any debts will be dealt with following completion.
Buyers should also ensure that appropriate surveys and valuations of the properties are undertaken. In the case of an Asset Purchase Sellers may also want to consider whether overage provisions are required to be imposed.
Social housing operators
For those buyers who are registered providers or registered charities, the organisation’s constitution will need to be reviewed to check whether the business being acquired would fall within the permitted objects of the buyer. Whilst this is likely to be the case, if not, then the acquisition may instead be permitted pursuant to the organisation’s powers of investment if made in accordance with the organisation’s investment policy and Charity Commission guidance.
Those buyers who are registered providers should inform the Regulator for Social Housing (the RSH) of any proposed acquisition as part of its co-regulatory principle (or the Welsh Government for those registered social landlords based in Wales).
The RSH may be interested in understanding the business case and stress-testing. As a part of this, the RSH will expect that the Board is in control of the strategy and strategic delivery of the transaction. It will also expect that the Board has within its ranks the skills and experience to understand the transaction and the risks involved.
Click here to read our recent Care Brief to find out more about common issues faced by our clients when providing care services or accommodation.
For more information, please contact Andrew Cowan, James Lyons or Caroline Mostowfi.