Whether moving out of a location, exiting the care sector or otherwise considering a sale of all or part of a care home business, 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 disposal to help the process run as smoothly as possible.
Who is your buyer?
Buyers who are not currently active in the care sector will need to obtain registration with the Care Quality Commission (CQC). Registration can often take up to 3 months providing there are no queries with the application. If a quick acquisition is required and the buyer is not already registered, 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 a company which is already registered with the CQC is to be acquired the CQC will need to be informed of the change of control. 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 (see below), a buyer of a care home business can be expected to seek to have a good understanding of the prior track record of the business and review 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.
Structure of your transaction?
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 an asset sale (the transfer of the properties and business assets as a going concern), or a share sale (the purchase of the share capital of the trading company which owns and operates the care business).
The chosen structure is commonly influenced by tax considerations for both seller and buyer, so tax advice should be sought at an early stage. Share sales are generally considered to give the seller a ‘clean break’ in that the entity which holds the assets and liabilities will transfer to the buyer with the entity whereas in an asset sale, the assets and liabilities must be specifically transferred to the buyer. A seller should consider whether the care home business is currently operating within a separate entity within its organisation? If not, a share sale may not be practical. For a buyer, acquisition of a new trading subsidiary may require additional consents and approvals, such as from lenders.
Preparing for Due Diligence
For sellers, good due diligence preparation can help ensure the sale process is not held up. The due diligence process can often be lengthy due to the number of care contracts which may be in place, whether with local authorities, suppliers and/or private funders. On an asset sale, each contract will also need to individually assigned or novated to the buyer as part of the transaction. On a sale a key part of the due diligence process is to check for any change of control provisions which may affect the contract as a result of the sale.
Managing information requests and enquiries can be time consuming for a seller. Working to identify and gather all of the necessary information early can help to avoid delays, it can also allow the seller to pre-empt the buyer’s own due diligence requirements. In addition, agreeing a process with a buyer as to how information will be organised and relayed at the outset can be helpful. Confidentiality and data protection requirements are also essential, and a 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.
Care homes are 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 be reviewed by the buyer from a compliance perspective to ensure they are adequate and up to date. It is also crucial that financial accounts and records are correct and up to date, supported by well-substantiated business plans and financial projections.
Buyers are likely to require full particulars of all staff including 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. They may also want to meet with key staff before the transfer including any “Registered Managers” registered with the CQC.
Property due diligence
In addition to the usual property due diligence and searches on the properties, a key aspect for any 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 are restrictions, the purchase of a defective title indemnity policy may provide protection for any buyer. Buyers are also likely to require appropriate surveys and valuations of the properties are undertaken.
A buyer will also need to review the care contracts to determine the occupational rights of individual residents and service users within the homes and, depending on the structure of the transaction, whether those residents agreements will be terminated by the seller and new agreements put in place with the buyer.
Other regulatory considerations
Many care homes are operated by those who also operate in the social housing sector. Sellers who are registered providers or registered charities will need to ensure they have assessed the business case for the transaction. Buyers who are registered providers or registered charities will need to consider whether the business being acquired falls within their permitted objects. Whilst this is likely to be the case, if not, the acquisition may fall within the buyer’s powers of investment (if made in accordance with the buyer’s investment policy / Charity Commission guidance).