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Buying and Selling Care Homes – Key Legal and Commercial Issues to Consider

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The buying and selling of a care home is a significant commercial transaction and there are a number of key legal and commercial considerations that need to be borne in mind, ideally at an early stage.

In this article Stephen Thompson, Partner with Cardiff based law firm Darwin Gray LLP, and Rob Kinsman, Regional Director at Christie & Co, consider some of these issues.

How should you structure the deal – asset or share sale?

An asset sale will involve the sale or transfer of a lease of the property and associated care home business as a “going concern”, usually to a limited company buyer.

A share sale will involve the purchase of (usually all of) the issued share capital in the trading company which owns and operates the care home. The shares in the trading company may be purchased by the buyers personally or alternatively through a limited company.

The choice of which type of transaction to opt for will often be driven by the tax consequences of the deal for both parties and therefore accountancy/tax advice will be essential in determining the best option for both parties.

Share deals are now more commonplace in the healthcare sector and, notwithstanding the tax implications, the key advantage is that the registered entity is transferred with the business, therefore removing the need for either CIW or CQC re-registration.

An early understanding of the structure of the deal is paramount, and so engaging with your solicitor and accountant at the start of the process will ensure key issues are addressed early on in the deal.

The “due diligence” process

The due diligence (“DD”) process of the transaction is where the buyer seeks a wide range of information about the business being sold by asking a variety of questions and also requesting copies of relevant documents.

The DD phase is often started by the buyer and its accountant, initially focussing on commercial and financial matters. The buyer will want to establish that the business is sound, does not have any significant problems, and is worth the purchase price.

Following on from commercial and financial DD, there will then usually be a period of legal DD undertaken by the buyer’s solicitors. That stage of the DD process is often undertaken between the parties’ respective lawyers. It is worth planning in advance for the DD process by ensuring that certain key information is readily available, including the following:

  • Financial and accounting information
  • Contracts with local authorities and residents
  • Contracts with third party suppliers and service providers
  • Service and maintenance records in relation to key equipment used within the business
  • Property information including any relevant surveys, reports and certificates
  • Information regarding complaints, regulatory breaches and legal disputes
  • Insurance details
  • Regulatory information and details
  • Employee information and particulars

Once the headline terms have been agreed and the DD process commences in earnest, it is key that the deal gathers momentum with a steady flow of information. If the information is not to hand, or in poor order, this will delay the transaction and frustrate the process.

The Handover

To ensure a smooth handover, it is in both the buyer’s and the seller’s interest to think about how the handover process will be handled. This is even more important if the home’s Responsible Individual (“RI”) will be leaving the home on completion, as the buyer will need to give thought to who they will appoint as the new RI and ensure that this is registered properly with the regulator.

Prospective buyers should also be alert to whether any senior managers within the business are likely to leave the business on completion and, if so, how the handover can be effectively managed. This might include reaching agreements with particular senior employees to ensure they will stay on for a couple of months to facilitate a handover, or agreeing a split exchange and completion to formalise a handover process before completion occurs.

If the vendor remains actively involved in the business, then the buyer might ask for an extended handover period to ensure continuity and reduce their risk. This could be an informal arrangement of on a paid, consultancy basis.

Employees

As part of the DD process, the seller will be required to provide the buyer with detailed information in relation to its employees, albeit usually on an anonymised basis.

If the deal is to proceed on the basis of an asset purchase, the transfer of the staff to the buyer will be subject to the Transfer of Undertakings (Protection of Employment) regulations (“TUPE”), and the advice of a HR consultant or lawyer will usually be required in relation to that issue.

However, if the deal is to proceed by way of a share sale, TUPE will not be relevant.

From a buyer’s perspective, prior to completion, it will also be important to meet and get to know the senior members of staff, in particular the RI. However, sellers often wish to keep even the existence of the deal secret until after completion. It will therefore be necessary to reach some sort of agreement in relation to pre-completion staff contact that is satisfactory to both parties. Again, a split exchange and completion can be useful here to give the sellers comfort that the sale will go ahead before approaching members of staff.

Staffing a care business has become more difficult than ever since Brexit and the pandemic, and succession planning is therefore a critical part of any sale process as well as the stability of the staffing team generally. An over-dependence on agency staff not only erodes profits in the business but also can adversely impact the quality of care that is provided if used in the long-term, and so buyers and their lenders will need clarity on staff retention and agency usage.

Will the Registered Manager be staying in the business, and do they have any retirement plans? Is there a deputy manager that would be able to step-up to the Registered Manager role?

The legal documents

Whether the deal proceeds by way of an asset or share sale, it will require a significant amount of work on the legal side.

The sale agreement will be either an asset purchase agreement (APA) or share purchase agreement (SPA), which will set out the details of the legal agreement in relation to the purchase of the business.  In addition to the core sale agreement, there will be a lot of other paperwork to facilitate the transaction which will need to be prepared and negotiated between the buyer and seller.

If you have not been through a sale or purchase process before, you may well find the legal side slightly daunting. However, an experienced lawyer will be able to guide you through the legal maze and ensure that you understand the process every step of the way.

Completion of the transaction

It usually takes around three months to complete the legal side of the sale and purchase of a care home, although the sale and marketing and also initial DD process may take much longer. On average, a going concern care home can take up to nine months to transact, from the moment you appoint an agent to legal completion. Planning accordingly is crucial and it’s important to avoid booking a holiday until you have clarity on the completion date!

The more work that you can do at the outset to prepare the business for sale, particularly in relation to DD, the quicker and more smoothly the legal side should proceed.

Also, ideally you should be prepared to invest a significant amount of time into liaising with your professional advisors in relation to the deal.

For more information about the above or a related matter, get in touch with Stephen Thompson on [email protected] / 02920 829 136 or Rob Kinsman on [email protected] / 0117946 8505 for a free, no obligation conversation to see how we can help you.