When buying a care home it is easy to just focus on the property aspect and to treat the whole transaction as a property purchase. This is an easy trap to fall into but does not reflect the fact that you are buying a business and not just a property. So what else should be on your checklist when buying a care home?
The operation of a care home is regulated by extensive legislation. The Care Quality Commission (“CQC“) is the regulatory body which oversees the care home industry. Following the Winterbourne View scandal and the Francis Report, the CQC has tightened up its regulatory requirements and monitoring processes.
The first step for a potential buyer is to clear all of the regulatory hurdles to be approved by the CQC to operate a care home and to ensure that it has proper processes in place to satisfy the CQC in relation to the operation of the business going forward. The buyer will also need to carry out specific due diligence on the regulatory compliance history of the target business. This will not only be key for the buyer but also any third party funders backing the buyer. Ultimately, if authorisation to operate a care home business is withheld or revoked by the CQC, then there is no business to operate.
Many acquisitions are structured with a gap between exchange and completion to allow the buyer to receive final CQC approval.
It is important that the buyer understands the nature of the care business that it is proposing to acquire. The term “care home” covers a whole range of potential activities. Are the residents principally funded by the local authority? Has anybody reviewed the local authority resident contracts? Do the current contracts cover all of the residents’ care requirements? If the residents are privately funded what are the standard contractual terms?
The care home manager is a key position in most care homes. As well as having to be registered with the CQC, the care home manager will play a fundamental role in ensuring compliance with the relevant regulatory requirements and the provision of care to the residents. The buyer will need to ensure that either the current care manager will be staying on to ensure a smooth handover, or that the buyer has an experienced care home manager in the wings.
If the buyer is proposing to buy the business and assets of the care home (rather than buying the shares in the operating company) the buyer will need to ensure that the seller complies with its obligations under the TUPE regulations which cover the transfer of the employees to the buyer.
Other issues that should be considered in relation to employees include considering what pension arrangements are in place and also what arrangements are in place for locum staff. Compliance with immigration laws and minimum wage legislation should also be covered by the buyer’s due diligence.
The buyer should undertake due diligence on the complaints and insurance claims history for the business and also enquire about any historic litigation. The CQC publish their reviews of individual care homes and this is a good starting point for assessing the care home.
One aspect of care home transactions which has received increased prominence over the last few years is the amount of press interest in incidents at care homes. This has been exacerbated by the introduction of “whistleblowing” legislation. Such coverage can adversely affect the reputation of the care home. Under the new CQC regulations the care home has a duty of candour in relation to any incidents that may occur at the home.
If the buyer requires third party funding for the purchase then it should look to a funder who has experience in this sector. Funders are increasingly focussing on the buyer’s ability to comply with regulatory requirements and, in particular, issues surrounding CQC inspections. This is because funders increasingly lend against the value of the business and the property and not just the property. It is best to involve the third party funder at a very early stage and to ensure that its requirements and creditor approval process are clearly set out.
In structuring a potential acquisition the buyer should consider how the purchase vehicle should be structured to ensure it is tax efficient and also undertake due diligence into the historic tax affairs of the target business.
If you are considering buying a care home please contact Giles Clegg who heads up the care team at Lupton Fawcett
Please note this information is provided by way of example and may not be complete and is certainly not intended to constitute legal advice. You should take bespoke advice for your circumstances.