Our team of corporate solicitors based in our Brighton office recently brought their expertise in buying and selling care homes to the fore to assist a client with the multi-million pound purchase of a company which holds a substantial residential care home in Sussex.
Whether buying or selling a care home, the process can be complex and usually involves some important considerations and due diligence enquiries. As with any share purchase, a transaction involving a care home will require due diligence in respect of the corporate structure, goodwill, accounts, contracts and employees however, as the business is property centric, there will always be a key focus on the property due diligence as well as investigations into the equipment and fixtures at the premises. In addition, in our experience it is also important to focus on occupation rates, health and social care issues and to ensure that the company does not have any adverse reports with the CQC. We highlight just some of the legal issues to consider below based on our most recent transaction as well as our experts’ experience in buying and selling businesses in this field.
Structure of transaction
One key initial consideration will be how the sale or purchase of the care home is structured. There are two main options here – a share sale/ purchase or an asset sale/ purchase.
A share sale or purchase can take place where the care home is operated via a limited company. In this scenario a buyer can simply purchase all of the shares in the company, thus becoming the new owner of the business via the limited company. This means that the buyer is buying the care home “warts and all”. All assets and liabilities will be taken on by the buyer. Nothing changes within the limited company, contracts with employees for example will remain unchanged with both contracting parties remaining the same, but the owner of the limited company will be the buyer.
This was the structure in place for the recent transaction handled by the corporate lawyers in the Brighton office. As such the lawyers had to carefully conduct extensive due diligence on the company and its affairs as our buyer client was taking on all assets and liabilities.
The alternative structure is an asset sale or purchase where select assets are cherry picked. In the case of a care home this would usually be the property (whether via a transfer of the freehold or assignment of the lease), equipment, goodwill and any other assets needed to run the business. Employees would usually transfer via TUPE in this structure.
The main benefit of an asset sale or purchase is that liabilities and unwanted assets can be left with the seller.
Whichever structure a seller and buyer ultimately agree on there will be advantages and disadvantages both from a legal and tax perspective. It is therefore important to carefully consider the best structure on a matter by matter basis.
The care home
As mentioned above, it is important that careful due diligence is carried out in respect of the property when purchasing a care home whether the transaction is taking place as a share or asset sale. It will be important to understand whether the property is owned or leased by the business, whether there are any issues with the property and whether there are any planning or permitted use concerns. Buyers will also need to be aware of any other property aspects such as restrictive covenants or environmental issues. These will be discovered during the property due diligence phase of the transaction.
If the care home is operated from a leased premises it will also be important for the property law experts to review the lease to ensure that the business can be run by the buyer as required. Another common issue we encounter when dealing with care homes operating from leased premises is the identity of the tenant. It is not uncommon that the care home is run by a trading company from a premises which is leased by a separate entity. If so that entity will need to be part of the transaction in order to assign the lease to the buyer or the trading company (if the buyer is buying that company as a share purchase).
If the transaction involves the transfer of a freehold property this comes with its own considerations. For example it may be necessary to ensure that mortgages are discharged by the seller on completion. It may also be the case that the property is held by a separate property holding company, in which case the transaction may involve a separate transfer of the freehold property or the purchase of the property holding company as well as the trading company. Indeed this was the case in the transaction recently handled by Acumen. Our property experts were required to handle the transfer of the freehold premises from a property holding company to the trading company on completion and ensure that all mortgages and debentures relating to the property were discharged.
Care Quality Commission (CQC)
An important part of buying or selling a care home is CQC registration. A buyer will need to ensure that it is CQC registered. This process can take a long time, even when there are no issues encountered, so early attention is advisable here.
Even if a buyer is purchasing the care home via a share purchase of a company already CQC registered it will still be necessary to lodge a change of control notification with CQC. As such it is crucial to deal with these issues as early as possible.
Considering the care home’s CQC reports and inspections will also be an important part of the due diligence for the buyer. A buyer will naturally want to know that the care home has remained compliant and not had any adverse findings against it in the years preceding completion.
An important part of due diligence when looking at a care home relates to the contracts. This is important to firstly understand the revenue streams of the business and how the transaction will affect them but also to ensure there are no surprises such as breaches of contracts waiting in the wings.
When we have acted for buyers in transactions relating to care homes we have always been required to carefully consider resident contracts as well as block contracts with local authorities. It is important to ensure that these are in good order and that the transaction will not result in those contracts becoming terminable, for example via a change of control provision. Where such a provision exists it is crucial to obtain consent to the transaction.
The above are just some of the considerations when buying or selling a care home. There are of course many other factors such as, number of bedrooms, average occupancy rates of the home, any health and safety issues and the make up of the staff operating the home.
It is true that many of the considerations discussed here are focussed more on the buyer as they will be taking on the business, however it is also in the best interests of the seller to ensure that the information required in relation to the above is in good order. This will make for a smoother and quicker transaction.
The corporate and property experts at Acumen have assisted many clients with the above when both buying or selling care homes in Sussex and beyond. If you are looking to buy or sell a care home please do not hesitate to get in touch for a free initial consultation and we would be happy to help you get the transaction over the line!