The care home market is expected to be buoyant in 2021. If you are considering buying a care home, there are various issues you should consider. Derek Ching partner in the commercial property team at Boyes Turner explains more.
Anyone who is considering buying a care home needs to undertake thorough due diligence. This is always time well spent and will minimise the chance of potentially expensive surprises happening later on in the purchase process, or even after the deal has completed.
An obvious starting point is for a potential buyer to look at the overheads of a care business. In doing this, it is important to look ahead and think about the impact that rising compliance standards may have.
Staff overheads also need to be factored in, including increases in the minimum wage and other employment overheads. Will these increases be matched by an increase in income?
Take time to consider staffing generally, including the impact of TUPE – the rules governing the transfer of staff – on the acquisition of a care business. Other questions to ask are if the business will be affected by changes to the immigration rules post-Brexit.
Consider the impact loss of key staff could have on the business. This will require contingency planning to ensure that key people don’t leave the business on day 1. Losing key staff could affect continuing Care Quality Commission registration and may also have a major impact on operational effectiveness. A key manager may hold the keys – both literally and metaphorically – to understanding how the business operates.
A great way to understand a care business before buying it is by speaking to the manager, who may not be the owner. This may be delicate commercially, but without that opportunity, your understanding of the business may be impaired.
Property and planning issues
Another item on your due diligence list should be to review the adequacy of any planning consents and issues over securing planning for any building improvements or extensions that you may be thinking of carrying out.
A review should be undertaken into the scope of the property title to ensure that no adverse third party rights or covenants exist, and that title restrictions do not impede any plans you may have for improvements.
If the care home is held under a lease, it is important to thoroughly understand the controls imposed by the lease covenants on the operator of the business. This should include permitted use, controls on alterations, dealing with assignments, transfer of licences and the scope of repairing obligations. Where landlord’s consent to assignment is needed, does the entity acquiring the lease have the financial strength to satisfy their requirements?
Ensure all necessary insurances can be put in place when required.
If you are relying on bank or other external investment be aware that the lenders’ legal requirements will be uncompromising and allow no room to sort things out afterwards. This makes it imperative that sellers are required to supply every piece of supporting documentation needed by the lender, even if you don’t consider them of immediate concern. Approval in principle for funding is never unconditional.
The problems and delays in the purchase process usually come in satisfying lenders pre-conditions. Demands for personal guarantees or secondary security often add to the timescale before funds can be released as well as add to the expenses of the transaction overall.
Look out for underinvestment
When looking around the premises, look for signs of underinvestment or cost cutting, which may mean expensive catch-up investment later. This could include lack of maintenance and decoration, poor record keeping, inadequate support and training for staff, poor management, reduction in purchasing of supplies.
Other issues to look out for are excessive dividends or repayment of director loans at the expense of reinvestment into the business.
A detailed survey of condition is crucial. The survey should encompass asbestos, DDA compliance, electrical and gas safety and energy performance. Many deficiencies can be swept under the carpet and only get picked up later when major spending becomes necessary.
Plan for ahead for CQC registration
Take time to understand any areas of improvement identified or outright non-compliances identified by CQC inspection reports and the implications for a new owner. This could be a sign of wider issues. Plan ahead for the CQC registration process to run smoothly.
There are a lot of issues to consider before buying a care home but taking time to do this thoroughly at the start of the process will save you time and money later on.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.