Top 10 tips for buying a care home business in the UK

When considering the purchase of a care home business, a key initial question will be how the acquisition should be structured. The usual choice is between acquiring the business and assets or acquiring the shares in the company that runs the home. That distinction is important.

With a share purchase, you are acquiring the company with all of its assets, obligations and historic liabilities.

If instead you proceed by way of an asset purchase, you are acquiring the business and specified assets directly and you can agree which liabilities you are prepared to take on.

Both options have their pros and cons and tax will often be a key factor in deciding which structure is right for you. Taking specialist tax advice at an early stage can help inform that decision.

Whichever structure you choose, here are ten practical points worth addressing. Where the position differs depending on whether the deal is an asset purchase or a share purchase, we highlight this below.

1. Be clear on exactly what you are buying

If proceeding with an asset purchase, it is important to identify at an early stage exactly what you need to acquire to ensure that the home continues to operate smoothly after completion.

This is likely to include, amongst others and most obviously, the care home premises itself, along with essential equipment, the goodwill in the business and the key contracts that support its day-to-day operation.

In a share purchase, you acquire the company as a whole and so the business and its assets transfer with it, but you will still want to satisfy yourself that all material assets are owned by (or properly licensed to) the target company and that nothing essential sits outside the corporate structure.

2. Think beyond the headline price

Agreeing the purchase price is only one part of the commercial picture. Equal thought should be given to the way in which that price is paid and whether the structure of the payment works for the deal as a whole.

The price does not always need to be paid entirely on completion. In some transactions, part of the consideration may be deferred or made contingent on the care home business meeting certain performance measures after the deal has completed.

You will also need to think carefully about how the business is being valued. In this sector, value is often shaped by the way the home is operating on the ground, including its occupancy levels, resident mix, staffing model, future investment needs and regulatory record.

These issues often come into sharper focus during the due diligence process.

3. Use heads of terms to flush out the big issues early

Once the main commercial points have been discussed, it is often sensible to record them in heads of terms and to set out a timetable for completion before significant costs begin to be incurred.

Although heads of terms are generally non-binding in most respects, it is worth seeking an exclusivity provision. This gives you a defined period in which the seller agrees not to negotiate with another prospective buyer, helping to reduce the risk of losing out to a rival bidder after you have already spent time and money on the transaction.

4. Carry out diligence

Due diligence is your opportunity to carry out a thorough review of the target care home business and the assets you propose to acquire. It is also to give you a realistic picture of whether the service is stable and sustainable and to highlight any challenges that may arise during the transition to new ownership.

Your solicitors and accountants will deal with the legal, financial and tax diligence.

In the care home context, due diligence will typically need to cover a number of sector-specific areas beyond the usual legal and financial review. These include the home’s regulatory compliance history (including inspection reports and ratings), employment and pensions arrangements, material contracts (such as resident agreements, local authority placements, catering and IT contracts), the physical condition of the property, and any outstanding or potential disputes or claims that could affect the value of the business.

5. Do not underestimate the regulatory angle

Care services across the UK must be registered with the relevant regulator before they can operate. In Scotland, it is the Care Inspectorate (and in certain cases Healthcare Improvement Scotland); in England, this is the Care Quality Commission (CQC); and in Wales, it is Care Inspectorate Wales.

If you are acquiring the business by way of an asset purchase and a new legal entity will be providing the service after completion, that entity will need to apply for registration in its own right. There is no mechanism for the transfer or assignation of an existing registration certificate to a new provider.

The registration process can be lengthy — in Scotland, for example, it can take up to eight months — and often completion will be conditional on the necessary regulatory approval being obtained. This can have a direct impact on both the structure and timing of your transaction. Lenders will typically not release funds until regulatory approval is confirmed.

Where the acquisition is structured as a share purchase, the registered entity remains the same and so a new registration application is not usually required. However, the relevant regulator will still need to be notified of the change of ownership.

It is a criminal offence to provide a care service while unregulated. You should therefore engage with regulatory planning as early as possible, take advice from your solicitors on the relevant regulatory requirements and factor the registration timeline into your overall deal timetable.

6. Consider funding requirements early

A lender’s view of a care home acquisition will usually be informed by both the value of the property and the strength of the business operating from it.

In practice, that means close attention is likely to be paid to matters such as cash flow, occupancy, fee rates and the extent to which revenue depends on local authority-funded as opposed to privately funded residents.

Lenders are therefore likely to want comfort on due diligence and regulatory approvals before funds are released. For that reason, it is worth getting these workstreams underway at an early stage.

7. Review the property as an operating asset, not just a title exercise

The premises are likely to sit at the heart of the transaction, so you should work closely with your real estate lawyers to ensure that a detailed review of the property is carried out and that its suitability for the business going forward is properly assessed.

That will include confirming that the home can lawfully continue to operate as intended and identifying any restrictions that could limit future expansion or alteration.

You will also need to consider matters such as fire safety, past alterations and where the property is leasehold, the lease terms, to establish whether any consents, remedial works or ongoing obligations could affect the business after completion.

8. Focus on people and workforce risk

Where the transaction is structured as an asset purchase, TUPE (the Transfer of Undertakings (Protection of Employment) Regulations 2006) is likely to apply, meaning employees assigned to the transferring business may move across automatically on their existing terms.

It is worth noting that, while employees may transfer automatically, they are not obliged to stay. You should therefore identify any key managers or senior staff at an early stage and think carefully about how you will retain those who are most important to maintaining continuity and confidence after completion.

You will also need to build up a clear picture of the employee-related liabilities that may pass across with the business.

That will usually involve reviewing the employment contracts and relevant policy documents, as well as any pension documentation, so you can understand not only the terms on which staff are engaged but also whether there are any existing issues or ongoing obligations that could give rise to cost or risk after completion.

In a share purchase, the employees’ contracts remain with the company and so TUPE does not apply, but due diligence on employment terms, pension liabilities and any ongoing disputes remains equally important.

If you are buying a care home from a wider operator, it will also be important to map out which employees you expect to take on as part of the acquisition. This can help avoid surprises after completion, for example where central office staff support the home or where certain functions are carried out centrally and may need to be covered under a transitional services agreement.

9. Check every contract you need to keep the service running

Behind the day-to-day delivery of care sits a range of contractual arrangements that will need careful review. Some go to the heart of the service itself, such as resident agreements and any local authority or NHS placements. Others are less visible but no less important.

Catering and other supplier contracts, for example, may underpin the practical running of the home, while IT and telecoms arrangements often support everything from care records and medication management to communication with families and staff.

Not every contract will automatically transfer to you in an asset sale. Some may need to be assigned, novated or entered into again and others may require third-party consent before they can continue.

Mapping out these contracts at the start of the deal can help avoid disruption to the service after completion.

In a share purchase, contracts generally remain in place with the company, but you should check for any change of control provisions that could allow a counterparty to terminate or renegotiate on a change of ownership.

10. Protect the value of the business post-completion

Finally, you should think carefully about how the value of the business will be protected once the deal has completed.

One of the key protections in a sale agreement is often a set of restrictive covenants. These are provisions designed to prevent the seller from doing things that could damage the business you have just acquired, such as competing in the same market, poaching staff or interfering with customer, resident or referral relationships.

In the care home context, those protections can be particularly important where the seller remains active in the sector or retains nearby operations.

Including appropriate restrictions can help preserve the goodwill and stability of the business after completion.

Should you need any advice in respect of your business, please get in touch with your usual Brodies contact or one of the contacts listed below who will be happy to assist.