Sale of a Care Home

The sale or acquisition of a care home is a significant commercial transaction, that requires extensive thought, legal and commercial consideration at an early stage of the process.

Things you must consider on purchase or sale of a care home:

Firstly, consideration must be given as to how the sale will be structured - as an asset or share sale?

On asset acquisition, the buyer is acquiring specific assets, in this instance this will usually involve the sale or transfer of a lease of the property that the care business operates in from the care business. Alternatively, on share sale the buyer will acquire the shares of a company which owns the care business from the shareholders.

The choice of sale can often be driven by a number of legal issues. Firstly, there are different tax consequences depending on choice, it is likely a heavier tax liability will arise on asset sale as proceeds of sale go back into the company and not to the shareholders directly, therefore, to receive the money via dividends incurs further tax. This is something to consider and accountancy/tax advice is essential in deciding on the best option.

Furthermore, on asset sale, there must be consideration to a number of care contracts that may be in place (this may be with local authorities or private funders), which will need to be individually assigned or novated to the buyer as part of the transaction. On the other hand, with a share sale it would just be necessary to check such contracts for any change of control provisions that may affect the contract, which is much less onerous on both parties.

Whichever way the deal proceeds, it will require a significant amount of legal work on main asset purchase agreement or share purchase agreement, establishing the key legal terms and details in relation to the sale and purchase of the care business.

Licenses and registrations required

Registrations with the Care Quality Commission (CQC) is required where a business is providing a regulated activities that includes personal and nursing care and accommodation for those who need such care. In order to be registered with the CQC, you must exhibit adequate and relevant skills/experience to effectively operate a care home. This includes having a 'registered care manager' (who must be qualified with an NVQ Level 4 and have at least two years' senior care management experience) and at least 50% of your care home staff trained to NVQ Level 2.

For buyers who aren't registered, the process of registration can take up to 3 months providing applications run smoothly (this may be longer considering the backlog of work due to the COVID-19 pandemic). Therefore, this process can cause significant delays to transactions and highlights the importance of engaging with the requirements early on. In practice legal agreements are often exchanged and completion then occurs at a later date, once registration has been approved.

If a company or business is already registered with the CQC and is then acquired via share sale, a notification of change in the control of the company must be given to CQC informing them of new ownership and allowing them to inspect, regulate and closely monitor the new care homeowner.

Due Diligence

The due diligence (DD) process of the transaction is where the buyer will seek to identify, evaluate and verify all available information regarding the care business. It is worth planning in advance for the DD process by ensuring information is readily available (otherwise the process can be quite lengthy), including:

• Contracts with local authorities and residents

  • Contracts like these are typically 'fixed initial term' (meaning there is an end date), so a buyer will want to ensure appropriate documentation is in place confirming the current contract term or any variations as these terms are often carried on beyond the initial term.

• Contracts with third party suppliers/service providers

  • Supply contracts will be in place for things such as providing clinical waste disposal and maintenance, so it will be up to the buyer to collate records of fire/resident risk assessment, data protection policies, food hygiene reports and ensure they're adequate and up to date.

• Property information including any relevant surveys, reports and certificates

  • In respects of DD against the property the care business operates, it is critical to scrutinise the relevant planning permissions for use as residential care home and any restrictive covenants restricting the use of property. This may be crucial in scenarios where a buyer has plans to increase capacity and if such restrictions are in place a purchase of a defective title indemnity policy may be required to provide protection.

• Financial and accounting information

  • It is crucial to ensure that financial accounts and records are correct and up to date, supported by substantial business plans and future financial projections.

• Information regarding complaints, regulatory breaches/information and legal disputes

  • A buyer should have a good understanding of prior track record of the business & reviewed results of inspection (past directors required to have been regarded as 'fit and proper' persons)

Given the nature of such a transaction parties may also wish to consider putting in place a non-disclosure agreement or a confidentiality agreement when selling or providing confidential data.

Employee considerations

As part of the DD process, the buyer will be provided with anonymised information detailing the employees of the company. Any buyer will find such particulars useful as care homes often operate with workers on a variety of different contracts (including part time, full time and zero-hour), therefore it will be useful to become knowledgeable on the employees type of employment they're engaged in and their salaries, pension contributions and contractual benefits prior to acquiring the care business.

On a regulatory note, if an asset sale is transacted the transfer of staff will be subject to the Transfer of Undertakings (Protection of Employment) regulations (TUPE) (this is not relevant to a share sale). Essentially this piece of legislation is there to protect employees when the business in which they are employed in changes hands by transferring them and any liabilities associated with them into the new employer.

Finally, it may also be considered good practice for buyers to meet with staff beforehand as they will be fundamental to a successful transition.