Driven by an aging population, increased life expectancy and ever evolving and changing services provided to senior care, the care homes sector has become one of the fastest growing industries of our time.
Buying a care home business can be a rewarding endeavour, personally and financially, but with it comes with various risks and challenges. It is a decision which requires careful thought, planning and consideration and is much more than just finding the right location, property and employees. This article aims to provide some assistance to those contemplating buying or expanding their business in the care home industry.
Due to an ageing population, there is an increased need for care homes within the UK. According to Experian Market IQ (September 2021), the estimated worth of the residential nursing care industry was approximately £7.7 bn with an annual growth of 1.4% from 2016 to 2021, and continues to grow. They estimate the market value worth for 2024 to 25 will be around £7.77 bn and from 2025 to 2026, in the region of £8.11 bn. With this growing need for more care homes, existing businesses are increasingly searching for opportunities to buy and expand, whilst being regulatory compliant.
Funding and Growth
The financial awards available being involved within this undoubtedly cash-generative sector, has the ability to achieve economies of scale. The biggest concern for those looking to acquire or expand however is what level of appropriate funding is suitable and available for what they require and we look below as some options.
There are various avenues you could consider when looking to fund your acquisition of a care home business. You may have already ringfenced cash reserves for this purpose alone, or had interest from a potential investor, or are otherwise looking to borrow from a commercial lender with a specialism in care homes. One avenue of funding could be to obtain Asset-Based Lending (‘ABL’) which is a common financing option used for purchasing or expanding a care home. By using physical property (or assets) as collateral for the funding, it serves as security for the loan received by the borrowers. It therefore makes it possible to access funding based on the valuation of the specific asset. Although this is a viable option that many consider, with it comes the various risks involved, such as defaulting on a loan and the lender seizing those assets, that some may not wish to gamble their business on.
If you are already involved in the care home industry and looking to expand your existing business, another avenue to consider is attending a growth workshop prepared and analysed by a Corporate professional with a focussed specialism in the healthcare sector. These workshops primarily focus on exploring key areas of each individual business, after in-depth analysis of the current market has been undertaken and benchmarking those findings against the current company, in order to improve and expand its services. Some key areas that might be considered at the workshop may involve analysing the quality of care and services provided, how the business is marketed and what outreach programme they have in place (if any), looking at staffing and recruitment and whether the growth could be achieved organically (i.e., through existing channels provided by the current company) or inorganically (i.e., through an acquisition) and then setting out a short-term and long-term plan.
In the alternative, if financing the care home business is not financially feasible or appealing, you may wish to consider outside investment from a Real Estate Investment Trust, or REITs for short. REITs are property investment companies which provide individuals the ability to invest in real estate, without directly owning the property itself. Their main purpose is to own, operate or finance cash-generative real estate, such as care homes, and can cover an expanse of sectors (i.e., residential, commercial, industrial etc.). By partnering with a REIT company, this would open up the business to various different opportunities for expansion and growth, such as acquiring or developing suitable facilities or providing a leaseback option, allowing the REIT to purchase the property and to then leaseback the property to the care home business. This would then free up capital used in the running and continuing operations of the business without a potential cash-flow issue.
These are just a few options available for those interested in acquiring a business or expanding their existing business and it is advised you obtain professional advice from specialists focussed in the care home sector to evaluate what options are available to you.
Regulatory compliance – What are the main requirements of running a care home?
Not only is funding a hurdle for new and existing businesses, the provision of care is also a highly regulated sector (and for good reason). Not only would you be assisting the elderly but potentially the very vulnerable, providing care into their last hours (depending on what type of care facility you intend to provide). It is no secret therefore that the care home and healthcare sectors are heavily regulated with not only having to comply with the stringent requirements under the Care Quality Commission (CQC), but also needing an in-depth understanding of current health and safety regulations, commercial property matters which may affect the running of the business, environmental issues and employment law issues to name a few.
The CQC is an independent regulator of health and adult social care in England, ensuring that the services provided to people are safe, effective, compassionate and high-quality. They have the ability to monitor, inspect and regulate the services provided and regularly publish their findings on their website. They also have powers to take action against care home providers who provide poor care services, facilities and/or are unsafe which assists in regulating the industry across the board. The CQC also provides a wealth of information and guidance for providers which might be helpful within your specific sector, including but not limited to further information on the regulations, how to register, what incidents you must notify them of and what they look out for when carrying out inspections. For more information, please visit their website at www.cqc.co.uk.
What to expect in a normal care home business purchase and how it is structured.
When purchasing a care home, the biggest question you will need to answer is what purchase structure would suit your needs and future goals of running a care home business. This can be either by a share purchase or an asset purchase. If the company operates as a company limited by shares, a share purchase involves purchasing the entire issued share capital, essentially acquiring full ownership of the company, including all of its liabilities and risks. In the alternative, an asset purchase involves purchasing the assets of the company, which can be cherry-picked to suit your needs and requirements. With anything, these options come with their pros and cons which are worth considering further and something a specialist M&A solicitor can assist with.
Once the structure of the purchase has been agreed upon and a formal offer accepted, there are a series of vital steps which will be required leading up to signing and completion. This can include (but not limited to) the following stages: non-disclosure agreement, carrying due diligence, enquiries, transaction documentation, disclosure of warranties and signing, as well as ensuring all the correct regulatory and compliance issues, employment and/or property matters are also being dealt with alongside it. Bear in mind, there are a multitude of factors, internal and external, which may be applicable and it is advisable that the right advice is obtained.
Legal and financial assistance – how can we help?
It is always worth considering seeking legal and financial assistance throughout purchasing (or selling) your care home, especially if your experience in business matters is limited. A solicitor who specialises in business acquisitions (and even better, one who specialises in care home businesses) can guide you through the process, contracts and legal aspects of the transaction. A financial advisor on the other hand, can assist with financial planning and funding aspects.
If this is something you are considering, our specialist corporate care home team will be able to provide you with the advice you require about the legal aspects of buying a care home business. Please contact either Matthew Lea (Matthew.lea@herrington-carmichael.com) or Emma Docking (Emma.Docking@hc.law) of the Corporate Team at Herrington Carmichael for further information on how to get started.
