Despite an expected slowdown in the early days of the pandemic, activity in the care market appears to be increasing again. Deals which had previously stalled in the Spring are completing, albeit with some challenges with financing and a renewed focus on due diligence in areas such as occupancy rates, infection control, furlough and shielding.
Whilst there is activity, there is also uncertainty, particularly when it comes to timescales. Sellers can ensure they put themselves in the best position to complete quickly and achieve their offer price by preparing thoroughly. The quicker the sale goes through, the less opportunity there is for the unexpected, such as a drop in occupancy or re-tendering of a local authority contract, which can spook lenders and investors.
There are some key points for sellers positioning their businesses in both the homecare and residential markets, and these are set out below.
Sellers should take advice from their tax advisors from the outset to ensure the business goes to market with the most favourable tax structure. It is often the case that this is a share sale and this usually negates the need for a split exchange and completion. Where an asset sale is agreed and there is a gap between exchange and completion, careful thought will need to be given to how risk is allocated between the parties during that period.
Particular concerns for the buyer will be protecting against a potential reduction in occupancy, fall in income or an outbreak of COVID-19 amongst staff or the people using services. Sellers should work with their professional team to plan the timing of the transaction so as to minimise the period between exchange and completion and negotiate fair provisions to deal with the consequences of these events, should they occur.
In an asset sale, the registration of the manager will need to be ‘fast-tracked’ to the incoming buyer. To optimise a quick completion, the appropriate Care Quality Commission (CQC) applications should be submitted at the earliest stage.
This inevitably involves informing the manager of the sale and brings with it concerns about confidentiality and stability. However, sellers can mitigate this by putting in place a bonus agreement in return for loyalty and confidentiality to the point of completion.
Frontloading due diligence
Whilst it is reasonable to be mindful of incurring professional costs in the early stages, it can be hugely beneficial for sellers to start populating a data room at the offer stage whilst the buyer is arranging finance.
Quality information provided at an early stage instils confidence in buyers, investors and lenders, puts momentum in the hands of sellers, minimises the chances of an avalanche of additional enquiries and reduces the opportunity for re-negotiation on price.
Anticipating the issues
We see a pattern of issues arise in care deals which concern buyers and hold up completion. These often relate to employees, in particular, sleep-in rates, failure to pay holiday pay correctly and incorrect use of furlough and shielding.
Sellers should face these head on. For example, providing detailed calculations on potential sleep-in liability at the outset will assist in both parties agreeing a sensible cap on liability whilst we await the outcome of the Supreme Court ruling on the Mencap case, which at the time of writing has not been delivered. Similarly, calculating and repaying any holiday pay due will reduce the need for an indemnity in the contract.
Facing up to COVID
Sellers should ensure they can provide full details of visitor policies, infection control policies, infection control grants (including application of the monies) and the financial impact of the pandemic on the business.
The provision of detailed management accounts is a must. Insurance can be a tricky issue, particularly in an asset sale where insurers may not be willing to sign new business. Both sellers and buyers should work closely with their brokers to try to resolve this, potentially by a transfer of the existing mandate and requesting it to be re-issued in the name of the buyer.
Working out the compromise
In any negotiations, the parties need to agree how risk will be allocated in order to agree the deal.
This is more relevant than ever in the current climate where there is so much uncertainty, for example, over the adequacy or validity of insurance cover and the risk of complaints and claims from staff and third parties.
Buyers will automatically look for indemnities in the broadest terms to protect against the unexpected. What is agreed will depend on the bargaining strength of each party. However, in order to keep the deal on track, sellers may need to risk assess the effect of each indemnity and look to negotiate limitations and exclusions rather than give a blanket refusal.
Sellers may also wish to investigate warranty and indemnity insurance to protect from financial losses arising due to unanticipated breaches. This does come with a word of caution – as with all insurance, the impact of COVID-19 has had a significant impact on the cost.
Making it work
While COVID-19 has had its impact, it is not impossible to successfully sell a care business in the current climate. Additional considerations do perhaps need to be given to areas that were previously not a focus, but with careful planning, detailed information and a collaborative, open stream of communication, the market is moving, and providers who are faced with wanting or needing to sell are able to do so.
Have you considered selling your business due to the impact of COVID-19? Share your experiences by commenting on this article below. We want to hear how you are finding the process.