We provide the complete commercial debt recovery service; from outsourced early arrears collections through to expert litigation, all handled in-house by a multi-award-winning law firm.
We provide the complete commercial debt recovery service; from outsourced early arrears collections through to expert litigation, all handled in-house by a multi-award-winning law firm.
Insight
Acquiring and investing in the social care sector can potentially be lucrative moves, made more attractive by the proven resilience of some providers to challenging conditions.
With many providers proving themselves profitable even in such trying times, the appetite of investors, many already attracted to the sector by the opportunity such a fractured market presents for growth and consolidation, appear hungrier than ever for picking up services in an industry where the term ‘close of business’ does not exist, even in a global pandemic.
When approaching a corporate transaction in the social care sector, be that as a buyer from the perspective of due diligence for an acquisition or a seller readying their business for sale, there are a number of fairly sector-specific considerations that feed into the typical assessment of profitability and sustainability. A few of these are set out below.
Unless the service is highly specialised and can draw a service user base from around the country, the geographical area in which the business operates is important for both demand, in terms of the pipeline of the demographic in need of care, and the ability to service that demand, in terms of the skill sets in the local workforce and whether there will be a reliance on expensive agency support.
Location also drives the rates payable for services through the approach of local commissioners for the publicly funded and the common practice of pegging private fees against average house prices in the region. A beautiful aesthetic helps too, of course, but a luxurious home in an area without the demand to fill it in the first place is no good to anybody.
Expanding on the above, a buyer will always want to understand the business’ levels of occupancy (in residential) or contracted hours (in domiciliary), the composition of that between private payers and the publicly funded, and the general pipeline. It is also helpful to get a clear idea of the level of service user turnover which, in itself, may be suggestive of a poor level of service if unexpectedly high.
It is important to understand, especially after Brexit, the workforce culture (even more so after COVID-19 where many workers in the sector feel a sense of burnout), staff retention and the ease with which the business can recruit. At a basic level, is the workforce adequate to provide care at the contracted and regulatory standard it is required to? An under-staffed operator runs the risk of contractual and/or regulatory breaches, whilst reflecting an inaccurate profitability position of the business compared to if it were compliant.
Pre-pandemic, all care businesses were subjected to regular CQC inspections, the ratings from which could give a fairly informed view to an outsider of the service’s strengths and weaknesses. That inspection regime changed dramatically and continues to evolve as a result of the pandemic, with a reduced emphasis on physical inspections at the present time. Just as some businesses may be stuck on a lower rating than they deserve, there are others who may not be the beacon of compliance they were some years back. The key for any buyer is to dig deeper and understand the business’ reporting history, action plans and regulatory housekeeping for a more rounded view.
It is a regular feature of legal due diligence reports on social care targets that their contract records with commissioners are incomplete (caused just as frequently by the commissioner not providing completed contracts as the operator prioritising other things such as the delivery of care) and those that are available contain notification obligations and termination rights in the event of a change of control. Faced with a reluctance by most sellers to engage commissioners prior to signing binding terms, buyers should consider how a new investor would be received by commissioners in forming a view on the likelihood of termination or a drop-off of referrals by a commissioner post-completion.
Have the sellers been integral to the business, and do they need replacing or retaining (even if just short-term)? Good, registered managers are in huge demand and short supply, so any buyer would be recommended to identify their direction as early as possible in the process.
Having a much greater emphasis in a residential setting, facilities range from purpose-built shiny homes to older converted buildings, the latter occasionally coming with risks around planning, construction, and third-party rights. Further questions are also posed by whether the property is (or will become a part of the transaction) part of a sale and leaseback structure, opco-propco structure, or simply held as an asset of the target.
A bad apple spoils the bushel, and many funders are taking a closer look at all of the above and much more to make doubly certain that their investment is a sound one. Buyers should recognise that their appetite for risk will regularly have to bow to that of their third-party funder.
Contact Us
If you would like any advice on any aspect of M&A, whether it be acquisitions and disposals, preparing a business for sale, management buy-outs or buy-ins, joint ventures, reorganising or restructuring a business or other specialist services, then please do not hesitate to get in touch with Martyn Brierley, Partner & Head of Corporate & Finance, on 01332 226 188 or complete the form below to arrange a confidential no-obligation discussion.
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