Articles and Publications
An Introduction to Buying or Selling a Care Home
15/Sep/2006
The care home sector has traditionally been a very fragmented market which means there have been (and still are) a high percentage of owners of single homes or perhaps a handful of homes. In recent years some degree of consolidation has started to take place and this has meant that there has been considerable activity within the sector. This trend seems set to continue.
This ongoing activity means that people may suddenly find themselves involved in the sale or purchase of a business (whether because they are looking to start to build a portfolio of care homes or because they are selling a care home they have owned for many years). This will often be a completely new experience for them and one which people may go into with some apprehension about exactly what the sale process will involve. This article attempts to give a general overview of the key legal stages in a typical transaction.
Heads of Terms
By the time a lawyer has been instructed the deal will ordinarily already have been struck. Either agents will have marketed a home or perhaps a direct approach will have been made to an owner by a prospective purchaser.
The first time that the lawyers are called upon will often be to draw up the Heads of Terms. These are effectively a summary of the key points that have been agreed in relation to the sale. They are not legally binding except for points such as exclusivity or confidentiality but they are the basis upon which all the main documentation will be drafted.
The Transaction Process
Once the Heads of Terms have been agreed then the "transaction process" can begin. There is no way of accurately predicting exactly how long the transaction process will take but it is relatively rare for a deal to take less than a month and 6-8 weeks would probably be seen as a good guideline. There are though many examples of transactions taking longer and if the purchase relates to several homes then different timescales may well apply.
Anybody new to buying or selling businesses should prepare themselves for a substantial amount of paperwork. People are invariably surprised by the scale of documentation involved. Because of this, buying or selling a business is a specialist area and a buyer or seller should check that their solicitor has experience of corporate law otherwise this may lead to a major cause of delay in the transaction. Ideally a corporate lawyer should have some care home experience to deal with the aspects of a sale which are particular to the care home sector.
Due Diligence
The first stage of the transaction is what is called the "pre-contract enquiries" or the "due diligence process". This involves a list of questions being sent by the buyer's solicitor to the seller's solicitor asking a wide variety of questions about the business. These range from questions about property to questions about litigation. In a care home transaction particular attention is often paid to areas such as residents' contracts, block contracts with local authorities, registration and inspection issues, employee issues (do staff have the relevant qualifications and do key staff have appropriate notice periods) and any claim that may have been made against the home, whether by residents or their families, or by employees.
The due diligence process is time consuming for the seller. They may not have all the information immediately to hand and they also have the business to run which is a full-time job. It is therefore very difficult to find the time to answer 10+ pages of questions, particularly as it will often be the case that they will be trying to collate all this information confidentially. It is essential though for a seller to bear in mind that the more detailed their response and the more documents that they can provide the better. A half-hearted response will simply lead to further time-consuming enquiries, and a full response may help to prevent a buyer bringing a warranty claim against the seller further down the line.
From a buyer's perspective, the due diligence exercise is essential to try and get a full picture of the business and to make sure there are no skeletons in the cupboard. If an issue does come up then it may lead to a buyer looking to reduce the price or seeking an indemnity from the seller to cover the possibility of the issue in question causing a loss to the business at a later date.
Frequently there will be an accounting due diligence exercise that takes place at the same time as the legal one. Inevitably there will be some duplication in the enquiries which leads to further frustration for the seller, but again, replies should be as full as possible.
The Acquisition Agreement
Once the due diligence exercise has been completed the buyer's solicitor will draw up the acquisition agreement. This is the main document in the transaction and depending on the size of the transaction may run to 100 pages. Most agreements will follow a similar basic structure but they are very difficult for non-lawyers to plough their way through and unfortunately the wording still tends to be in legalese.
The early clauses in the agreement will usually deal with the price payable for the business. The purchase price may be payable in full on completion or there may be some element of the purchase price which is deferred and payable by way of instalments. There are numerous payment scenarios. It will frequently be part of a deal that "Completion Accounts" are prepared. These are a set of accounts which are prepared to show the financial position of the business as at the completion date. These are primarily for the benefit of the buyer to make sure that the business he is buying is performing as he thinks it is.
The completion accounts are ordinarily prepared by the seller's accountants and then reviewed by the buyer's accountants (although it can be the other way around on occasion). Once the completion accounts have been agreed there may be an adjustment to the purchase price. This could be an upward adjustment if the financial position is better than anticipated or a downward adjustment if the position is worse.
Another key clause in the acquisition agreement is the clause setting out the restrictive covenants or the non-compete provisions which typically will be for a period of 1-3 years. A purchaser paying for a business, including its goodwill and reputation will be anxious to ensure that the seller does not set up a competing home within the same catchment area. Equally a key asset of any business are its staff and the buyer will want to ensure that a seller is prevented from enticing staff away to work for any new business which the seller may set up.
On the subject of employees, another issue is when exactly to tell them about the transaction. Much depends on whether it is an asset sale or a share sale. If it is an asset sale then the employment contracts of the employees are actually transferred to the new company. In these circumstances the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply and under those regulations there is an obligation to consult with the employees in advance and give them certain information about the transaction. If the deal is a share sale, the position is different. This is because a buyer is buying shares in a limited company, and therefore the employees will simply continue to be employed by the same company. There is therefore not the same obligation to consult with the employees.
Often in a share sale both the buyer and the seller prefer not to inform the employees about the transaction at too early a stage. Partly to avoid details of the transaction being leaked to other people, but primarily to avoid unsettling the employees.
A change of ownership is always a cause for concern for employees, particularly if the existing owners have been owners for a considerable length of time. The buyer and the seller will therefore need to agree when the employees should be told. It may be that they decide to tell them a few days before completion when it is virtually certain that the deal is going to go ahead. Sometimes it will be agreed that the employees are not told until the day after completion. Either way it is usually a joint announcement that is made so that the buyer can offer words of re-assurance to the employees that the change of ownership will not affect their jobs.
Warranties
The most important section of the agreement will be the warranties. These will usually be set out in a schedule to the agreement and will often be in excess of 30 pages long. Warranties are effectively a series of statements that the seller makes about the state of the business. If it subsequently turns out that one of those statements is untrue and as a result the buyer or the business suffers a loss, then the buyer may be able to bring a warranty claim against the seller in respect of such loss.
Typically, warranties will cover every aspect of a business, from contracts and employees to property and environmental issues. The length of warranty period varies but a seller should expect the warranties to last between 18 months and 3 years. Often a warranty claim will not become apparent until some considerable time after completion and therefore the warranties must last for a sensible period.
Normally a buyer will be relatively comfortable if he is able to complete two audits within the warranty period as by that stage, most issues should have come to the surface. The tax warranties always last for a longer period - often 7 years due to the ability of the tax authorities to go back and investigate the previous tax affairs of a business.
The warranties are for the benefit of the buyer to cover any problems that arise after completion of which they were not aware and which relate to the period before completion. The acquisition agreement will also however include a series of seller protection provisions which, for example, prevent the buyer bringing claims for small amounts and most importantly prevent the buyer from bringing a claim in respect of anything that has been fairly disclosed by the seller.
The seller will, with the assistance of his solicitor, go through each of the warranties to see whether they are true. If there are warranties which do not reflect the correct position, then the seller should tell the buyer, e.g. there may be a warranty which says "the business is not involved in any litigation or dispute". If the home is in fact in dispute with one of its employees then this must be disclosed to the buyer. Provided that disclosures are of an adequate standard then these prevent the buyer from bringing any subsequent claim under that particular warranty.
All the disclosures made by the seller are put together in a document called a "disclosure letter" and the disclosures are supported by all relevant documentation (e.g. correspondence between the care home and the employee) which is collated in a "disclosure bundle".
The transaction documentation will go back and forth between solicitors and various drafts will be prepared until eventually a mutually acceptable position is achieved. Once this stage has been reached the final step is the infamous "Completion Meeting". This is where all parties get together, usually at the offices of the buyer's solicitors, to sign up the mountain of paperwork that has been generated throughout the transaction process.
The Completion Meeting
Completion Meetings have a reputation for being long drawn out and tedious. There are often last minute issues to negotiate and the documents may need to be re-drafted and processed. This all takes time. It is advisable to keep the whole day free for a Completion Meeting as they rarely turn out exactly as anticipated!
Once the documents have been signed and arrangements made about paying the purchase price, the deal can formally complete with handshakes all round and hopefully a well deserved glass of champagne for all involved in the hard work required to get the deal to completion.
Conclusion
Buying or selling a care home is often a much more complex and time consuming process than people anticipate. It is essential to choose professional advisers with experience of corporate transactions who can explain and negotiate the lengthy legal documents and advise and assist the buyer or seller in achieving the desired result – a successful sale or purchase.
This article was written by Damian Collinge and first appeared in Nursing and Residential Care, August 2006, Vol 8, No 8.
This ongoing activity means that people may suddenly find themselves involved in the sale or purchase of a business (whether because they are looking to start to build a portfolio of care homes or because they are selling a care home they have owned for many years). This will often be a completely new experience for them and one which people may go into with some apprehension about exactly what the sale process will involve. This article attempts to give a general overview of the key legal stages in a typical transaction.
Heads of Terms
By the time a lawyer has been instructed the deal will ordinarily already have been struck. Either agents will have marketed a home or perhaps a direct approach will have been made to an owner by a prospective purchaser.
The first time that the lawyers are called upon will often be to draw up the Heads of Terms. These are effectively a summary of the key points that have been agreed in relation to the sale. They are not legally binding except for points such as exclusivity or confidentiality but they are the basis upon which all the main documentation will be drafted.
The Transaction Process
Once the Heads of Terms have been agreed then the "transaction process" can begin. There is no way of accurately predicting exactly how long the transaction process will take but it is relatively rare for a deal to take less than a month and 6-8 weeks would probably be seen as a good guideline. There are though many examples of transactions taking longer and if the purchase relates to several homes then different timescales may well apply.
Anybody new to buying or selling businesses should prepare themselves for a substantial amount of paperwork. People are invariably surprised by the scale of documentation involved. Because of this, buying or selling a business is a specialist area and a buyer or seller should check that their solicitor has experience of corporate law otherwise this may lead to a major cause of delay in the transaction. Ideally a corporate lawyer should have some care home experience to deal with the aspects of a sale which are particular to the care home sector.
Due Diligence
The first stage of the transaction is what is called the "pre-contract enquiries" or the "due diligence process". This involves a list of questions being sent by the buyer's solicitor to the seller's solicitor asking a wide variety of questions about the business. These range from questions about property to questions about litigation. In a care home transaction particular attention is often paid to areas such as residents' contracts, block contracts with local authorities, registration and inspection issues, employee issues (do staff have the relevant qualifications and do key staff have appropriate notice periods) and any claim that may have been made against the home, whether by residents or their families, or by employees.
The due diligence process is time consuming for the seller. They may not have all the information immediately to hand and they also have the business to run which is a full-time job. It is therefore very difficult to find the time to answer 10+ pages of questions, particularly as it will often be the case that they will be trying to collate all this information confidentially. It is essential though for a seller to bear in mind that the more detailed their response and the more documents that they can provide the better. A half-hearted response will simply lead to further time-consuming enquiries, and a full response may help to prevent a buyer bringing a warranty claim against the seller further down the line.
From a buyer's perspective, the due diligence exercise is essential to try and get a full picture of the business and to make sure there are no skeletons in the cupboard. If an issue does come up then it may lead to a buyer looking to reduce the price or seeking an indemnity from the seller to cover the possibility of the issue in question causing a loss to the business at a later date.
Frequently there will be an accounting due diligence exercise that takes place at the same time as the legal one. Inevitably there will be some duplication in the enquiries which leads to further frustration for the seller, but again, replies should be as full as possible.
The Acquisition Agreement
Once the due diligence exercise has been completed the buyer's solicitor will draw up the acquisition agreement. This is the main document in the transaction and depending on the size of the transaction may run to 100 pages. Most agreements will follow a similar basic structure but they are very difficult for non-lawyers to plough their way through and unfortunately the wording still tends to be in legalese.
The early clauses in the agreement will usually deal with the price payable for the business. The purchase price may be payable in full on completion or there may be some element of the purchase price which is deferred and payable by way of instalments. There are numerous payment scenarios. It will frequently be part of a deal that "Completion Accounts" are prepared. These are a set of accounts which are prepared to show the financial position of the business as at the completion date. These are primarily for the benefit of the buyer to make sure that the business he is buying is performing as he thinks it is.
The completion accounts are ordinarily prepared by the seller's accountants and then reviewed by the buyer's accountants (although it can be the other way around on occasion). Once the completion accounts have been agreed there may be an adjustment to the purchase price. This could be an upward adjustment if the financial position is better than anticipated or a downward adjustment if the position is worse.
Another key clause in the acquisition agreement is the clause setting out the restrictive covenants or the non-compete provisions which typically will be for a period of 1-3 years. A purchaser paying for a business, including its goodwill and reputation will be anxious to ensure that the seller does not set up a competing home within the same catchment area. Equally a key asset of any business are its staff and the buyer will want to ensure that a seller is prevented from enticing staff away to work for any new business which the seller may set up.
On the subject of employees, another issue is when exactly to tell them about the transaction. Much depends on whether it is an asset sale or a share sale. If it is an asset sale then the employment contracts of the employees are actually transferred to the new company. In these circumstances the Transfer of Undertakings (Protection of Employment) Regulations 2006 apply and under those regulations there is an obligation to consult with the employees in advance and give them certain information about the transaction. If the deal is a share sale, the position is different. This is because a buyer is buying shares in a limited company, and therefore the employees will simply continue to be employed by the same company. There is therefore not the same obligation to consult with the employees.
Often in a share sale both the buyer and the seller prefer not to inform the employees about the transaction at too early a stage. Partly to avoid details of the transaction being leaked to other people, but primarily to avoid unsettling the employees.
A change of ownership is always a cause for concern for employees, particularly if the existing owners have been owners for a considerable length of time. The buyer and the seller will therefore need to agree when the employees should be told. It may be that they decide to tell them a few days before completion when it is virtually certain that the deal is going to go ahead. Sometimes it will be agreed that the employees are not told until the day after completion. Either way it is usually a joint announcement that is made so that the buyer can offer words of re-assurance to the employees that the change of ownership will not affect their jobs.
Warranties
The most important section of the agreement will be the warranties. These will usually be set out in a schedule to the agreement and will often be in excess of 30 pages long. Warranties are effectively a series of statements that the seller makes about the state of the business. If it subsequently turns out that one of those statements is untrue and as a result the buyer or the business suffers a loss, then the buyer may be able to bring a warranty claim against the seller in respect of such loss.
Typically, warranties will cover every aspect of a business, from contracts and employees to property and environmental issues. The length of warranty period varies but a seller should expect the warranties to last between 18 months and 3 years. Often a warranty claim will not become apparent until some considerable time after completion and therefore the warranties must last for a sensible period.
Normally a buyer will be relatively comfortable if he is able to complete two audits within the warranty period as by that stage, most issues should have come to the surface. The tax warranties always last for a longer period - often 7 years due to the ability of the tax authorities to go back and investigate the previous tax affairs of a business.
The warranties are for the benefit of the buyer to cover any problems that arise after completion of which they were not aware and which relate to the period before completion. The acquisition agreement will also however include a series of seller protection provisions which, for example, prevent the buyer bringing claims for small amounts and most importantly prevent the buyer from bringing a claim in respect of anything that has been fairly disclosed by the seller.
The seller will, with the assistance of his solicitor, go through each of the warranties to see whether they are true. If there are warranties which do not reflect the correct position, then the seller should tell the buyer, e.g. there may be a warranty which says "the business is not involved in any litigation or dispute". If the home is in fact in dispute with one of its employees then this must be disclosed to the buyer. Provided that disclosures are of an adequate standard then these prevent the buyer from bringing any subsequent claim under that particular warranty.
All the disclosures made by the seller are put together in a document called a "disclosure letter" and the disclosures are supported by all relevant documentation (e.g. correspondence between the care home and the employee) which is collated in a "disclosure bundle".
The transaction documentation will go back and forth between solicitors and various drafts will be prepared until eventually a mutually acceptable position is achieved. Once this stage has been reached the final step is the infamous "Completion Meeting". This is where all parties get together, usually at the offices of the buyer's solicitors, to sign up the mountain of paperwork that has been generated throughout the transaction process.
The Completion Meeting
Completion Meetings have a reputation for being long drawn out and tedious. There are often last minute issues to negotiate and the documents may need to be re-drafted and processed. This all takes time. It is advisable to keep the whole day free for a Completion Meeting as they rarely turn out exactly as anticipated!
Once the documents have been signed and arrangements made about paying the purchase price, the deal can formally complete with handshakes all round and hopefully a well deserved glass of champagne for all involved in the hard work required to get the deal to completion.
Conclusion
Buying or selling a care home is often a much more complex and time consuming process than people anticipate. It is essential to choose professional advisers with experience of corporate transactions who can explain and negotiate the lengthy legal documents and advise and assist the buyer or seller in achieving the desired result – a successful sale or purchase.
This article was written by Damian Collinge and first appeared in Nursing and Residential Care, August 2006, Vol 8, No 8.
