Buying Or Selling A Care Home
By Paul Davies, Head of Commercial Property at Harper James (www.harperjames.co.uk)
The care home industry has seen remarkable growth in recent years to meet the needs of an ageing population. At the same time, mounting regulations and rising operational costs make running a care home challenging. In this article, Paul Davies, Head of Commercial Property at Harper James, discusses the key considerations and procedures when buying or selling a care home.
Are you prepared to purchase or sell your care home?
Care homeowners sell for a variety of reasons. You may be disposing of an underperforming unit from your portfolio, retiring from the industry or pursuing other interests altogether. Whatever your motivation, take care that it is well-informed and unrushed.
Equally, purchasing a care home is a huge commitment. Reflect on your passion for high-quality care, as well as your long-term goals to decide if this is the right field for you.
Reviewing your personal and financial situation
Before buying or selling, assess your readiness for such a transaction.
Personally, consider your experience and expertise in the industry, whether you are qualified to manage care home operations or if you’ll need support and training. Reflect on your strength of character and whether you have the resilience and business acumen to succeed. Lastly, contemplate the potential impact on your lifestyle, including time commitments and work-life balance.
Financially, consider how much can you afford to invest and your creditworthiness. Bear in mind the inherent risks involved in taking on a business and what impact this might have on your personal finances.
For sellers, ensure financial records are all in order ready to present to potential buyers for scrutiny.
Determining the value of the care home:
The factors that influence the selling price include:
• location
• occupancy rates
• financial performance
• size and capacity
• condition and age of the facility
• staffing and reputation
• overall market conditions
Well-maintained care homes with higher occupancy rates, healthy financial records, and a strong reputation are likely to achieve higher selling prices. Freehold buildings tend to be more valuable than leased premises. Prices may also be driven up by limited supply and high demand.
Appraisal methods and process
Common valuation methods include:
• Comparison approach: comparing the care home to similar local properties that have been recently sold
• Income approach: estimating potential income based on occupancy rates, operating expenses etc
• Costs approach: estimating the cost to replace the care home with a similar one
• Market capitalisation: calculating the total value of a company’s equity (often used for care homes that are part of a larger portfolio)
The appraisal process usually starts with an inspection to gather details about the property. The appraiser then collects and analyses relevant market data, and applies the chosen appraisal method to calculate the care home’s value.
Preparing for sale or purchase
What steps do you need to take to prepare for a property purchase
First, decide whether you are purchasing as a sole trader, in a partnership or through a limited company. Next, do your market research and define your requirements (location, size, specialised services etc). Recruit a specialist buying agent to identify suitable options. Finally, choose a professional advisory team to guide you through the legal and financial aspects of the purchase.
Sellers often need to decide between two types of sale:
1. Asset sale – selling specific assets which make up your business
2. Share sale – selling the majority of shares in your business and handing over control
Option two is generally preferred because buyers acquire the entire business, and sellers get a clean break.
Exploring financing options
There are both traditional and alternative ways to fund a purchase:
• Commercial mortgage: this commonly used loan is typically secured against the care home premises.
• Release built-up equity: this could be in other properties you own or within your portfolio.
• Seller financing: sometimes sellers accept a large downpayment with the remainder via instalments with interest.
• Equity finance: seek private investment or equity-based crowdfunding. Another option is forming partnerships to share the financial load.
Talking to a commercial property solicitor can help you decide which funding method is best for your individual circumstances.
Negotiation advice
Effective negotiation techniques for a successful transaction
Applying good negotiation techniques keeps things moving forward, and involves: being clear on your overriding objectives for the sale or purchase from the outset; maintaining flexibility for areas that do not impact your overriding objectives; using objective criteria such as market data, inspections, or appraisals to justify your position; keeping alternative options in mind; and finding mutually beneficial solutions.
The importance of the due diligence process
Due diligence involves investigating what you are about to buy to uncover any potential issues.
From a business perspective, assess the financial performance of the care home and verify that it is meeting all applicable operating rules and regulations.
Standard conveyancing searches and enquiries reveal important information about the property itself. This includes planning restrictions, outstanding charges, boundary disputes and ownership issues. Commissioning a property inspection will identify any potential issues such as structural damage, hazards or necessary repairs.
During this process, commercial property solicitors will seek to negotiate any onerous obligations in the property deeds that may impact its value, future use, and ongoing costs. This includes covenants which restrict certain activities on the property, rights of way allowing others to use or access the land, or stringent clauses within leases, such as wide-ranging repairing responsibilities.
Completing the transaction
Exchange of contracts
Once due diligence is complete, negotiations ironed out, and funding arrangements finalised – it’s time to sign and swap contracts. This key milestone makes the transaction legally binding.
Post-acquisition considerations
Ensuring continuity with staff and suppliers
Following exchange, focus on implementing a smooth transition. Establish open lines of communication with staff members and engage early with key suppliers to ensure continuity. Get to know the residents, and be considerate when introducing new measures.
Making sure you remain compliant with the rules and regulations related to the care home sector
All care homes are registered and regulated by the Care Quality Commission (CQC). Going forward, ensure the care home continues to meet fundamental standards of quality and safety, and that any new measures introduced are compliant.
Summary
As we’ve seen, buying or selling your care home requires careful planning, research and preparation to ensure a smooth transaction. Sellers should assess their motivations and ensure their financial records are in order, while buyers need to evaluate their personal and financial readiness. Seeking legal advice at the outset will help you achieve the best possible outcome.
