Buying in the care sector - getting a good deal

The downturn has created some fantastic opportunities.

Deals are still going through, even if they are taking longer. We are also seeing more stringent due diligence processes in place, particularly where a buyer is reliant on funding (in most cases).

So, how does a buyer in the care sector secure a good deal and take advantage of the current climate? Below we have set out the top five headline tips that buyers in the care sector should consider.

Following these top five tips should assist:

1. Buyer's Approach and the Purchase Process

A Buyer should complete as much research as possible before approaching a potential seller. Knowledge of the care industry, specific regulatory requirements and the seller's place in the market is vital. Speak to lawyers and corporate finance advisers with specialist care industry knowledge and investigate any opportunities on their books. Knowledge is power.

A successful buyer must be focused from the outset. Often the level of work involved in purchasing a care home is underestimated and the process is poorly managed, leading to increased costs and drawn out negotiations. That is particularly true of care sector transactions where there are often significant property portfolio considerations, as well as employment and regulatory issues.

Establish a transaction team and agree a specific costs budget. Negotiate heads of agreement with the sellers which will save time and money later on in the process, but be aware these are not binding. Secure exclusivity for as long as possible and try to get an indemnity for your costs if the transaction does not go ahead.

Prepare for the purchase process, which can take on a life of its own. The process usually takes between 3 and 6 months, but given the current climate be aware that it may take longer. Both the acquirer and the seller will need to keep running their businesses so this is where your dedicated project manager and team of professionals come into their own.

2. Consideration Structure/Funding

Purchasers have a variety of options when it comes to agreeing a consideration structure, which will often depend on the method of funding. In the current climate it is popular to pay the minimum amount of cash upfront, combining this with shares, further/earn-out and deferred consideration (potentially linked to ongoing performance). Consider how you will “sell” such a structure to the sellers; are there tax advantages? Do you want a no cash/no debt deal? Will you be needing debt or equity investment?

3. Due diligence and Disclosure

A buyer acquirer who has done their research can concentrate their legal, commercial and financial due diligence into known/likely risk areas. Establish what your main concerns are, what is material to the deal and consider having a focused report, identifying only areas of specific risk. Also be aware that a buyer's funder may also conduct further due diligence or seek to rely on yours.

Whereas a buyer will use the due diligence process as a way to quantify its potential liability, the sellers will use the disclosure process to qualify their liability. The sellers will attempt to disclose as much as possible against the warranties and it is necessary to ensure that such disclosure is fair. The lawyers will manage this process, but a buyer should be on the look out as the lawyers can deal only with information they receive during the disclosure process. It is vital that the project manager and acquisition team work closely together. Sellers may try to hold on to certain disclosures until the very last minute and these may impact substantially on the transaction.

4. Warranties and Specific Indemnities

A full warranty schedule with specific warranties relating to the care sector will be incorporated in the sale agreement together with any specific indemnities required as a result of the due diligence process. Consider how long warranties should be enforceable for and also what excess on warranty claims should be agreed – the lower the better. Try not to accept any limits on liability relating to any indemnities (including tax) and any breaches of fundamental title warranties.

5. Post-Completion and Review

Ensure that any post-completion tidy-ups have been dealt (with and it is important to liaise with the lawyers in respect of this process to continue to keep minds focused which may have strayed following completion). Note and diarise important follow up dates (determination of completions accounts, payment of further consideration, warranty/indemnity periods, for example).

Serial acquirers are commonplace in the care sector and, as such, the purchase process should be continually reviewed. What would you change?

Common issues to be considered include:- amount of time involved; number of problems that arise that could not have been anticipated;, problems that could have been discovered earlier if the right acquisition team structure had been in place; levels of costs spiralling out of control and a lack of knowledge of target industry/company.

Danos Swain, associate, is a corporate lawyer and a member of the firm's care sector group. He has advised on the acquisition and sale of a considerable number of care operations and has received third party recognition as a care sector specialist.