Wednesday, 3 March 2010

Buying a care home in administration - things to consider

It’s been a while since my last blog entry and I thought I would update by writing a short article on what seems to be an endless stream of care homes that are in administration that are hitting the market for sale. Whilst the buying a home in this situation may seem daunting, as long as you do your homework and have the right advice, it can be easier in many ways.

In many people’s view, it would be quite difficult for a care home to end up in this situation. At it’s most basic level, fee income comes in, expenses go out and the difference between the two is profit. Whilst in most cases this is true, a lot of the homes that we have seen that come to the market in administration are due to reasons that are nothing to do with the home itself. For example, we are dealing with a case at the moment where the operator had overstretched themselves with other projects and in a recent case we dealt with, it was unpaid taxes that cased the problem.

Whatever the reason, there are certainly some good opportunities to be had. Savills are selling an 88-registed care home in Yorkshire for £2.5m which in a better market and out of administration, would be worth significantly more. Additionally, you are dealing with a receiver and it is in their interest to keep the home running efficiently to secure the best sale price. They will be easier to deal with than many vendors and will give over what information they have to make the process as straightforward as possible.

When buying a care home that is in administration, here are a few important points to consider;

Establish the reason why

This is important if you are raising commercial funding on the purchase. Many lenders will be much more reassured if they know that the problems were nothing to do with the care home itself. If the problems are in connection with the care home, then an action plan can be created to solve the problems that caused the home to be in difficulty.

It should be noted however that the chances of raising funding on the home if the problems are to do with it are greatly diminished, unless you are an established operator with significant cash flow.

Surround yourself with professionals

When buying a care home out of an administrative receivership, it is not the time to cut costs on professional fees. Given the likely nature of cost cutting that may have occurred before the receivers were called in, there may be many pitfalls that await you through the purchase process. It is therefore a good time to get an experienced, healthcare specific commercial solicitor involved. The slight increase in fees over that of the small high street practice, will save you much time and money in the long run.

In fact, this is good advice for all healthcare purchases but more so for homes in administration. We are happy to recommend a small number of good firms (please contact us for details). A good broker is also essential unless you are an operator with a suite of bankers. You will need someone dedicated to drive the funding process through.

Act fast

This is probably the most important of all of the above factors and again this is good generic advice for any purchase but especially the case if the home is in administration. In most cases, there will be a bed block put in place by the CQC and due to the nature of the care home business, the passing of residents will mean that the goodwill of the business will diminish with each one.

If you are trying to raise commercial funding with a bank, the goodwill element will be critical to their

calculations of debt servicing and as such, it is important to drive the deal through as quickly as possible to secure the bank funding.

As an example, we are currently acting for a client buying a care home registered for 28 that is in administration. We were introduced to the deal 10-days ago and have already met with Banks and are awaiting the formal offer of funding. When choosing the lender that we wanted to do the deal, an equally important factor is the speed of which the bank can move, as well as the other usual factors of margin, loan to value etc.

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