Undertaking Due Diligence – Why it pays to do your homework

They say buying and selling a property is one of the most stressful things you can do in life.  Now imagine buying or selling a health or social care business where several 10’s or 100’s of people are reliant on good care being provided or money being in their pay packet at the end of each month.  And that’s entirely separate to whether it’s a sound investment.

Just as you’re unlikely to purchase a house without having a survey carried out, you are unlikely to buy a health or social care business without undertaking some due diligence.  There have been times over my career where purchasers would buy ‘blind’ or undertake limited due diligence, usually financial and property related but the regulatory enquiries would be limited or non-existent.  But times have changed.  The last few years have seen a regulator increasingly willing to take enforcement action against providers, increasing pressures on local authority funding requiring providers to do more with less, and an ageing population presenting with increasingly complex needs.  Top that off with a global pandemic which has hit the sector hard and we’re in a very different landscape to where we were some years ago.

Providers may choose to sell a health or social care business for a number of reasons, be it through need or choice, and there are investors and purchasers looking for opportunities to enter or expand their portfolio.  But whether you are buying or selling it is likely that there will be increased scrutiny surrounding the transaction and you need to know where there may be problem areas.

One of the first due diligence exercises I was involved in, the company being purchased was not the registered provider of the care homes the purchaser thought they would be getting.  Seems like an obvious point, but one that had not been picked up prior to the regulatory lawyers becoming involved.  But it’s not just about whether the correct registrations are in place, regulatory due diligence can be as wide or as narrow as you wish (with a sliding scale of resulting risk) and a variety of matters can be looked at to assess the health of that business.  Some example of issues that have arisen over the years include:

  • A high number of restraints being undertaken on a service user
  • Recurring gaps in paperwork being revealed on internal audits
  • A lack of staff training in autism and challenging behaviours in a provider who specialised in looking after service users with those presenting needs
  • Undated or out of date risk assessments
  • MAR charts being incorrectly completed
  • The death of a child in care
  • Carrying on regulated activities without being registered
  • A history of poor inspection reports

These are just a few examples of the types of matters that can be highlighted as part of regulatory due diligence.  Some, you might say, are part and parcel of running a health or social care business but such matters should not be ignored.  Not only should the severity of individual, isolated concerns be considered to determine what, if anything, might arise from them, if there are several concerns then this may indicate a deeper problem.  Not only might individual concerns be deemed to be a breach of particular regulations, on-going multiple concerns might demonstrate governance issues and possible breaches of Regulation 17 of the Health and Social Care Act 2008 (Regulated Activities) Regulations 2014.

Vendors should consider if they can, or should, take action ahead of any sale to rectify any concerns or at least be prepared with an explanation, as it is likely that purchasers will pick up these issues and use them to price chip.  Purchasers should consider whether these concerns impact their decision to purchase altogether or what costs might be likely to remedy or may be needed in the future in the event concerns escalate.

There are many aspects to a business which can be looked at to assess the health of that business.  As all health and social care businesses are subject to regulation it is an area that should feature in any sale or purchase.

If you’re purchasing a business, then lawyers, working in conjunction with other advisers, can issue an Information Request which will focus on the most pertinent documents and information required from the vendor to ascertain a picture of the state of the business.  This can be as comprehensive or as limited as the purchaser requires.  An analysis of the documents will be undertaken and a report detailing the findings from the documents disclosed.  The report will highlight any concerns and the potential impact these may have on the business including possible regulatory action.

If you’re selling a business, then lawyers can organise and arrange documents for the purposes of a disclosure room, can be the central point of contact to field information requests received and negotiate warranties.  They can also advise the vendor on whether any purchaser concerns are valid and what impact these may have on the business for the purchaser moving forward which may impact on price.

In the last couple of years we’ve seen some large operators divest part of their portfolios but this is a sector which is not going to see a decline in demand for services.  It is therefore important that business health checks are undertaken to ensure the good care of those the sector serves.

If you would like to discuss your regulatory due diligence needs, then please call Ridouts on 0207 317 0340 or email info@ridout-law.com.

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