M&A Deal Trends in the Nursing Homes Sector

Since 2019, the Irish nursing home sector has undergone a transformational consolidation. The sector has attracted interest and funding from a range of private equity, large international care home groups, and French and Belgian funds.

However, in 2022, the pace of that consolidation slowed down somewhat, as inflation, especially in respect of energy costs, the cost of borrowing, gaps in valuation expectation, HIQA Regulations rendering certain rooms unusable and stationary Fair Deal rates made transactions more challenging for a variety of reasons.

We continue to act on deals in the sector, and expect the levels of activity we saw from 2019 to early 2022 could be reinstated in 2023 if revised Fair Deal rates are put in place which reflect the increases in costs for nursing homes, and if certain other macro-economic factors stabilise.

As we move into the next stage of the consolidation of the Irish nursing homes market, we consider the deal trends we have been seeing on the many transactions in the sector we have advised on over the past few years.

Structure

Nursing home transactions often comprise the sale of both property and business assets. The legal process will involve:

• Executing heads of terms, which set out the key commercial terms of the transaction, including price, adjustment mechanism, inclusion or exclusion of restrictive covenants, etc, including provisions dealing with confidentiality and exclusivity
• Completing due diligence in respect of the target company, if applicable, the business and the assets, including the property
• Negotiating the share purchase agreement or business transfer agreement
• Complying with regulatory and any other pre-conditions to the sale and purchase of the nursing home(s)
• Funding arrangements

Where the business and assets of the nursing home are held exclusively within a private limited company, amd the buyer wishes to acquire that company, a share purchase agreement and a tax deed are the customary transaction documents.

Where the buyer wishes to pick and choose certain assets in the nursing home and leave other assets and liabilities behind, or wants to avoid acquiring the operating company for whatever other reason, an asset purchase or business transfer agreement may be preferable.

Alternatively, the parties sometimes agree to implement a pre-sale reorganisation. The seller “hives-out” selected assets and possibly some liabilities into a newly incorporated company whose shares are then acquired by the buyer under the terms of a share purchase agreement.

Where the property assets of the nursing home are being sold, it will be necessary to negotiate a separate suite of property contracts, including a contract for sale and deed of transfer. If the freehold property of the nursing home will be owned by a different entity to the one which will own and operate the business, a lease will typically be put in place between these entities simultaneously.

The most common structures in recent nursing home transactions we have advised on are the following alternative structures:

• The seller transfers the freehold property where the nursing home is situated, to a third party investor. A separate operating company acquires the operating business of the nursing home by asset purchase agreement. A lease is put in place between the investor and the operating company
• The seller transfers the freehold property where the nursing home is situated, to a third party investor. The company, which operates the business of the nursing home, is acquired by share purchase agreement. A lease is put in place between the investor and the company which owns the operating business
• The seller retains the freehold property of the nursing home. A lease is entered into, with a put and call option separately agreed, under which the freehold property can be acquired at a later stage if set financial performance criteria of the nursing home is achieved. The business is operated by the tenant in the interim under a management agreement or lease
• The investor acquires the shares of the company which owns the nursing home business(es), and which also owns the freehold property where the nursing home is situated.

Notification and consent requirements

No party may operate a nursing home in Ireland unless the nursing home is registered with the Health Information and Quality Authority (HIQA) and that party is registered as the registered provider of the nursing home. Specific notification requirements to HIQA are triggered when there is a change in the ownership or management of a nursing home. When a notification is filed with HIQA, the National Treatment Purchase Fund (NTPF) and the Health Services Executive (HSE) are also required to be notified.

Depending on the nature of the nursing home business being acquired and the parties involved, it may also be necessary to review the terms of the transaction from an Irish competition law perspective. In some cases, the transaction may be required to be notified to the Competition and Consumer Protection Commission (CCPC).

Any notice or consent requirements should be specifically dealt with in the sale and purchase documentation and would typically be included as pre-conditions to the completion of the transaction.

Due diligence

Before committing to purchase any company or business, a potential buyer is strongly advised to undertake a detailed review or “due diligence” of the company, the business and / or the assets which it is acquiring.

The buyer and its legal advisers will be particularly interested in reviewing matters such as ownership structure, regulatory and compliance matters including HIQA registrations, finance, and employee matters.

As a seller, it is important that all financial, legal, contracts and operational information is accurate, up-to-date and presented accurately, comprehensively, and in a user-friendly manner. Specific details of any insurance claims that relate to COVID-19 matters should also be readily available for review.

The seller will be required to provide a disclosure letter to the buyer as part of the transaction documents. It is important that the seller, in this document, fully discloses all exceptions to the warranties which are contained in the share purchase agreement / asset purchase agreement. A thorough and organised process is required to ensure inadvertent breaches of the transaction documents are avoided by the seller.

Smooth transaction

The full range of practical issues when transferring the ownership of a business to a new owner should be considered by the parties. These include:

• Whether the seller or family members intend to continue to work in the business after the sale
• Informing staff and residents of the change in ownership
• The transfer of records and information to the new owners
• The alignment of internal systems.

Post transaction considerations

Once the sale and purchase process is complete, the new owners often use the transitional period to review and update any outdated or non-compliant practices in the business. Given the CCPC’s published guidelines on the area of unfair terms for contracts for care, it is more important than ever for nursing home operators to ensure that the contracts they issue to residents are transparent, clear and not uncertain. An audit of data protection and privacy policies is a worthwhile exercise to identify any non-compliance issues.

Conclusion

Whether you are buying or selling a nursing home or nursing home group, it is important to approach the sale process with a high level of preparation and planning. Engaging your lawyers early in the transaction discussions is a positive step in achieving a smooth and timely process. Early engagement allows important issues to be addressed so that they do not negatively impact the overall deal structure or delay completing the transaction.

Should you require any further guidance about any of the issues, contact a member of our Healthcare or Corporate teams.

The content of this article is provided for information purposes only and does not constitute legal or other advice.