The care home sector has seen more than its fair share of difficulty in recent years. Between 2011 and 2012, when overall corporate insolvency levels dropped by five per cent, the care industry actually saw an increase in administrations, with 60 homes failing in 2011 and 67 in 2012. A string of abuse charges tainted the public perception of the industry and the resulting calls to improve transparency meant that people were operating in a very different business to the one that existed before the recession.
But after years of problems, the latest figures from business intelligence provider Company Watch showed an 18 per cent decrease in the number of care homes at risk of calling for financial rescue over the past six months. The research group found that 23 per cent of the 20,000 or so care homes across the country were at risk of requiring some kind of financial help in February of this year, compared to the 29.7 per cent recorded in August of last year.
Despite the drop in the number of financially distressed care home, almost a quarter of the industry remains close to or already in need of administrators. These high numbers of distressed businesses are offering some excellent acquisition opportunities, but the risks remain and vigilance and research are imperative.
Understanding the problems in the care sector
The troubles faced by the sector may have been sparked by issues seen across the economy at large. But a number of specific incidents meant that care homes had an extra level of difficulties to contend with.
Rising energy costs proved to be an issue for many as prices continued to increase despite the recessionary climate that gripped the country. But for a business concerned with the care and wellbeing of the vulnerable, there was no way of turning down the heat on this particular expense.
Although energy costs contributed to the sector's distress, cuts to council and local authority budgets were almost certainly a bigger issue. Ongoing cut backs in expenditure have continued to put pressure on care homes struggling to make ends meet as the budgets available from NHS patients are restricted, while further difficulties have been brought about by increases in business rates in some areas of the country.
Specific cases, crucially that of Southern Cross, compounded the broader issues at hand and proved to be game changers in the industry. Southern Cross was broken up in 2011 and its care homes sold on. Things were looking good for the firm back in 2008 when it announced that it had successfully refinanced its debt and brought in a new chief executive, Jamie Buchan, to try and sort out a string of issues; shares were up and rumours of private equity acquisition interest started to stir over the following years.
But at the beginning of 2011 the business came under criticism for the poor quality of care in its homes. Legal cases accusing some workers of abuse further marred the company's reputation. A substantial pre-tax loss and the sudden departure of key personnel sealed the company's fate and a sale was prepared.
In the wake of Southern Cross' downfall, the care home industry and the Care Quality Commission found themselves under close scrutiny, forcing in new levels of transparency.
Christine Elliott, chief executive of the Institute for Turnaround, commented on the case: “The lesson is that large corporations in trouble can no longer expect to conduct their activities behind-the-scenes, only attracting the attention of others in the industry.
“The level of interest in Southern Cross, from people who are not direct stakeholders, signals a new trend in public scrutiny.”
What next?
That the industry has been forced to clean up its act due to increased levels of scrutiny is certainly a step in the right direction. But the improvements in care are being made under increasingly squeezed business conditions.
Buyers now need to be sure that they can not only turn around a company in today's trickier climate, but that they have a well-thought through and flexible plan for making their business work in the years to come.
Public finances are unlikely to become any less restricted for the foreseeable future. Meanwhile, there is a strong likelihood that interest rates will be increased in 2015, making borrowing a more expensive option for all businesses. There is also the matter of minimum wage; with growing calls to pay Londoners a 'living wage' and ongoing campaigns to ensure that workers get a fair deal, a business like a care home that relies on low-paid workers will need to make sure it can factor such increases into its business turnaround plan.
The tough outlook might prompt some to think twice about buying a care home, particularly a distressed business. But with figures suggesting that an additional 600,000 extra beds will be needed by this time next year just to cater for the ageing baby boomer generation, it's clear that the sector still has some excellent opportunities to offer to the right buyers, especially as the market potential grows.
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