Insolvency Practitioners and Domiciliary Care Providers
Why are Domiciliary Care Providers Struggling? Can Insolvency Practitioners Help?
The UK’s care home industry is on the ‘brink of collapse’ according to one recent headline. Another suggested that 12% of care homes are at risk of becoming insolvent in the next 3 years. These statements are worrying and deeply concerning not just for the industry, but for the ever growing number of people, in an aging population, who will be put at risk as a result. As insolvency practitioners we are seeing more and more companies in this sector in distressed financial circumstances. This article looks briefly at why this is happening, and looks at how insolvency practitioners can help.
Why is the Care Home Industry Struggling?
Until the 1970s, home nursing care for the elderly was mainly paid for and managed by the state, after which it was largely handed over to be run by the private sector. The industry is characterised by a small number of large players, with many more smaller companies, whose average net worth is only a little over £300,000. Typically, local authorities buy care provision from the private companies. This tends to be done on a piecemeal basis, where companies bid for a contract, with price a key factor. Given the long term squeeze on the budgets of local authorities, prices, and therefore costs, have been under significant pressure for many years.
It is against this background of local authority funding cuts, which has seen funding falling by 31% in real terms since 2012, that the following factors have played their part in creating a crisis in the care home industry:
- The National Living Wage. Currently standing at £7.50 per hour for employees aged 25 or over, this has increased costs in a cash strapped industry. Given that staff costs account for up to 60% of a care home’s budget, it is easy to see why this is a factor.
- Workplace Pensions. Workplace pensions and the National Living Wage will impact on the margins of all employers. The care home sector, where a high proportion of staff earn the minimum wage, is likely to be amongst the worst affected.
- Shortage of skilled staff. This is driven by a number of factors: reduced government spending, a reduction in student nurse places, regulatory compliance issues and policies on immigration, especially after the Brexit referendum. This has led to an increasing reliance on more expensive agency staff.
- Increased Regulation. The Care Quality Commission monitors the standards of care homes and has the power to revoke registrations if standards are not met. The CQC’s role and increased levels of regulation follows a number of distressing headline news items about poor care levels. That said, increased monitoring drives up in-house costs, which are a problem in poorer run homes.
All of these factors, and there are others that we haven’t mentioned, add up to an industry where not only the threat, but also the incidence of insolvency is growing.
Insolvency Practitioners: Our Role and Can we Help?
As insolvency practitioners, our job is to help financially distressed companies restructure so that they can recover and turn things around, and this applies to care homes just as much as any other sector.
It is also our job to run administrations and liquidations, but this is a highly sensitive area given the nature of this sector. In this section, we look at our role in the care home sector and some of the things that need to be taken into consideration.
- Planning and Taking Action. A well planned and well managed business is a must, and especially so in this sector. This means a proper business plan and cash flow forecasting, amongst other things, that help early responses to problems.
- The nature of the sector. This sector is totally about people, their quality of life, and the families that support them. As such, decisions made at insolvency must be very carefully judged with this and the key stakeholders (local authorities, lenders) in mind. Often, there is also political pressure to keep care homes open, that are to all intents and purposes insolvent, to protect the residents and the wider community.
- Trading Whilst in Insolvency and Engaging Third Parties to Assist. This process, often used by Insolvency Practitioners, to keep a business trading, is often a less viable option in this sector. Partly due to the issues noted above, but also because of the legal and regulatory issues that are difficult to overcome, and often slow things down. Engaging specialist 3rd parties to run the business is costly and they will still be subject to the same requirements of compliance.
If the business is to be sold, there are likely to be considerable delays due to the purchaser registration requirements.
Pre-pack administrations also carry a number of issues in this sector. In particular, a buyer will not wish to purchase the under-performing parts of a business. If they did, the under-performing part cannot be closed without 28 days notice to enable alternative accommodation to be found for the affected residents. There is great complexity in this area, as can be seen.
Are There any Alternatives to Trading Administrations and Pre-Pack Insolvencies?
The answer is yes. The following are areas that are often considered:
- Debt Forgiveness. Negotiating some form of debt forgiveness with important creditors and lenders can buy the time needed to restructure the business. Experience and understanding of what the creditors want is particularly needed here.
- Solvent Restructuring. There are several options here, including: a plan to trade the business back into profit; third party refinancing; and a lender-led restructuring.
- External investment, from a 3rd party or overseas investor
As always, Take Early Action
The care home sector faces a large number of complex challenges, not least of which are those presented to Insolvency Practitioners, who are engaged in turning a business around or trying to get the best outcome for residents and creditors alike.
We always say that every insolvency is different and demands the right response. This is especially true in the care sector, where more than ever, experience of the sector and understanding of its particular sensitivities is required.
As ever, the earlier that action is take, the better. If you are running a care home and the financial distress is mounting, please contact us or call us on 0121 200 2962 for a FREE initial chat with one of our team at our central Birmingham headquarters.
