Acquisitions in aged care – buying the box or what is in it?
By Julie McStay16 Jul 2013
The threshold issue that needs to be considered when you are thinking of buying or selling an aged care facility is how you actually structure the transaction.
You need to consider whether you buy the box, or what is in the box. What do we mean by that?
Consider the aged care facility you are buying as a box for the purposes of this very simple example. If you buy what is ‘in’ the box you are purchasing in the traditional manner – you enter into contracts with the vendor for the purchase of the freehold facility and the operating business from the vendor entity. Those contracts include a due diligence over the assets themselves, and when it is completed the vendor entity walks away from you, and you own the asset. In effect you pluck the assets out of the box and walk away with them.
If you buy the vendor entity itself, as opposed to just what the vendor entity owns, you are in effect buying the box. You are purchasing the vendor. The vendor doesn’t walk away from you after settlement – their shareholders do because you have purchased the entity that is the box itself and all that is in it (including the freehold, the business and the assets and liabilities of the business).
What do you want to purchase?
An aged care facility will include some (or all) of the following:
- the allocated places (bed licences);
- the accommodation bonds;
- land, buildings, equipment, machinery;
- contracts or licences which support or underpin those assets - IT and other service contracts, financing arrangements, licences or permits issued by a government body;
- contracts under which revenue is generated from those assets - lease agreements, service agreements, resident agreements;
- intellectual property - trade marks, licences; and
- employee and staffing arrangements.
A preliminary question is whether it is only some of the assets of the aged care facility that are to be sold. Depending on your answer, buying some of the things in the box might be your preferred option. However, that is not to say you cannot buy the box and sell some of the assets in the box out to the vendors (or another third party).
The next issue – as with any commercial transaction - is consideration of risk. The biggest risk in buying the box is that the purchaser inherits the liabilities of the box. A typical transaction of this nature includes copious warranties on the part of the share vendors about the liabilities of the company itself – whether known or unknown. These are usually one of the most intensive legal aspects of the transaction – and for good reason – as the purchaser will bear the risk of those known and unknown liabilities after purchase.
Indemnities and the contractual right to claim for breach of warranty under any sale agreement are only as good as the willingness and financial position of the person who is bound by it.
There are many things to take into account in either form of transaction and unique issues will arise in every case. Some of the issues you will need to consider in every transaction include:
- Who is the approved provider? This might not necessarily be the owner of the underlying assets of the facility.
- Do the places need to be transferred from the seller to the buyer? If so, you will need to obtain the Department of Health and Ageing’s approval for the transfer and any sale should be made conditional on obtaining that approval. Careful consideration needs to be given to any conditions placed on any allocations which may need to be met.
- Adjustments – What adjustments need to be made in terms of tax, GST and related adjustments (including an adjustment for any accommodation bonds) on settlement.
- Restraints of trade - Unless a contractual provision is built in during the sale or pre-existing in employment contracts, any outgoing director or executive employee of the company is not restrained from opening a competing business following the transfer of the shares.
- Whether there any tax benefits or government subsidies or programs that will expire over time?
- Are there any tax benefits or government subsidies or programs that will change with a change in ownership of the business?
- Due diligence – Who is doing the due diligence? If you intend to brief experts to undertake all or some of the due diligence what is the scope of their brief? It is vital in an aged care transaction to obtain assistance from experts who understand how an aged care business operates. We can certainly assist you from a legal perspective and we can recommend other experts such as accountants to you.
- The transferability of any service or other contracts and whether there are deemed assignment / change in control provisions in any of those.
- Employees – No matter what structure you choose, dealing with employees and their entitlements can be complex, depending on the nature of the employment arrangements in place but particularly if employees are subject to an award.
- Materiality - Protection against any material change between the time of signing the sale agreement and the transfer of the assets
Tax and stamp duty
Stamp duty - An asset purchase (buying what is in the box) will almost always attract some duty due to the nature and definition of dutiable property, unless an exemption is available. Buying the box may reduce stamp duty (subject to land rich duty requirements).
Tax – Deductibility of money borrowed to purchase shares needs to be handled carefully. Buying the box also means you may inherit the vendor’s cost base for CGT purposes.
GST – You need to compare purchasing as a going concern (buying what is in the box) as against buying the box, which may well be a financial supply which then becomes input taxed.
This article is only intended to highlight some of the issues you need to consider in the purchase of an aged care facility. The matters listed above are by no means an exhaustive list of issues to be considered, but they are the first things you should consider in any transaction in the aged care industry.
If you need advice, whether as seller or buyer, we can help.
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