Distressed purchases in social care: Key pitfalls and what does success look like?

Browne Jacobson recently hosted a roundtable discussion bringing together insolvency practitioners, banking specialists and turnaround consultants to explore the challenges and opportunities surrounding distressed purchases in the social care sector. 

Under Chatham House rules, participants shared valuable insights on identifying early warning signs, common pitfalls, and best practices for successful outcomes in this essential but challenging market.

Here are some of the key themes and discussion points that came from the roundtable.

Early warning signs and red flags

Financial pressures

Participants identified several key financial indicators that signal potential distress:

• National Insurance increases are significantly impacting operators' bottom lines and causing covenant breaches, with many providers struggling to absorb these costs.
• Staff cost increases outpacing fee rises, particularly in the elderly care market, creating unsustainable operating models.
• Spike in agency costs remains an instant red flag given the indicator of staff turnover.
• Inadequate capital expenditure on maintenance and upkeep of care homes, often indicating deeper financial difficulties.

Operational and management issues

The discussion highlighted that management capability is often as critical as financial health:

• Weak management teams: Operators who have grown organically into roles without formal management skills, particularly struggling with strategic planning around KPIs, cashflow, staff numbers and occupancy rates across multiple sites.

• Absent or distant owners: Participants noted particular concerns around operators who are not present on-site regularly (some not visiting for five to six weeks), leading to slipping standards.

• Rapid expansion without infrastructure: The transition from one to three care homes to up to 10 facilities represents a critical pressure point, with some operators struggling to scale whilst maintaining quality across all sites.

• Lack of head office function: Groups of decent size operating without proper central support structures.

• Poor management information: Inability to track and respond to key operational metrics.

One participant observed that the "husband and wife model" businesses expanding from a small number of homes borne out of a genuine passion for social care to a larger operation represent particularly high-risk scenarios, remarking there may be 10 sites with 10 different business plans.

Regulatory concerns

• Poor CQC ratings or services not inspected for over three years following poor ratings.
• Lack of proactive engagement with regulatory issues.
• Inadequate specialist understanding of regulatory requirements within management teams.

The group noted significant differences between CQC operations in England compared to Wales and Scotland, where more frequent inspections help regulators stay "on top of" issues, making them less likely to be “on the look out” for issues.

Staffing challenges

The care sector faces a genuine dearth of skilled workers - worse than any other sector according to participants:

• High staff turnover and negative staff feedback.
• Competition from alternative employers: The creation of new jobs in other sectors such as logistics when large warehouses run by household-name retailers creates significant recruitment and retention challenges for care providers.
• Government limitations on international visas for social care have exacerbated staffing shortages.
• Managers without care backgrounds or experience representing a significant risk factor.

Local authority and contracting issues

Fee negotiations

Participants highlighted the complexity of local authority relationships:

• Many local authorities operate in largely different ways, creating inconsistency and complexity for multi-site operators.
• Pressure to accept care packages that create future risks, with needs potentially escalating rapidly (e.g. from 1-to-1 care to 3-to-1 care requirements).
• Difficult conversations in care package negotiations when vulnerable individuals are at the centre of discussions.
• Need for evidence-based fee increase requests, with consultants increasingly called upon to support providers in demonstrating cost pressures to local authorities.
• Growing use of joint funding arrangements meaning that multiple parties are involved in any fee discussions

Communication gaps

The group noted that communication between local authorities and providers is generally better in children's services compared to adult social care, suggesting room for improvement in the latter.

Size and regional disparities

Scale factors

While historically smaller care homes were more likely to experience distress, one participant reported that 40% of distressed facilities have over 30 bedrooms. The critical stress point remains the transition phase when expanding, rather than absolute size.

Regional variations

• North and Midlands experiencing higher levels of distress, particularly in former mining towns with large (e.g. 65-bed) care homes where property values are lowest.
• Purpose-built facilities requiring substantial investment on three to four-year cycles.
• New facilities taking two or three years to fill based on current modelling at approximately £1,600 per week per bed.

Sector-wide challenges and opportunities

The ageing population paradox

Participants noted an unprecedented situation: no other sector has this level of demand for services with such a high level of distress simultaneously.

Key observations included:

• Massive shortage of beds driving push towards home care.
• When home care arrangements fail, individuals often require more complex residential care than they would have needed six months earlier.
• Need for repurposed properties and high-specification facilities to accommodate the ageing population.
• International models of high-quality retirement living (Denmark, US) not translating to the UK market.
• OpCo lending models likely to emerge to deliver new capacity and will require funding.

Children's services

The proposed capping of profits for children's homes is creating concern among investors and funders, with some lenders largely discounting children's services from business plans for the largest PE-backed groups.

Structural models

Discussion touched on market consolidation and various operational structures, including sale-and-leaseback models and OpCo becoming management companies, though participants noted the UK market may be overly complicated compared to international comparisons.

Common mistakes in distress situations

Adversarial approaches

One particular mistake cited was an operator "picking a fight with the regulator". Participants emphasised that providers who have entered difficulties by going to war with the CQC over relatively minor issues compound their problems. 

The consistent advice: get the help you can rather than taking the fight to the regulator, and choose your battles carefully when in distress.

Failure to communicate

Not talking to funders early about emerging problems erodes trust and damages essential stakeholder relationships at the most critical time.

Inadequate due diligence

Family-owned businesses often pool responsibilities between family members but fail to engage lawyers and accountants for proper due diligence when acquiring additional care homes, missing opportunities to get ahead of distress.

Best practice and success factors

Proactive management

Successful operators demonstrate:

• Preparation and forward planning: Implementing schemes to mitigate wage rises (pension salary sacrifice schemes, mental health days, staff support funds).
• Long-term business planning: 10 to 15-year business plans and comprehensive workforce strategies.
• Investment in people: Coaching and training for leaders and middle managers, which aids both staff retention and quality.
• Innovative staff retention measures: Examples included distressed funds to help staff with emergencies (e.g. replacing broken washing machines) and food banks for staff.

One participant noted that operators implementing half a dozen proactive measures can offset entire cost increases while helping keep people in business.

Self-awareness and resource deployment

The best operators:

• Know their own weaknesses and resource themselves accordingly.
• Understand when to bring in specialists (e.g. recognising strength in regulatory compliance but weakness in finance, and engaging experts accordingly).
• Have a support network that allows them to concentrate on what they're good at.
• Use knowledgeable advisers who understand the sector.

Stakeholder engagement

• Proactive engagement with issues - whether financial (e.g. NI changes) or operational (engaging constructively and proactively with local authorities).
• Early communication with funders about problems to maintain trust.
• Taking charge of care package negotiations: the best operators clearly articulate what package of care is needed rather than passively accepting unsuitable arrangements.
• Proactively addressing issues that could attract CQC scrutiny.

Regulatory relationships

• Engaging constructively rather than in an adversarial manner with the CQC.
• Addressing inspection concerns promptly and thoroughly.
• Understanding that the CQC's changing inspection frameworks (with three frameworks across three years by 2026) create comparison challenges.

Strategic investment

• Spending capital expenditure when needed rather than deferring essential maintenance.
• Investing in appropriate technology to drive innovations and efficiencies. 
• Having proper head office functions at the four to five care home level and above.

Valuing people

Small gestures can make significant differences:

• Training and development opportunities.
• Staff perks and wellbeing initiatives.
• Creating an environment where staff feel valued and supported.

Planning for continuity

Having succession plans in place ensures business continuity and demonstrates strategic thinking to funders and other stakeholders.

Market outlook

Despite the challenges, participants concluded on a positive note: healthcare is still seen as one of the best investment options, and there is considerable appetite and support for good, professional operators that seek out knowledgeable advice and ask for support when needed.

The sector remains fundamentally strong with growing demand, but success increasingly depends on professional management, proactive stakeholder engagement and the wisdom to recognise and address weaknesses before they become critical.

Conclusion

The roundtable highlighted that while the social care sector faces significant headwinds - from cost pressures and staffing challenges to regulatory complexity and local authority funding constraints - distress is not inevitable. 

The operators that succeed are those that plan ahead, invest in their people, engage proactively with regulators and funders, know their limitations, and seek specialist advice when needed. 

With the right approach and support, the sector offers significant opportunities for those prepared to navigate its complexities professionally and thoughtfully.