An increase in the number of children in care over recent years, combined with a lack of care provision, has shifted the supply and demand balance in the social care sector. This has made the industry increasingly attractive to private equity, giving greater choice to business owners looking at their future options – whether that is growth, acquisition or exit.
However, the number of deals currently taking place is difficult to quantify because of the fragmented nature of social care. There is a handful of large operators in the UK and a majority of single-site or dual-site independent operators with income well below the annual audit threshold.
This means much of the information available about these providers is from limited Companies House information with filing disclosures often months after a deal has happened.
Despite this, there has been a number of notable examples of deals in the sector over recent years, including Graphite Capital’s acquisition of Horizon in 2019, G Square’s acquisition of Keys Group, August Equity’s acquisition of Esland, and Mubadala Capital’s recent acquisition of a majority stake in WitherslackGroup.
This increasing private equity focus on the sector does create questions for those involved in social care on a daily basis.
Does PE investment shift the focus to driving returns and profits rather than the overall quality of care provision? Or does the investment, financial expertise and potential for increased returns create expansion opportunities at a time when there is a significant and longstanding excess of demand over supply for care beds in children’s and adult social care?
The industry is also facing increased Government scrutiny, which has the potential to effect larger private equity backed investment in the short-term. A review of the Competition and Markets Authority’s (CMA) review into children’s social care provision was announced in March 2021.
This could make larger operators and new investment entrants into the sector hesitant about the future landscape until the CMA publish their findings and recommendations.
The sector also faces staff retention challenges and one remedy to this among smaller providers is broadening the shareholder base beyond the original founders. Long-term incentive plans such as Enterprise Management Incentive Scheme share options are increasingly helping social care companies to retain key staff where applicable.
However, for business owners of all sizes in the social care sector, succession planning as early as possible is vital.
We experience many owners who have unrealistically high aspirations of business valuations, often because of an incomplete or ill-informed understanding of the key value drivers in the sector.
They may have heard about the value potential in the sector but have done little to prepare for a sale so are unable to realise the value they expect. Early planning can often lead to avoidable disruption to business operations as they prepare the business for sale.
One of the most important factors in value is a strong Ofsted report or Care Quality Commission rating. In addition to this, the measurement of outcomes is vital. From our experience, putting care first will always generate increased buyer appetite and above average financial returns over the medium to long term.
For smaller independent providers with consistently strong Ofsted or CQC ratings, stable staff structures and high-quality property estates are also key to realising strong valuation. Demand is coming from well-funded trade buyers wanting to bolt-on additional service provision to capture experienced staff teams and unlock ‘back office’ cost synergies to improve overall financial performance and long-term viability.
Another key consideration, especially for smaller social care providers trying to achieve a retirement sale, is the time and effort the sale transaction process takes.
Many owners often have a limited senior team around them and no matter how ‘light touch’ a due diligence acquisition process might be, it is still a significant distraction from day-to-day business operations. This is in a sector which has continual care-related pressures and a high propensity for the unexpected, which can often need senior management input.
Small business owners also need to formally assess their retirement plans and work out what they need. It is often better to plan ahead with a pensions or wealth review and work backwards to assess price, and then map that against the business’s possible current value. That will allow owners to work out a plan to improve the business to achieve its optimum exit value and ‘saleability’ when the time comes to sell.
Market view: key considerations
- A demand for care and a lack of provision has shifted the supply and demand balance in the sector, bringing social care increasingly into the focus of private equity
- Putting care first will always generate the best financial returns when a business owner is looking at succession
- Planning ahead is key to realising value and avoid business disruption before and during the transaction process
Simon Carruthers is corporate finance director at MHA Moore and Smalley’s Manchester office.