8th July 2022 All Posts Expert Advice

‘Ask the Expert’- Christie & Co

Our popular blog series ‘Ask the Expert’ provides a platform for all Early Years Education and Care (ECEC) professionals, where they can share their experiences and advice with the industry, on their chosen specialist subject.

So, whether you’re a policy expert, nutrition specialist, or knowledgeable practitioner, we want to hear from you!

This month, we speak to Courteney Donaldson, managing director – childcare and education, at Christie & Co — a leading specialist advisor in the buying and selling of businesses in the sector.

Here, she provides insight into investment potential within the early years sector, what people should consider before buying or selling a childcare business, and what challenges those in the industry are likely to encounter…

What makes day nurseries such a good sector in which to invest?

As a needs-driven industry, the services delivered are continually sought-after. This demand has continued to grow over the years due to an increased reliance on dual incomes, with it now being common for both parents to work.

Demand for quality ECEC has been further bolstered by research which supports the benefits of high-quality early years education, and the positive impact it has on preparing children for their learning journey – another factor increasing the uptake of childcare provision.  

With the UK day nursery sector largely dominated by private sector provision, the market remains highly fragmented, which awards new entrants and investors the opportunity for consolidation. As an essential, needs-driven service, with favourable macro and micro economic factors, alongside demand and a range of other factors, positive market drivers attract and underpin market activity. Day nurseries are viewed as being a ‘green light’ business growth area by banks, investors and private equity firms when approached to finance such new development projects and acquisitions.  

For a day nursery business to be successful, the old adage; ‘Location, location, location’ is a key factor, alongside quality of service, management, workforce and facilities.

What should people consider before buying a nursery business?

Owning a day nursery business comes with a huge degree of responsibility – you are responsible for the care, education and safeguarding of all children in your care.  However, running a business in the early years education and care sector can also be a hugely rewarding career for those who are emotionally invested in creating positive outcomes for the little ones in their care and their workforce.

Adherence to tight regulations is another factor which will characterise owning a business in this sector. As a highly regulated sector, compliance with requirements will be intrinsic to the successful running of a setting, and therefore an element which should be carefully considered at the outset.

Ultimately, while a rewarding opportunity for the right person, running a nursery is a huge undertaking which would, for new entrants, be suited to an individual with previous experience of leading a business.

What should buyers look for when considering the purchase of a day nursery business?

There are so many different variables to consider. The location of a setting — whether it is positioned in an affluent or deprived, rural or city-centre area — will all shape the service offering and influence the day-to-day running of the business. Factors such as demand, supply, unique selling points, occupancy, fee structure, types of sessions available, key areas of educational focus, and perhaps even meal preferences, will be affected and shape businesses differently. Essentially, the buyer is seeking to understand historic, current and future earnings potential.

Assessing the current operational structure will be important, too. Does the buyer want a nursery with an existing management team who can continue to run the setting? How is staff retention and culture? Is occupancy good? Does the provision score well with Ofsted? Does it have a great reputation locally? These are all important factors when assessing the merits of individual childcare business, from a buyer’s perspective.

It’s also important to note the type of business that you’d be buying and consider how well that fits with your wish-list. If the nursery is an individual setting, what is the reputation of the brand? Whereas, when considering a franchise, you’ll need to assess what is and isn’t included in the sale, and the implications that this will have on long-term viability.

Considering how Covid has impacted an organisation is a good idea, too. A business may have been performing strongly three years ago, but the pandemic might have seen a change in circumstances for parents, creating a downturn in demand – which is unusual for the sector. For example, an increase in working from home has negatively impacted uptake of some city-centre locations.

 For those looking to sell, how far in advance should a vendor begin preparing and what steps should they take in order to achieve the best possible value?

In ‘normal’ times, many business owners might not have had an exit plan. Whereas seasoned investors will have an exit plan in place even ahead of formally completing their first acquisition. Post covid, individual owners are increasingly thinking about an exit, more so due to a few very challenging years. Often these vendors can make decisions at pace, given the smaller circle of people with decision-making influence.

Sometimes, even those with the best laid plans are forced to change direction. For example, many owners who had intended to sell in 2020/2021, were forced to put their retirement plans on hold due to the operational issues presented by the pandemic – which, for many, proved not just financially costly, but also time consuming. Similarly, personal circumstances such as ill health can unexpectedly force a sale.

However, there is never a bad time to sell a good business — providing vendors have all the documentation that they need, to hand. Experienced owners will have this detail, such as management accounts and asbestos reports, at their fingertips. This will ensure that a sale process runs as smoothly as possible, preventing unnecessary delays.

Technology can play an important role in ensuring that documentation is easily accessible, standing settings with this kind of provision in good stead.

In your experience, are there any stand-out factors that make a nursery business successful? What should buyers/existing nursery owners be aiming for?

During the sales process, it’s vitally important to have the right information to hand. To-ing and fro-ing while awaiting key information can stall a sales process and both vendor and buyer fatigue can be detrimental to closing a sale and indeed the operational performance of the business being sold.

Buyers will want to know how a nursery is performing, month on month.  They’ll need a clear understanding of occupancy levels and any fluctuations. In addition, revenue forecasts, insight into staff training, ratios, and retention, as well as an understanding of how well a setting has been maintained from a property condition and regulatory compliance perspective will all enlighten and shape a buyer’s view on the desirability of a business.

An important factor for nursery business buyers will be staff engagement – which often has a strong bearing on a setting’s performance and overall satisfaction levels. Practitioners who are valued and appreciated will help a company to maintain a coveted reputation within the area – and is an element that will help to set the nursery apart from its competitors.

Products like Connect, enable business owners to provide clear records and offer immediate access to documentation, which can prove particularly advantageous during a sales process.

How has Covid impacted the nursery sector – have you seen more independent businesses forced to sell?

While there have been financial repercussions for some settings, Covid-19 has also significantly raised the profile of the sector. When nurseries closed, apart from for serving key workers, parents realised how challenging it is to look after and educate young children – and, therefore, how critical the service is in enabling them to work.

Not only did the experience raise parental appreciation, but it also piqued the interest of buyers and investors. This has led to a surge of interest within the sector, with a fair amount of private equity investment in the last year fuelling market activity.

On the other hand, with the operational challenges experienced by nurseries, many have postponed sale, meaning that there haven’t been the same volumes of businesses coming to the market as usual – although this is slowly beginning to change.

Thankfully, we haven’t seen a great deal of serious distress within the industry, or a trend for nurseries being placed into administration. But, having said that, it has become evident that not all settings have returned to pre-pandemic levels. Sickness among staff and shifts in parental working patterns have each contributed to this.  

Have you seen an increase in the number of nursery groups as opposed to independents? Why do you think this is?

The sector is still dominated by single setting operators, at around 80%. But we have seen groups expanding and developing. Whether owners with a couple of settings who are wanting to grow, or regional groups with a larger footprint, current government funding opportunities have helped to facilitate this. 

What challenges are buyers likely to face when purchasing a nursery?

This really depends on the nature of the buyer. If we have a first-time business owner who has no nursery or company experience – perhaps a teacher who has chosen to branch out into nursery ownership – they’re likely to face more challenges when it comes to raising funds. Without a demonstrable track record of operating a successful organisation previously, they typically prove a riskier prospect for lenders.

For more experienced business owners, the challenges are likely to be mainly around understanding the business that they’re buying. Even if they’ve owned a nursery in the past, each setting varies broadly depending on the communities it serves.

How can buyers/sellers work together to ease parental worries during the transition process?

When a nursery business is being sold, the vast majority of deals are processed on a confidential basis. Therefore, news of a sale can come as a shock to staff and parents. Post completion, it’s important that a plan has been made for effective communications between parents and staff.

Providing reassurance that children will be given the same high standard of care, that workforce will remain in place, and that consistency will be maintained, is vital.

How can technology support during the acquisition process?

Firstly, having important records to hand is crucial. Any buyer will go through a high degree of due diligence, so being able to easily showcase data relating to performance, trends, and occupancy will smooth the acquisition or sales process and ensure that an owner gets the best possible price.

In addition, buyers pay for the goodwill that accompanies a business. Nurturing great communication with parents, with the assistance of technology, is a fantastic way to build reputation – and something that will benefit the organisation during a sale.

Utilising technology to help record and store important records enables accuracy and ease of access for owners, without trawling through years of paperwork. Meanwhile, harnessing its communicative benefits will help to improve parental satisfaction, learning outcomes, and nursery occupancy.

What advice would you give to someone looking to buy/sell?

With either route, it’s vitally important that people always do their homework to ensure they have a robust understanding of the sector. Coupled with professional advice, it’s the best way to protect your interests.

For those looking to sell, explore how an agent can assist throughout the sales process. Not only does enlisting a professional take some of the stress out of the process, but it will open doors — ultimately, helping to facilitate the right deal at the best price.

And from either angle, it’s worth remembering that the sector is one built upon relationships. Remaining honest and transparent will help to maintain and build bonds, an investment that can pay dividends in future.   

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