Buying a Day Nursery? Six steps to a smooth acquisition process

According to the Department for Education’s most recent Survey of Childcare and Early Year Providers, in the spring of 2019 there were an estimated 72,000 early years providers offering 1.7m Ofsted registered childcare places in England. However, you can count the number of groups with 50+ settings using your own fingers.

Depending on how you see your glass, this contrasting scale of offering implies either a highly fractured market or a market ripe for consolidation.

However, assuming you are reading this because you are of the more ‘half-full’ persuasion, this note is for you and has been prepared to help highlight a few things to bear in mind when considering your next acquisition:

  • Ensuring your strategy is in place
  • Effectively valuing the target and considering financing alternatives
  • Heads of Terms – getting key terms written down early
  • The four types of due diligence
  • Regulatory hurdles
  • Resourcing the acquisition

Strategise for success

As more settings come back onto the market, buyers are looking at targets with renewed interest. However, the best nursery for your group may not be the nursery round the corner; it may not even be the best performing nursery.

With this in mind, any acquisition should be made with a clear strategy in mind. For instance, are you looking to expand around a central hub, are you looking to serve certain areas of the Country, will your nurseries all have scope for improvement when you take them on or are you looking to acquire nurseries of a certain size?

Sellers will often work with agents to help them market their nurseries to prospective buyers and when looking for targets you are likely to engage with a number of intermediaries. The right agent can be very helpful – they will make sensible introductions and help showcase a nursery’s potential to acquisitive groups and investors. However as a potential purchaser, you should bear in mind that an agent marketing a group or setting will be acting for the seller and not for you.

Value the target and determine your funding

Having created a shortlist of targets, a buyer should stress-test the asking prices – indeed, a bank or other lender is very likely to want to complete a formal valuation to assure itself of the proposed price – and check any assumptions made in the marketing process.

In relation to a 'price', a professional valuer will be able to help you work through a target’s balance sheet and profit and loss account, and will be able to suggest an appropriate valuation mechanism to confirm or verify the ‘going price’ for the setting on the open market.

As to the assumptions, every buyer should complete some preliminary, light-touch due diligence before making an offer to confirm the potential is really as good as it seems (as below).

Of course when it comes to raising finance, every non-cash buyer should bear in mind that there are a number of alternatives to debt finance available, ranging from familiar financial injection through share issues, and PE and VC investment, to more creative and ambitious options such as fund creation. Ensure you consider these not just in the context of your short-term goals but also your longer-term ambitions.

Get your agreed terms written down

Having agreed a price in principle with the seller, you should record the key terms – and any red lines – in heads of terms (also known as a memorandum of understanding). Although typically non-binding (save for confidentiality or exclusivity provisions – as below) heads help focus the parties and their advisers on key negotiation points and can provide a moral high ground if a party tries to change transaction ambitions part way through the process.

If not in separate agreements already, the heads can be a good place to record any confidentiality obligations you may want to impose on the sellers (for instance, you may not want the market knowing the price you are offering) or exclusivity arrangements (which would stop the sellers negotiating with other parties while they negotiate with you).

‘Kick the tyres’: Due Diligence

Once a deal in principle has been agreed, you can start carrying out more thorough due diligence to ensure the setting meets your expectations. Broadly due diligence on an educational establishment falls into four categories:

  • Commercial: Unless you’re ‘branching out’, you will want to make sure the target’s business plans and current operations align with yours, and that the nursery’s reputation and community relationships are positive. Consider whether historic business plans have been effective, whether future plans are realistic (and suitably ambitious) and whether messaging is a good fit with your group.
  • Financial: As a general rule, groups looking to expand are looking for financially sound settings to join their family. Are your target’s finances in a good state, is the setting / group profitable and are they offering Early Years Funded places (and if so, how many?). On that latter point, Early Years places have proved challenging for a large number of nurseries so you need to make sure their offering complements your plans.
  • Legal: There are a number of aspects to look through when it comes to legals and different groups will have different priorities. However, as a general rule, the most important three areas of focus are:
    • Property: Your nursery’s location and quality of setting will be paramount in ensuring a steady attendance and full waiting list (and, naturally, a safe and nurturing environment!). You will need to ensure the building fits your needs, meets regulatory requirements and is held in a way that works with your longer term ambitions (ie, freehold, leasehold or on a shorter licence).
    • Employees: A nursery is only as good as its staff. Unless you are intending to wholescale change the employee list (which will create a raft of other issues to deal with), ensure the staff are appropriately qualified, that suitable employment contracts are in place and that your future employees are happy with their current arrangements.
    • Regulatory: Understandably, there is a myriad of complex legislation, regulation and guidance surrounding a nursery’s operation – from pre-requirements to register with the Local Authority if you’re intending to serve food through to ensuring asbestos and fire surveys are up to date. However, among all the registrations a nursery is required to have its registration with Ofsted is pivotal as the nursery cannot be run without it. Indeed, it is an offence to run a nursery that isn’t registered. Ensure the nursery has complied with its regulatory obligations to date. Note that you may need to put arrangements in place to ensure a continuity of registration when completion arrives (see below).
  • Academic Performance: Finally, and by no means least, academic performance has to be considered. OFSTED has responsibility for regulating nurseries’ operation so a good place to start is the most recent OFSTED report. Consider whether this is a nursery that needs to be improved or whose success you can build upon, and whether you are able to achieve your plans with the resources at your disposal.

Don’t forget your ongoing regulatory compliance

As a nursery's registration process following an acquisition can take a number of months, if a new or renewed registration is needed, you will want to ensure provisions are put in place to ensure there is no period following completion where the nursery is without registration.

There are a number of potential solutions to this. For instance, the acquisition can be made conditional on the new registration or the existing proprietor could be retained to continue to operate the business until the registration is complete.

You should consider and explore the various solutions with your legal and commercial advisers.

And finally… don’t underestimate the time and effort an acquisition will require

Although an acquisition can be completed in a matter of weeks, this is rare and typically only happens because one party has a particular need to get to closing, quickly (such as a pending insolvency or threat that the existing proprietor’s registration will be removed). As such, it is wiser to anticipate a timescale in the region of three months for a straightforward acquisition with a smooth due diligence and disclosure process and up to six months for a more fraught process involving protracted negotiation and a variety of issues uncovered in due diligence.

With this in mind, you must ensure that you can allocate appropriate resources to the process – for instance, time to read and analyse due diligence documents and reports, the ability to visit sites and capability to working with the sellers to agree financials and on-board staff and management.

Our content explained

Every piece of content we create is correct on the date it’s published but please don’t rely on it as legal advice. If you’d like to speak to us about your own legal requirements, please contact one of our expert lawyers.

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