This, the second of a trilogy of articles on buying a day nursery, provides pointers on what to look for when identifying possible nursery business acquisition opportunities, visiting nurseries and meeting vendors, and the importance of financial information in formulating your offer.
You’ve identified a nursery for sale which looks good on paper:
Having identified a nursery business which appeals to you, divide your attention into five areas and get as much information as you can about each:
- The locality – if you intend to be a hands-on owner-operator, living either on-site or nearby, the locality is a matter of personal choice for you and your family. Think about schools, transport, amenities, culture, climate and so on.
- The location – this is of prime importance to the success of a nursery business and dictates where your customers will predominantly come from. Think about demographics, competitors, local trading conditions, fee levels, average house prices in the area and so on.
- The tenure – does the nursery trade from freehold or leasehold premises. Think about both the long term and the short term, and how much money you can afford.
- The property – Think about the condition of the building and any repairs needed. Consider also parking, access, outdoor areas and whether the property has ‘kerb-appeal’.
- The business – this relates to the financial state of the business. Think about how the accounts reflect the performance of the business.
The more information you can gather on each of these areas, the better. You can then use your fund of data about the business to find out more by asking informed and intelligent questions of the vendors and their agent.
Viewing the business and meeting the owners
On the day you decide to view, dress appropriately – think about the impression you want to create to the business owner. Ask yourself a series of questions, all of which are important because you need to look at every aspect of the business very carefully before you commit yourself to it:
- Why do you want to buy this specific nursery?
- If you were a parent, would you send your child to this day nursery? Why? What makes you decide?
- Why is this business on the market? The answer may be good, bad or indifferent. The owners may be moving on to another business (but not, you hope, just down the road); they may be bankrupt; they may be cashing in before a new bypass is developed and takes trade away from the door. They may be retiring, sick or fed up; they may be getting out due to a major subsidence or dry-rot problem.
- What role do the owners have? This is a vital question because a charismatic and innovative owner may be responsible for a considerable amount of a business’ turnover.
- What skills do the current owners have? Do you have the same range of transferable skills? What skills would you need to acquire to be like the present owners? What skills could you buy in?
Financial information is fundamental in formulating your offer
Many factors act together to determine the value of a business: Its location; its buildings and their condition; its tenure; its assets and liabilities; its fixtures and fittings; and its goodwill. But the single most important factor in the value of a business as a going concern is its financial information. This comprises the business’ accounts, which take three forms: Profit and loss accounts; balance sheet; management information; and cash flow appraisals.
To be able to read the accounts of the businesses you are thinking about buying, you need to understand some basic principles of accounting. The best way to look at accounts is to take as long a view as possible and to examine the accounts for the last few years, but a concise understanding of the business’ current performance is essential. Good, dependable and accurate management accounts should show trading accounts and profit and loss for every month. You and your accountant will have to decide whether the accounts represent the true state of affairs; this applies to the profit and loss account, balance sheet and cash flow account.
From the accounts you should be able to tell if the business is well run, if it is over-priced for the amount of trade involved, and if there are areas of the business which you can either extend or operate better than the current owners.
Making your offer
When you decide to make an offer, you can make it through the vendor’s agent. Your offer should be the monetary sum to purchase the freehold or leasehold interests, the fixtures and fittings and the goodwill of the business. You should advise your solicitor of your offer and send it to the vendor’s agent in writing. Your offer may be accepted or it may be rejected, and you may find yourself in further negotiations. There may be a counter-offer from another potential purchaser. At this point you should decide whether you wish to continue negotiating yourself, and you need to find out whether the vendor, via their agent, is happy to further negotiate with you.
Always bear in mind that just as the vendor has appointed an agent to assist them with the sale, you can appoint an independent non-conflicted agent or specialist property advisor to act on your behalf. They can to assist you in the formulation of your offer and they can also negotiate on your behalf.
- Think about the condition of the building and any repairs or investment that may be required
- On the day you decide to view, dress appropriately – think about the impression you want to create.
- Remember, while the physical aspects of a building may be changed, its location cannot.
- Up to date management accounts are essential – the business may have been flying last year and the year before, but how is the business performing today?
- From the accounts you should be able to tell if the business is well run.
- Always submit your offer to the vendor’s agent in writing.
Our next article will examine the progression and process of the sale once your offer is accepted, ‘all-party communications’, binding contracts, completion and business ‘handover’ procedures.