For a first time acquirer, and seasoned purchaser alike, there will always be that surge of excitement, when you learn that your offer has been accepted.
Your offer has been accepted, but you are a long way from a ‘done deal’.
Undoubtedly, you will have invested a great deal of time and effort to get you to this stage, searching long and hard to identify the right nursery acquisition opportunity for you. Having learnt that your offer has been accepted, a long and often challenging path towards completion lies ahead.
Often agreeing the deal is the easy part. As a purchaser, this is where your commitment and contribution to progress your acquisition work really starts. As a buyer you need to step up and embrace the process.
In the vast majority of nursery business sales, the vendor will have instructed an agent to secure the most favourable price and transaction terms, and to facilitate, oversee, and progress the sale, on their, the owners, behalf. As purchaser, you have the option of appointing your own agent as your ‘buy-side’ adviser, or you may have chosen to undertake negotiations yourself.
The advantage of appointing a specialist agent to work on your ‘buy-side’ behalf, is that the agent will seek to negotiate and secure the best possible price and deal terms, for you as a prospective purchaser. Once a deal is agreed your agent will work closely with you to progress the transaction. If you decide to appoint an Agent or advisor to act on your behalf, ensure that they are qualified to do so, most notably that they hold the correct expertise and skills that they have experience of negotiating and concluding day nursery sales and that they are qualified Chartered Surveyors, being a member of, and regulated by the Royal Institution of Chartered Surveyors (RICS).
The headline terms of a transaction, once agreed between the buyer and vendor, will be summarised in a ‘Heads of Terms’ (HOT) agreement, which will be submitted by the vendor’s agent to both vendors and purchasers solicitors. Often, the HOT’s will summarise the total consideration agreed, along with any conditions.
Intricate transaction details which more frequently relate to share sales, rather than asset sales, are points for subsequent discussion between the respective solicitors. Such points could include:
- Indemnities and warranties
- Non-compete / re-entry to sector restrictions – as sought to be enforced by the purchaser
- For leasehold properties – negotiations with landlords regarding assignments, where applicable
- The amount of working capital to be retained within the business on completion
First port of call – finance
We briefly touched on finance fundamentals within the first article of this ‘Buying a day nursery’ series. On originally submitting your offer you will have been asked, by the vendor’s agent, to provide proof of funds – as agreed in principle with your bank, along with confirmation of other funds required to facilitate your acquisition such as your deposit.
Once you have been advised that your offer has been accepted, alongside appointing your solicitor, your first port of call should be to revert back to your finance broker or bank.
All banks have their own internal processes, which will need to be strictly adhered to in the pursuit of ensuring all matters are in order for credit sanctioning applications to be submitted. A successful sanctioning, subject to process will facilitate your solicitor to be able to draw down funds to complete your acquisition.
Your finance broker or bank will be able to advise you as to what they require, and when they require it by. Your bank will need to see a wealth of information, both personal data relating to you as a potential mortgage recipient, alongside information and reports relating to the nursery business that you seek to acquire. Banks processes in order to prepare a case to be submitted for credit sanctioning take time. Each bank has different pre-requisite lending criteria and process. Your bank will seek to work closely with your solicitor, possibly alongside accountants, depending on the nature of your proposed acquisition, the amount of financial due diligence and property due diligence required and complexities of the acquisition.
From a deal being agreed, and HOT’s issued, it is not unusual for an acquisition to take up to six months to complete, depending on the complexity of the acquisition, the amount of due diligence required, the size of any bank loan required to facilitate your acquisition and based on the experience of your solicitor. However, if you are a cash buyer, less complicated acquisitions, with no need for OfSTED re-registration, have been concluded in less than six weeks, but regretfully such is not the norm!
Other acquisition costs
Alongside the headline acquisition sum, you will need to be mindful of other associated ‘deal’ costs. While not an exhaustive list, ‘deal or acquisition costs’ could or may include:
- Solicitors’ fees – the extent of fees will vary dependent on whether you are acquiring the business via an acquisition of the assets and goodwill, or a share sale. Try and negotiate a fixed fee with your solicitor at the outset. Always ensure that the solicitor you appoint is experienced in nursery business share sales or commercial, asset sales – Your solicitor will be pivotal to progressing and concluding your acquisition
- If you seek to acquire a nursery, with bank funds via commercial mortgage, your bank will undoubtedly require an independent ‘Red Book’ valuation to be commissioned and you will be responsible for the payment of valuation report fees. In order to mitigate any potential ‘conflict’ your bank will request three quotes via their banks approved panel valuers for day nurseries. The bank will then provide the quotes to the purchaser for them to decide, which valuers they would like the bank to appoint, and confirmation that the independent valuers fees is acceptable. Valuers’ conflicts of interests must be declared. For example, if Christie + Co were acting as the vendor’s agent, Christie + Co would not be able to provide independent formal valuation advice, due to a clear conflict of interests. Do not automatically select the cheapest valuation fee quote. Do your research on the companies that your bank has proposed. Ensure that each company is active and knowledgeable of the children’s day nursery sector. For a single asset, freehold day nursery formal, independent valuation for secured lending purposes, you should expect to pay circa £1,850 to £2,250 plus VAT
- Predominantly for freehold assets, be mindful that while the valuer will not undertake a formal building survey, should they note any matters which create cause for concern, they may recommend that a structural survey be commissioned – this would be an additional cost, which the buyer would incur.
- If you are acquiring assets which are held outside of a company, stamp duty may be applicable
All Party Communications
As your acquisition progresses, it is imperative that your advisors keep you updated and that you keep the vendor’s agent, fully informed of your progress in moving toward a swift exchange. Regular communication is essential to demonstrate that you have all aspects of your acquisition in hand. In the event you propose a timetable for certain matters to be addressed, ensure that your timetable is achievable – it is always better to under promise and exceed expectations.
Until you exchange contracts, neither the vendor nor you as purchaser have any legal obligation to complete the transaction. Until exchange is reached, there is no binding contract, if you upset the vendor by repeatedly failing to deliver on promises, and in the event you are unable to take pragmatic ‘views’ from time to time, you risk losing the ‘faith’ of the vendor, which in the worst case scenario, could result in the owners deciding to pull out of the sale, irrelevant of the costs that may have been incurred on either side to that point of the transaction.
During the progression of the transaction, there will be points which require further negotiation – negotiation is a skill – you need to be clear on areas where you are prepared to flex, and points on which you are firm, in every transaction there will be varying degrees of ‘give and take’.
Completion & Business Handover
The final period leading up to completion, will be incredibly busy, but your solicitors should communicate frequently with you, as will your bank as you move toward an agreed date for the exchange of contracts. The nature of your acquisition will determine whether you may be able to simultaneously exchange and complete, often preferable when acquiring a vacant property, or in the event that TUPE is applicable, your solicitor may recommend that a specific period of time elapse, between exchange and completion.
One essential to consider and plan in advance of exchange / completion, is your need to discuss and agree a strategy with the owners in terms of communications to staff and parents about the change in ownership, teamed with arrangements as to how the handover will be implemented in practice.
For first-time buyers, often the vendors will agree to be on hand during the first week on the business being operated under new ownership. Thereafter, deal negotiations may have facilitated for the former owners to be available, on an ‘on call’ basis for a specific period of time, which could be from between four weeks to three months. Purchasers that are experienced nursery operators will rarely request that the owner remain available for any period of time.
- Agreeing a deal is only the start – a significant amount of work will be required to successfully complete your acquisition – your drive, passion and commitment is essential
- Appoint an agent to work on your behalf. Ensure that they are a qualified Chartered Surveyor, a member of the RICS and that they are experienced in concluding nursery transactions. Their experience will be invaluable and rather than seeing their fee as an additional deal ‘cost’, their involvement could prove to be invaluable. Specialist agents acting on the ‘buy-side’ of a deal do not ordinarily charge upfront fees. Many specialist agents / advisers will accept instructions on a ‘no deal – no fee’ basis, thus their fees would normally become payable on successful completion of your acquisition
- During negotiations be pragmatic – hold firm on points that are fundamentally important to you, but be prepared and willing to give on flex points
- Regular communication is key to progressing a deal – If you suggest a time frame for an ‘action’ ensure it is reasonable – under promise and over achieve
- Having successfully completed your acquisition, take advantage of the owner’s willingness to facilitate an on call handover period, if you feel that it would be beneficial to you and the smooth running of the business. Yes, this is your business now, but always be mindful that staff and the parents of the children that you serve may be apprehensive of change. In the early days post completion, unless urgent action is required, make yourself available to all staff and parents, get to know all staff and parents, observe day to day operations and don’t charge in like a bull in a china shop, making sweeping changes immediately, unless you deem such to be absolutely necessary
- Last but by no means least – enjoy your new business, embrace the challenges, be proactive, forward thinking, make your nursery the premier nursery in your local area – reach for the stars and the rewards will follow.
Courteney Donaldson MRICS, Christie + Co Director & Head of Child Centric Sectors gives professional advice on buying a children’s day nursery business.