EYB Magazine article Buying a Day Nursery

BUYING A DAY NURSERY – PART 1

Are you aspiring to acquire a children’s day nursery business in 2013?

As we enter a new year, we often think about our personal aims and objectives for the forthcoming months. Many will consider a change of career direction that could empower them to take control of their own destiny.  Acquiring your own business could facilitate that ambition.

It may be a bit of a cliché, but for your business to succeed, you’ll need to have a genuine passion for what you’re doing.

Successful business owners never underestimate the amount of work they’ll need to put in and the potential impact on their family and friends. It’s not enough to be acquiring, or starting your own business, because you were fed up with working for someone else or because you were tempted by the idea of a millionaire lifestyle, albeit rare in childcare. You won’t get there unless you have the deep enthusiasm and drive necessary to succeed.

Before you purchase a business, it is essential to take the time to make sure that owning your own business is the right move for you.

Know Yourself

Buying your own business is an exciting and satisfying project that should allow you to organise your working life as you want. In return for your hard work, commitment and energy, you’ll be in charge of your own future. You may have others to consider in your decision-making process such as family, partners, friends and colleagues. However, as the owner and manager of your own business, the decisions are ultimately yours and yours alone.

Before committing yourself to buying a nursery business, you’ll need to be clear about your priorities, wants, needs, hopes and plans not just throughout 2013, but over the next few years and in the longer term. This will require you to be honest, unblinking and self-critical, because one of the greatest assets in your business is you. This step isn’t easy, but having taken it, you’ll emerge stronger and more self-aware.

The qualities that will help you to succeed in a business are your own entrepreneurial skills: optimism, energy, self-confidence, ambition, integrity, passion about results and attention to detail. And, if luck is a quality, you’ll need that too. It takes more than one single talent to run a successful childcare business. You should ask yourself the following questions:

  • Are you self-disciplined and do you get things done?
  • Do you have support from your family and/or partner?
  • Can you work hard, sometimes seven days a week?
  • Can you get along with people?
  • Can you manage under stress?
  • Do you persevere?
  • Can you learn from mistakes?
  • Can you take advice?
  • Can you take a long term view?
  • Are you in good health?
  • Do you have definite aims?
  • Do you fully appreciate the responsibilities and understand the risks?

Preparing your CV

These days we can rely on having three to six changes in career direction during our working life. To move confidently from one field to another you must be clear about the skills you have and how they might be freshly applied, enhanced or extended. The most useful exercise you can do at this stage is to write down all the skills and experience you have in the form of a Curriculum Vitae (CV).

A CV is vital, not only because it helps you think about yourself clearly, but because it will show others – lenders in particular – that you have the right skills for the business you plan to buy. Since the economic downturn, banks’ desire to mitigate risk has increased therefore sector experience is essential and a comprehensive CV will assist in demonstrating this. Presenting both yourself and your business acquisition intentions and ideas in the best possible way to potential lenders is a vital part of securing the funding you’ll need to buy the business you want.

A good CV should be no more than two pages long. Start with your most recent employment and work back in time. List the jobs you’ve done and summarise the key tasks and responsibilities these entailed; include any training courses or skills acquired and any notable achievements.

On another piece of paper, make a note of any skills you feel you should acquire before buying your own business, and any skills you would need to buy in.

You should also compile a list of what professional recruiters call your transferable skills – those skills that derive from one area of experience and can be applied to another. These are attributes that are distinct from aspects of your character: determined, works well under pressure, pays attention to detail, intuitive, persistent and so on. Transferable skills are those skills that have helped you – and perhaps your employer – achieve, win business, improve the workplace, increase profits and so on. What are the skills that enable you to do those things?

How to find the right nursery business

Having gained confidence that owning a business is right for you, it’s time to determine what attributes you’ll need in the nursery business that you wish to acquire.

At any one time in the UK there will be a wide selection of day nurseries for sale. For many nursery owners the decision to sell their business can be a very difficult one. They will wish to keep the sale highly confidential, in order to mitigate any risks associated to the potential departure of staff and/or parents, uncertain as to what the implications of a sale may mean to them as employees or service users.

It is therefore essential that, rather than ‘trawling’ the web for possible nursery acquisition opportunities, you speak directly to agents that specialise in the sale of nursery businesses and advise them of your specific requirements. These agents can then determine which available opportunities may be suited to you and they may ask you to sign a non-disclosure agreement (NDA) prior to any confidential information, such as sensitive trading information, being released to you.

When contacting agents you need to have determined your requirements:

  • What is your acquisition price range?
  • What are your geographical requirements?
  • Do you seek a freehold or leasehold nursery business?
  • Are you looking to acquire a business operated under management, or one which you will manage and run yourself?
  • What size of registered capacity do you desire?

The agents’ role when acting for the vendor (business owner) is to introduce suitably vetted, serious prospective purchasers that have the pre-requisite childcare experience and financial ability to successfully conclude a transaction. While your CV will assist you when seeking bank funds, it will also assist at this stage, by demonstrating the credibility of your skills, qualifications and experience.

For many vendors, while price is important, so is their confidence in the buyer. Many vendors need to feel confident that under the prospective buyer’s ownership, the business, children and staff would continue to thrive.

The agents’ primary objective is to achieve the best possible price for their client, often the vendor, and then subsequently nurture the transaction through to completion. Most nursery acquisitions will be subject to financial and property due diligence, particularly if a bank or lender are to provide acquisition funds. The length of time, between a ‘deal’ being agreed and the transaction completing should not be underestimated. Often, the sale or acquisition will take between four to six months, from the deal being agreed to completion, depending on whether the transaction is an asset sale or share sale.

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Finance Fundamentals

As noted above, the first consideration when seeking to buy a business is how much you can afford, and to a large degree this will be determined by the size of your cash deposit: the days of acquiring a nursery business with a 100% business mortgage are long gone.

Decide whether you want or need to borrow money. You may have an investment, inheritance, pension lump sum or redundancy lump sum that will allow you to buy a business outright. Or you may want to invest some of your assets in a business and use the business to finance the borrowing costs – if so; you should be clear about how you’re going to fund this.

Many institutions can offer the money you may need to buy your business. Where you go will depend on how much you want to borrow and how much it’ll cost to borrow, the length of the loan, the state of the business and the record you have as a borrower. Also, some banks specialise in particular markets and are keen to lend to aspiring purchasers in those markets. As a business buyer, you can finance your purchase by borrowing money from a lender or by selling a share in your business to a partner. These are called debt funding and equity funding respectively. Debt funding is quicker to set up, keeps you in control of the business, and leaves you in possession of the business when you sell. Equity funding involves a partner whom you must pay out of profits – it requires you to share control of the business, and means you’ll split the proceeds from the sale of the business when you sell it. Finding an equity partner can take a long time.

You can borrow money from family, friends and banks; or through general mortgage brokers, business mortgage brokers, venture capital firms and business angels. The simplest of these money resources is a lender who understands the business and has a professional sense of what you’re trying to achieve. How much you can borrow depends on so many personal variables that it’s impossible to give general advice. There are, however, three important factors that all lenders consider:

  • How much of your own capital are you putting towards the purchase price of the business?
  • What skills, experience and ideas are you bringing to the business?
  • What level of debt can the business itself sustain?

For freehold nurseries, whereby you will be acquiring the freehold property and the in-situ nursery business, banks may consider a loan on the basis of 60 -70% loan to value (LTV), depending on the experience and track record of the buyer. Thus, if a purchase price of £1,000,000 were agreed, the buyer would need a ‘cash’ deposit of between £300,000 to £400,000, plus acquisition costs, such as solicitors and surveyors fees.

Speaking to a financial broker that specialises in securing loans for nursery business acquisitions at the outset of your investigations will be a great advantage and will ensure that your aspirations on the funding front are likely to be realised.

Given the size of ‘cash’ deposits required for freehold acquisitions, many new entrants to the sector will seek in the first instance to buy a leasehold business, as the cost of entry is often substantially lower than the extent of costs associated with freehold acquisitions. However, while leasehold nurseries will often have a lower capital value, the LTV as assessed by the bank, is likely to be closer to 50% or less, depending on the term of years remaining on the lease and other salient lease terms, such as provisions for a landlords ‘break clause’.

Next Steps

If owning a nursery business is for you, start the ball rolling in 2013 to achieve your ambitions:

  • Review your finances and seek advice from a finance broker.
  • Determine your nursery business acquisition requirements.
  • Contact specialists agents to ensure you receive details of businesses meet your specific requirements.

Our next article will highlight matters that buyers should look for when meeting with vendors and visiting nurseries and the importance of financial information in formulating an offer.

READ PART 2 BY CLICKING HERE