Key Factors of Childcare Acquisition Process
Childcare industry is booming at a fast pace across Australia, but faster in Victoria and New South Wales. Over the past few years, Victoria and New South Wales have witnessed a consistent increase in the childcare market, resulting in higher demands for childcare facility acquisition. To buy a childcare business, you have to factor some points other than whom you are buying from. These include;
Childcare Acquisition Service Provider – With many vendors enlisting facilities for sale, it becomes a challenge for a novice player to bump into the right choice. ELM, being one of the most experienced players in the childcare industry, makes a practical decision in many ways. ELM is a highly regarded provider of early learning and operational and financial forecasting, digital marketing and due diligence for purchasing established services.
Financial Consultation – A good acquisition specialist will always advise you on the matters of value and profitability. The buyer will be interested in all of the businesses’ historical financial accounts and related financial metrics, as well as the reasonableness of the childcare’s projections of its future performance. It is obligatory that as a financial consultant, the buyer must be shown the past profit records of the business as well as expenses, liabilities, revenue and the asset’s current market value. Understanding financial terms and figures may seem difficult to the one who’s new into the world of childcare. Therefore, the involvement of a Childcare Acquisition Service professional is imperative. Once the report is understood, the supposed buyer can now decide whether to continue with the proposal of acquisition or not.
A few points to be considered would be;
• What do the childcare’s annual, quarterly, and monthly financial/business accounts for the last three years reveal about its financial performance and condition of the childcare service?
• Are the business’s financial accounts audited, and if so for how long?
• Do the financial accounts and related notes set out all liabilities of the business, both current and contingent?
• Is the EBIT / revenue for the business progressing or declining?
• Are the business’s projections for the future and underlying assumptions reasonable and believable?
Legal Advisors – Each buyer will need its solicitor. The seller’s solicitor will prepare the contract for business sale, whereas the buyer’s solicitor will have advice as to its commitments under the contract. Once each term is agreed upon, both solicitors shall work toward preparing a formal agreement (contracts and exchange) and the successive settlement.
Law and Regulations – Both State and Federal governments, play a key role in licensing the childcare facility in Victoria, New South Wales and Queensland, Australia, covering the areas such as staff qualification, physical premises of the facility, equipment and child ratios in the process.
Employee/Management Issues – The buyer will want to review some matters to understand the quality of the businesses’ management and employee base, including:
• Management organisation chart and biographical information
• Summary of any labour conflicts
• Information concerning any previous, pending or threatened labour issues
• Employment and consulting agreements, and documents relating to other transactions with officers, directors, key employees, and related parties
• Schedule of remuneration paid to officers, directors, and essential employees for the three most recent fiscal years showing payroll, bonuses, and non-cash benefits (e.g., use of cars, property, etc.)
• Summary of employee benefits and copies of any pension, profit sharing, deferred compensation, and retirement plans
There are a number of profitability drivers unique to childcare businesses. Revenues will be primarily driven by daily fees paid, the number of Licensed Places in a centre and occupancy rates. The businesses profits will be most sensitive to movements in occupancy rates. Business expenses are predominantly composed of employee salary expenses and rental expenses. Rental costs are mainly fixed due to the long-term nature of the lease agreements negotiated with landlords.
Fees levied by child care centres are paid for by families and the Commonwealth Government, through its various funding initiatives (including the Child Care Rebate and Child Care Benefit) and from 2 July 2018, one new Child Care Subsidy will replace the two current child care payments. The industry’s ability to increase its fees is a contributing factor to year-on-year revenue growth.
Key factors which allow a centre to charge higher fees include centre location, staff qualifications, staff to child ratios and the quality level of facilities and tasteful surroundings. Centre occupancy levels and the length of waitlists for new enrolments can also impact the ability of a centre to charge higher fees.
A centre’s occupancy rate is determined as the number of Licensed Places in a centre that are utilised. Maintaining high occupancy rates is a key profitability driver with centre profits most sensitive to underlying changes in occupancy. The length of any waitlists for new enrolments is a fundamental driver of future occupancy levels.
Employee expenses are the largest contributor to the costs of operating a child care business. Employee expenses are variable in nature with the majority of employees remunerated according to hours worked. As such, efficient management of staff rostering and staff to child ratios is key to optimising resources.