Buying a Nursery Business - thoughts sought !
Discussion
Never been in this game, considering the purchase on a leveraged basis for Mrs Shocks, the outline is this :
Income of £379k generating an adjusted EBITDA of £83k which represents a 22% return on income
Strong and consistent level of profitability achieved
Popular with parents due to the excellent reputation within the local community
Registered for 52 children aged 0 - pre school
Full occupancy with a waiting list until April 2015
Care Commisions Rating of Very Good & Good
Strong management and organisation structure, supported by experienced and well qualified team
Scope to add complimentary services and increase fees which would improve profitability further
Have the accounts, no skeletons from first pass,good revenue stream.
+ Scope to improve fee's
+ scope to expand
+ 36% revenue growth 2009 - 2014
- Increased staffing costs y-o-y @ 20%
Looking for thoughts or guidance !
Best
Shocks
From a business perspective it looks solid. Parents will always need nursery care and I wouldn't be surprised if the next government (of whatever colour) increased the amount of care that the state subsidises in order to get more parents back into work.
A couple of potential issues. A possible future Labour government may look to increase the minimum wage significantly, and there is also talk of the "Living Wage". This could have a significant impact on your costs, though you may be able to offset it with increased fees, that will open you up to cheaper competitors.
Biggest threat is likely to be other nurseries opening in the area, particularly likely if there are not enough places available for all the local children.
My biggest concerns, though, would be more practical than financial. The regulatory and training regime will need to be very closely managed (I wouldn't leave this to the staff, as the owner i'd want to oversee this personally as you (or your wife) will be the one that has to face the music). I can also imagine that getting (and keeping) good staff might be difficult, seeing as wages for nursery staff tend to be very low.
Finally, your customers are trusting you with their most prized possessions, so if something goes wrong, expect trouble.
A couple of potential issues. A possible future Labour government may look to increase the minimum wage significantly, and there is also talk of the "Living Wage". This could have a significant impact on your costs, though you may be able to offset it with increased fees, that will open you up to cheaper competitors.
Biggest threat is likely to be other nurseries opening in the area, particularly likely if there are not enough places available for all the local children.
My biggest concerns, though, would be more practical than financial. The regulatory and training regime will need to be very closely managed (I wouldn't leave this to the staff, as the owner i'd want to oversee this personally as you (or your wife) will be the one that has to face the music). I can also imagine that getting (and keeping) good staff might be difficult, seeing as wages for nursery staff tend to be very low.
Finally, your customers are trusting you with their most prized possessions, so if something goes wrong, expect trouble.
Countdown said:
What's the return on capital employed?
I.e how much capital are you putting in?
Exactly!I.e how much capital are you putting in?
Describe an interesting business - make no mention of how much it costs to buy or the financing structure!
It would be like saying that you found a lovely house situated in central london right at the end of The Mall with solid in-home security.
Sounds great but HOW MUCH!!?
smifffymoto said:
My Mother used to own a very successful nursery in Cheshire but got sick of all the legislation and closed it down in the end because it was becoming to much about ticking boxes and not enough about real child care.
yep same as my mum. maybe ok if you have a chain and can benefit from some economies of scale.Countdown said:
What's the return on capital employed?
I.e how much capital are you putting in?
Depending on how we structure the financials rouge calc would be I.e how much capital are you putting in?
(a) Worst Case ROIC = 12%
(b) Best Case ROIC = 40%
Off course there are many considerations and ways in which we can structure.
The books are straightforward enough, NP isn't optimal as a number of costs / overheads are less optimal.
My OH used to be the "manager", ie all non-care/teaching tasks, on a part-time basis in a similar size operation. I can endorse the issues with regulations and inspections. The only other problem they had was finding suitable premises as the number grew and making sure they made best use of the fixed assets. Other than this it's just the normal staff issues and dealing with difficult parents. Kids generally not a problem.
A few thoughts...
Don't forget to account for the owner's time, if they are involved in running the business.
Many owners effectively work for free and take dividends which inflates the true profitability.
Is the ROIC post-tax and are you including a fully costed view on capex vs. depreciation?
In other words - have they been investing like crazy to improve facilities while depreciation is playing catch-up? So forward profitability will have a headwind as depreciation rises owing to historical investments?
Make very sure you are confident about the ongoing capital costs.
Leases - check the property situation thoroughly - how long can you use the building - will rent rise soon?
Or if the property is included freehold - what would be the value of the property if you shut down? That's a worst case scenario downside.
Finally that 36% revenue growth is clearly unsustainable and slightly worries me.
Have price rises been very high? Is capacity at bursting point?
I guess the waiting list is evidence that pricing is fine but perhaps some due diligence on relative pricing compared to other options.
How many kids are on multiple nursery waiting lists!
Don't forget to account for the owner's time, if they are involved in running the business.
Many owners effectively work for free and take dividends which inflates the true profitability.
Is the ROIC post-tax and are you including a fully costed view on capex vs. depreciation?
In other words - have they been investing like crazy to improve facilities while depreciation is playing catch-up? So forward profitability will have a headwind as depreciation rises owing to historical investments?
Make very sure you are confident about the ongoing capital costs.
Leases - check the property situation thoroughly - how long can you use the building - will rent rise soon?
Or if the property is included freehold - what would be the value of the property if you shut down? That's a worst case scenario downside.
Finally that 36% revenue growth is clearly unsustainable and slightly worries me.
Have price rises been very high? Is capacity at bursting point?
I guess the waiting list is evidence that pricing is fine but perhaps some due diligence on relative pricing compared to other options.
How many kids are on multiple nursery waiting lists!
Frimley111R said:
walm said:
Finally that 36% revenue growth is clearly unsustainable and slightly worries me.
Bear in mind that was over 5 years though.shocks said:
Looking for thoughts or guidance !
Could it be possible that the owner realises the bricks and mortar are the limiting factor?If they know there is a good market in the area, what stops them setting up in larger premises close by?
If they opened a mile away in premises twice the capacity that they currently have, the current waiting lists in the area would disappear - along with the scope for price increases due to the supply/demand relationship.
JustinP1 said:
If they know there is a good market in the area, what stops them setting up in larger premises close by?
If they opened a mile away in premises twice the capacity that they currently have, the current waiting lists in the area would disappear - along with the scope for price increases due to the supply/demand relationship.
You would have a non-compete clause in the purchase agreementIf they opened a mile away in premises twice the capacity that they currently have, the current waiting lists in the area would disappear - along with the scope for price increases due to the supply/demand relationship.
As a parent, I wince when paying the bills but with a business head on - if you're going to go for giving a grteat service, then the numbers are pretty tight. Replacing/updating toys, consumables. Paying decent rate to get - & retain - good staff doesn't seem to leave a huge amount of meat.
Controlling costs will be key but irt surprises me how poorly the local nurseries around here use the web & social to engage with prospective parents. Do that well & you could manage the perception of a premium facility & charge a little more.
You need to be red hot on the legalities. Any ropiness in an OFSTED will kill your repuatioan & earning potential as will any incidents.
Too much worry for too little return I'd say. But it undoubtedly does well for some. Someone I know with a couple of hands-off nurseries (he owns but doesn't manage) says the biggest headache is the stream of small bad debts from parents that need to be chased.
Controlling costs will be key but irt surprises me how poorly the local nurseries around here use the web & social to engage with prospective parents. Do that well & you could manage the perception of a premium facility & charge a little more.
You need to be red hot on the legalities. Any ropiness in an OFSTED will kill your repuatioan & earning potential as will any incidents.
Too much worry for too little return I'd say. But it undoubtedly does well for some. Someone I know with a couple of hands-off nurseries (he owns but doesn't manage) says the biggest headache is the stream of small bad debts from parents that need to be chased.
PlayersNo6 said:
JustinP1 said:
If they know there is a good market in the area, what stops them setting up in larger premises close by?
If they opened a mile away in premises twice the capacity that they currently have, the current waiting lists in the area would disappear - along with the scope for price increases due to the supply/demand relationship.
You would have a non-compete clause in the purchase agreementIf they opened a mile away in premises twice the capacity that they currently have, the current waiting lists in the area would disappear - along with the scope for price increases due to the supply/demand relationship.
Its like a law firm or accountancy practice.
The value of the business is almost entirely with the workforce; the people are your product. If the workforce ups and leaves, they're going to take the value in the business with them.
Is that a risk worth buying in to? Are you experienced in running such a business and managing staff in that arena?
The value of the business is almost entirely with the workforce; the people are your product. If the workforce ups and leaves, they're going to take the value in the business with them.
Is that a risk worth buying in to? Are you experienced in running such a business and managing staff in that arena?
zzzzzzzzzzzzzzz said:
Its like a law firm or accountancy practice.
The value of the business is almost entirely with the workforce; the people are your product. If the workforce ups and leaves, they're going to take the value in the business with them.
Is that a risk worth buying in to? Are you experienced in running such a business and managing staff in that arena?
I slightly disagree although my view is tainted from watching The Good Wife.The value of the business is almost entirely with the workforce; the people are your product. If the workforce ups and leaves, they're going to take the value in the business with them.
Is that a risk worth buying in to? Are you experienced in running such a business and managing staff in that arena?
Lawyers (good ones) are valued for the individual - so when they leave a firm they take clients with them and set up shop elsewhere. That's a problem.
In a nursery there is a strong chance that the kids will stay with you while you replace employees.
I have literally never heard of a parent saying, gosh Miss Fluffy Bunny has left to Nursery#2 so I am moving Bernard Jnr to stay with her.
As long as you replace competent staff with competent staff you will most likely be ok.
I guess if the staff left en masse to set up a competitor nursery right next door to yours you would be screwed.
More evidence of this is the simple fact that typically nursery employees don't have a non-compete clause or gardening leave built into their contracts. Nursery managers perhaps but certainly not the front line staff.
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