.Dolphin Nurseries acquired an existing nursery in Bracknell, Berkshire in September 2002, but the process began over 12 months earlier when we were approached by a day nursery sales agent.
As a company we build and operate our own nurseries, but there are advantages to acquiring an existing nursery, in particular the benefit of an immediate income stream on acquisition. The challenge is to manage the process to achieve good value from the negotiation and not jeopardise the goodwill you will have paid for when making changes once you own the site.
You can find nurseries for sale through a number of agents, most of which frequently advertise in Nursery World. It is worth registering your interest with all of them. Of course, you can approach a nursery directly by phone or letter, but you will need to ensure that you make contact with the owner rather than an employee - as you will discover, one of the most sensitive issues to deal with when acquiring an existing nursery business is when and how to tell the staff.
One of the hurdles in acquiring an established nursery is that occasionally vendors will test the market to see what their business is worth and may not be a genuine seller - as a potential purchaser this can waste time and money. I recommend probing the vendor to ensure that they are committed to selling. In fact, we had made an offer for the Bracknell nursery some years before we acquired it but the owners were not committed to selling their business at that time. They went on to develop the nursery from 50 places to more than 90 before putting it on the market again.
Analysis
The process of acquiring a nursery will include visits to the nursery by you and others to help you form an opinion. At Bracknell the vendors were reluctant to allow me or my colleagues entry during operating hours, so I had many viewings of pristinely laid out rooms at weekends before I finally saw the day-to-day operation. However, they were helpful in providing us with good quality trading information including occupancy figures, fees, salaries and other costs.
Before we made our offer we conducted an initial analysis of the nursery's trading performance based on the information provided by the vendors, adding our own assumptions. We also looked at where the existing clients of the nursery came from and where we might source new clients. We spoke to competitors and really got a 'feel' for the area. We then worked out an action plan and a financial model showing how the nursery could develop under our operation.
Our greatest concern was to ensure as much continuity as possible with the staff team. However, the vendors were clear about their strategy on this issue. A few years earlier they had lost part of their team when uncertainty developed because staff discovered that the owners might be selling. So, we agreed to the vendor's request that we would inform the staff only after the purchase became unconditional.
Before we made an offer we wanted to research the reputation that the nursery had established among local parents. This is a tricky factor to pin down unless you are a local resident or user of the nursery, but we asked around without raising suspicion and established that parents were pretty satisfied. We were also concerned about the nursery's reputation among local employees.
Negotiations
Like many areas in the south-east, Bracknell is a difficult recruitment market and we discovered that the previous owners had significant problems recruiting key staff - we made the assumption that they had probably been at a disadvantage because salaries were at a rate below the market level.
This factor affected our offer because we recognised that it would increase our costs to make improvements.
Negotiating the price can be a drawn out process and you will only achieve a good result if you are prepared to walk away from the deal. We recently stepped back from a potential acquisition of a nursery in Sussex days before exchange was due. New information had come to light which materially affected the value of the business and the vendor was not prepared to renegotiate.
All negotiation is best handled through the agent rather than directly with the client (I once had a midnight call from a nursery vendor, swearing at me because things weren't going her way - we didn't conclude that purchase). Having said that, our acquisitions at Bracknell and Upminster were both successfully negotiated directly with the owners.
We arrived at our offer for the nursery in Bracknell by applying a multiplying figure to the Earnings Before Interest, Taxes, Depreciation and Amortisation of the business at the time of purchase (or, net earnings excluding any interest payments and tax). This method is the same as that employed by professional valuers when providing a valuation for bank borrowing purposes. The multiplying figure is determined by monitoring as many transactions in the marketplace as possible and it varies depending upon whether the premises is sold freehold or as leasehold. Any professional firm of valuers will give you their considered opinion on the level of multiplier to use.
Agreement
After some negotiation, the price we finally agreed with the vendors at Bracknell seemed pretty fair for both parties and we set the lawyers to work on the purchase agreement. We then began a process of rigorous 'due diligence'. This is a thorough investigation into the business you are acquiring so that you can verify, or adjust, all your original assumptions.
The process may unearth hidden costs, a poor reputation or other factors which will affect the value of the nursery. If you discover negatives you can always renegotiate, or walk away. Be wary of any vendor who is reluctant to disclose any information you feel you require - I know of at least one instance where a nursery owner had something to hide and simply refused to provide full trading accounts.
The extent of your due diligence will also depend on whether you are buying the nursery assets and goodwill, or whether you are acquiring a limited company - the former is a much more straightforward process and the latter is likely to require warranties from the vendor as you will be taking on the liabilities of the limited company.
Both our nursery acquisitions were asset purchases and we conducted our own due diligence; however, at Bracknell we included an investigation by a financial consultant who provided us with a detailed report of the audited and management accounts.
We intended to borrow a proportion of the acquisition moneys from a high street bank and the bank instructed a valuation inspection by a firm of valuers. The findings in the valuer's report put a market value on the nursery which broadly concurred with our own.
Completion
From agreeing the purchase price with the Bracknell vendors in January, we proceeded to exchange of contracts in June. Because of the sensitivity of the vendors to news getting out to staff or parents we had agreed not to apply to Ofsted for transfer of the registration until we had exchanged.
Consequently we had to make the completion of the contract subject to Ofsted approval. We were then in Ofsted's hands regarding the timing of the completion and met with them and the nursery manager to outline our plans for takeover. With registration in our name, completion finally took place in September.
Just prior to completion we spent a day at the nursery adjusting the completion price by apportioning all the income and expenditure to be fair to both parties.
One of the key aspects in both our acquisitions was that competent managers operated the nurseries and the owners had stayed at arm's length. This meant that we inherited sufficient management expertise for the nurseries to operate autonomously when required and that the owner's input was not a key factor in the operation at the time of acquisition. Unless an owner has delegated and built up the skills of the staff a potential purchaser can find that a 'tight ship' can quickly founder once the 'captain' is no longer at the helm.
Takeover
We have a policy of being open in our communications with parents and staff, so immediately after the Bracknell acquisition we met with the staff team to outline our plans and to apologise for having kept them in the dark about the transfer of ownership. Many of them had guessed that something was happening, so for some it was a time of relief as well as surprise.
We were keen to build a bond of trust with the team and to retain as many of them as possible, not least for the sake of continuity for the children.
I was sure we had inherited a competent team but that they were undervalued by the previous owners. Our plan was to make immediate improvements which would benefit them directly and then evaluate their skills and invest in training and development where required.
We called a meeting with parents at the earliest opportunity to announce the changes and outline our plans for the future. These included considerable investment in the facilities, including equipment, but also making much needed improvements to the building and outdoor area. While some parents were wary of change, most seemed to welcome our open approach.
Operation
The pace of change is important in a nursery takeover - too fast and the staff are under pressure to handle the new; too slow and there is a risk of looking like you aren't delivering on promises. We wanted to ensure that the bond of trust between parent and nursery and staff and employer was maintained at all times and this required support and open communication.
Our plans included a gentle re-branding of the nursery - a change of name and a new marketing plan. This included approaching businesses which could have childcare needs for employees.
And the results at Bracknell 18 months on? Well, in spite of the relocation of one of the most significant employers in the area - the Meteorological Office moved from Bracknell - resulting in a temporary reduction in occupancy, we have improved the setting's profitability.
Keeping to our promises has helped develop a strong bond of trust and has resulted in high level retention, especially among key staff. The excellent management team we inherited is still with the nursery and the benefits which have accrued from this continuity have resulted in advances in the quality of childcare and education.
We are now benefiting from the factors which create a virtuous circle - good staff morale and staff proud of their nursery.
Martin Pace is managing director of Dolphin Nurseries, a London-based nursery chain. Dolphin owns and operates five nurseries - two of which were acquired and three developed from scratch.
Key points
* Conduct a comprehensive analysis before making an offer.
* Make sure that the seller is genuine about their intentions to sell.
* Strike the best deal you can - and be prepared to walk away, even at the last minute.
* Get expert advice - from valuers, financial consultants, Early Years Development and Childcare Partnerships etc.
* Be open in your communications to parents and staff and keep your promises.
* Make change at a manageable pace so that staff and parents can deal with it.
* Brookbank Nursery in Cheshire was bought last month by Dunmar Nurseries for an undisclosed sum close to the 1.25m asking price. Mr and Mrs Brannan instructed nursery agents Dowling Kerr to market the 116-place nursery which also has a 12-place out-of-school club. The former family residence boasts well-equipped gardens.
The new owner is an established nursery chain which trades under the Treetops name and now operates 13 nurseries and seven out-of-school clubs.
For further information contact Andrew Coulter, Dowling Kerr valuation director, tel: 0870 750 5021.
* Flying Start Day Nursery in Southsea, Hampshire has been purchased by Jackie Scarff and Jane Ainsley who are new to the childcare industry.
The nursery, established by Derek and Ann Hellier, is based in a converted large terraced house and is registered for 29 children. It has gained an excellent local reputation during the past four years.
For further information contact Charles Phillips at Christie & Co's Winchester office, tel: 01962 844455.
* Abacus Day Nursery in Dursley, Gloucestershire is the first nursery to be purchased by Oxford and Swindon Co-op which is set to develop a chain of nurseries operating under the name 'Imagine...'
Nursery agents Dowling Kerr successfully sold the nursery on behalf of Lynn Bedford. It is currently registered for 38 children but there is the potential to extend the nursery to add an additional 11 places, making the already profitable business a lucrative investment.
For further information contact Andrew Coulter, Dowling Kerr valuation director, tel: 0870 750 5021.
* Specialist business agents Christie & Co recently sold one of Devon's longest established day nurseries.
Sunbury Hill Day Nursery in Torquay was opened by Teresa Mackenzie 38 years ago. She is now retiring and has sold the 24-place business to Stuart and Avis MacDonald for an undisclosed figure from a freehold asking price of Pounds 225,000.
The central property, a period, semi-detached house, includes owner's accommodation and a children's adventure playground.
For further information contact Simon Harvey at Christie & Co's Exeter office, tel: 01392 285600.
