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Independent Article
What to look for when buying a
business
Conny Schmidt
Childcare Sales Australia will
be focusing on all of the
aspects of the buying and
selling transaction for
Childcare Operators in a series
of articles over the next few
newsletters. In this article,
Conny Schmidt, Industry
specialist and owner of Maximise
Childcare Consultancy looks at
some of the significant issues
to consider during a due
diligence period.
BUYING A CHILDCARE BUSINESS
may well be one of the biggest
financial transactions that you
will ever undertake. As a result
it is important to understand
the fundamentals that drive the
business you are looking at
purchasing.
The value of a childcare
business is determined by
assessing key criteria.
Understanding how to value a
childcare business and the
individual drivers of a
particular centre allows the
business owner to potentially
improve on, not only the end
price that they can realise on
sale but the ongoing
profitability of the business as
it continues to grow. As a
purchaser of a childcare
business these are important for
you, as it could ensure better
and more consistent returns.
I have been witness to far too
many purchasers not using their
due diligence period wisely, and
either missing out on a
potentially profitable business
to purchase or proceeding with a
disastrous one.
My experience in due diligence
over the last 10 years has
highlighted to me that due
diligence is divided into 2
significant parts, one being
financial due diligence and the
other being operational due
diligence. Both equally
important and you cannot get a
true reflection of the value of
the business or its potential
with out examining both very
well.
Often purchasers will employ the
services of an accountant to do
a due diligence on the business
financials to review the state a
business is in. Whilst I
consider this a critical part of
any due diligence. In isolation,
it can pose two problems. In
some cases where only the
financials are assessed it can
mean that the opportunity to
turn around a poorly run
business that has great staff
can be overlooked. Or the
opposite may occur, where
financials reflect historical
data that shows a very
profitable balance sheet, but
the immediate climate of the
centre is on a very rapid
decline and further potential
problems have not yet come to
the surface, hence the new owner
wears the emotional and
financial drain trying to save
the business.
Therefore it is critical that
when you are looking to purchase
a new centre that you find a
balance between researching and
understanding the financials and
the daily operations that drive
a successful childcare business.
In some cases you may be
fortunate enough to have access
to a highly skilled accountant
with very good childcare
industry knowledge, however
should that option not be
available to you than- Below I
have highlighted some areas to
consider during Due Diligence
when you are looking to purchase
a childcare centre.
Staff as part of the purchase
Many industry specialists will
agree that staff can be both
your greatest asset in a
childcare business or your
greatest liability, yet often it
can be the one area that a lot
of purchasers overlook during
the due diligence period.
However I believe it is a
critical area of research. In
some cases an inexperienced
Director that has been operating
under the direction of a highly
skilled childcare owner will not
be evident during a due
diligence. Or it may be that the
Director has enormous skill and
huge potential but due business
or financial decisions made by
the current owner the centre is
not running at its full
potential. However with the
right advice the Director could
end up being your greatest asset
and assist in the business
thriving moving forward. Both of
these can certainly get
overlooked during a purchase if
you simply don’t know what to
look for.
Equipment, facilities and
Resources
Understanding what is required
from a legislative perspective
is critical to ensuring you
receive a childcare licence to
operate, however understanding
what is considered sufficient to
ensure the delivery of a high
quality and competitive service
is another matter. A good
operational due diligence
specialist will do a thorough
site visit using a detailed
checklist to determine what
additional costs you may be
required to purchase or spend on
upgrading facilities prior to
receiving a licence. This
information can in some cases be
used to negotiate your purchase
price prior to settlement, or
justify the listed price.
The Blue Sky!
Look for potential opportunities
to increase revenue- This can be
done by way of fee increase,
building extensions, licence re
configuration, better management
of staff rosters or simply
streamlining current
administrative practices. A
potential purchaser can save
thousands of dollars each month
and end up with a better, more
financial business than first
thought.
Financials
A review of financial
information will assist you in
understanding the businesses
highs and lows. As a buyer of a
business you are looking for a
healthy balance sheet with
strong indicators of ongoing
performance and the opportunity
for growth. Some of these
factors may include- current
debtors, roster management,
competition, market demand, as
well as systems and procedures.
It is also critical to
understand how Commonwealth
Funding is administrated to the
service and how to distinguish
actual revenue in the computer
system versus artificial
revenue, as this can be
difficult to detect when looking
at current data. Remembering that historical data
is not the only indicator, of a
successful business, I have seen
some very successful businesses
turn around with good business
practices and a very good
understanding of the childcare
industry.
The current childcare market is
seeing a significant increase in
activity in relation to the
acquisition and sale of
childcare centres. It is
important to deal with an
experienced childcare agent and
advisors who can assist in
undertaking a thorough due
diligence and purchase
negotiations.
Please follow this link to visit
the Maximise website.
Maximise
Childcare Consultancy |
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Kevin Stapleton - Childcare Sales International
If you are in the market to sell a Childcare Centre please call
us today on
Australia: 1800 700
517
NZ: 0800 893 472
We have
plenty of buyers waiting throughout Australasia
What to
look for when buying a business
Independent Article
Conny
Schmidt, Maximise Childcare
July
2007
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