Specialist Article - Buying a centre

RESEARCH

• research the competition
• check with Council for new applications
• clarify if accounting is cash or accruals
• check income against childcare benefit claims
• seek accountants advise on purchasing entity

What is the competition near the centre you are considering buying -- make an internal inspection of the other centres by posing as a prospective parent, obtain their fee and charges and any additional services they provide ie meals morning tea nappies etc. and obtain a copy of their promotional brochure or parent handbook.

Check the local Council for any applications pending for childcare centres in your area of interest.

Don't hold out for the perfect childcare centre 10 minutes from where you live -- you'll probably never find it!

Clarify if the profit and loss account presented to you as an interested buyer is recording the income on a cash accounting basis (bank deposits) or on an accruals (billings) basis. Due to the timing of the government childcare benefit payments around the end of June beginning of July or possible overpayments/under payments to the cash deposits basis may not give a true picture of the trading during that period. Crosscheck the income with the childcare benefit claims and payments.

The Commonwealth Government is rolling out a new delivery model of childcare subsidy payments from 1 July 2008. These subsidy payments Call Childcare Benefit have always been paid direct to childcare centres on behalf of parents and previously involved and estimates of subsidy which was subsequently accounted for on actual use reporting. The new system called CCMS (Child Care Management System) will require centres to provide online live data of daily attendance to the government and actual usage will be paid to two weeks in arrears to the centre. A copy of the handbook for long day care centres on the new system can be obtained at http://www.facsia.gov.au/childcare/handbook2007-08_ccms/contents.htm.

The changing to the new system may result in some cash flow issues with some operators however in the long term should even out cash flow peaks. The interesting thing to watch in the next couple of years will be whether the government progressively delays payments to the centres!

Be sure the contract you enter into allows for a training period immediately before settlement and immediately afterwards. Typical is one week before and one week after.

If you are new to the industry consider getting a suitable consultant to undertake an operations check on the centre during the contract due diligence period ie interview staff, do a mystery shop at the centre as a prospective parent etc

Make sure your contract has a due diligence period which allows you and your consultants including your accountant to make all reasonable checks on the business and the accounts. If you're buying a leasehold make sure the lease is examined by your solicitor and is acceptable to you. The longer the lease term the better from a buyer's point of view. A term of 15 to 20 years unexpired is desirable.

Before you sign a contract get advice from your accountant as to the recommended type of entity with which the purchase of the childcare centre should be actioned under. If you are buying a freehold business your accountant may recommend that the business is held in one entity and the freehold land and buildings in another. A common scenario for purchase is a Trustee company for a family or other Ordinary trust. In some states you will incur a double stamp duty cost if the name of the purchaser is changed after signing the contract.


SELLING

• financial records up to date
• review centre presentation
• be realistic on price
• consider financing a buyer

Get all the paperwork and financial data together that your broker requests before the childcare centre is offered to the market.

Get your financial statements up to date as much as possible. If it is already September or later and your accountant has not done your tax accounts for the previous year put pressure on him.A buyer or his accountant will certainly ask for these. Have interim accounts prepared for the year to date.

Before presenting your taxation accounts to a prospective buyer have a discussion with your accountant about ad backs ' which are expenses of a personal or extra ordinary nature which can be added to the taxable profit.

Choose a childcare broker with good industry knowledge. If you are not acquainted with a broker then ask others in the industry for a referral.

Have a good look at your centre -- does it present well -- you only get one chance to make a first impression with a potential buyer!

Be realistic on price. Do you want to list the property or do you want to sell it? Remember the broker doesn't determine the price and neither does the vendor, the market will ultimately set the price. Buyers are buying a business and a profit. They are not willing to pay much for blue sky or potential profit. If there is potential upside in the business then why haven't you realised on it before selling!

Credit is getting tighter and interest rates are rising. If you do not need all the money from a sale consider offering finance to a buyer who is having trouble with finance. Remember if the purchaser ultimately defaults on the mortgage you are well acquainted with the business if you have to step back in!


THE OUTLOOK

• positive federal budget
• tightening financial conditions generally
• rising interest rates
• continued strong support from both sides of government

The recent budget provided some positive news for childcare with the increase in the tax rebate.
To help ease the burden, the child care tax rebate will increase from 30 per cent to 50 per cent of out-of-pocket costs.
The rebates will be paid quarterly, not annually, so parents have access to the money closer to when the bills roll in. The maximum amount payable will rise from $4354 per child to $7500 per child.

Single-parent families, or families where parents are both working full-time, will also be eligible for up to 50 hours of child care benefits a week.

A couple with two children and one partner earning $60,000 a year and the other $27,000 a year will receive more than $12,400 in child care assistance.
This will cover around 70 per cent of their child care costs - $2000 a year more than previously.
We see the coming 12 months as a consolidation period in childcare. In keeping with the tighter economic conditions and higher interest rates some of the heat has come out of the childcare market from prospective buyers. Centres are taking longer to sell and the vendors have to be more negotiable on price. We also see more centres coming onto the market particularly marginally profitable centres where the owner has significant borrowings.

This presents opportunities for buyers in an industry which is now part of the Australian economic and cultural landscape and is strongly underwritten by government policy.