what are the key things you need to consider? Here, two experts from the
banking and property sectors offer some insight.
The property expert: Paul Miller, Redwoods Dowling Kerr
The first thing to do is to ask yourself a number of questions. Is your setting at a level where you require more capacity, and could you fill it? How would you use additional space? Is there sufficient long-term childcare demand in your area to justify expanding, and if so is there space within the existing setting or nearby to expand? How likely is it that planning permission will be granted for proposed expansion? What impact would this have on your nursery business? How will you fund growth?
Ideally, your existing setting should be performing well, and you will no doubt have a strong reputation within the local community for the quality of childcare that you provide, which is backed up by high occupancy levels.
Key drivers are vital. If demand is high, and this can be evidenced - for example, by long waiting lists - then this is one good indicator. A thorough insight into your location can also reveal whether your setting would benefit from expansion. For example, if there are any ongoing, or new, housing or business developments, then this will likely result in more parents needing childcare places.
If competition is low, and demand is high, this is also a good sign. However, even in cases where there are higher levels of competition, finding out if other childcare providers have waiting lists can give you an idea of the demand in childcare as a whole. Understanding local demographic trends - for instance, birth rates in a particular year within the area you operate - can help predict the likelihood of more parents needing childcare in the near future.
Embarking on an expansion may mean an extension on your existing nursery setting to provide more spaces for children. Permitted development rights have recently become more relaxed, meaning that carrying out smaller extensions on existing settings is now easier.
Another way to expand is to acquire a new setting. Generally speaking, the new setting should be close enough to your existing setting to benefit from your established reputation but far away enough to not compete with your current setting. Having a strong team already in place comes in handy here, as transferring some of your existing staff to your new setting can make things easier - as they already know the culture, and the standards your new setting should be at.
Change of use law has also been revised so that theoretically nurseries can set up in a former office block, for example, without applying for a full planning application. This is certainly worth exploring, and we would always recommend using a planning expert.
The finance expert: Andy Jamieson, Santander
A healthy business would typically deliver a gross profit margin of around 45 per cent and an EBITDA (earnings before interest, taxes, depreciation and amortisation) margin of about 20 per cent. This would normally be sufficient to meet all obligations of the business. This is very much dependant on the company's financial position - in turn driven by the size of the debt and resulting interest costs. Also the standard of the property and resulting repair and maintenance costs, payment terms negotiated with customers and suppliers, and the resulting working capital requirement. And don't forget the remuneration requirements of the shareholders and taxation.
There are two key components that will support a bank's decision to lend to a business: the business plan and the management team. The management team is the face of the business, so it is essential for them to successfully sell themselves. They need to be professional and confident, articulate their plans coherently, and be knowledgeable and enthusiastic about opening a nursery.
A business plan is very important to operators and potential funders to buy into the intended strategy - the operator should be comfortable that their funder is not only able to support the business today but is also showing a willingness to support the aspirations of the business in the years ahead.
A business plan should include: the background of the business; its track record with the regulators; management structure; experience/background of management; historic financial performance; strategic direction of the business; forecast financial performance (to include three years' profit and loss); balance sheet; and cashflow forecast with management commentary/assumptions); local competition; and succession planning. It cannot be emphasised enough how important it is to get the business plan right. Nursery owners need to be as thorough in their research as they possibly can, setting out realistic targets and cash flow projections.
Banks will typically fund up to 70 per cent of acquisitions subject to satisfaction with other lending metrics, including the business's ability to service the proposed borrowing.
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