It has been another profitable year so far for the early years mergers and acquisitions (M&A) market, with large groups in the sector continuing to grow.
Kids Planet is rapidly approaching 200 settings, Ashbourne Nurseries has bought up Harp Nurseries and Dutch chain Partou has merged Just Childcare and All About Children under its brand to become one of the top five groups in the UK by size.
In fact, data from broker Redwoods Dowling Kerr (RDK) found that on average, the market share for groups with 15 or more settings nearly doubles every three years.
Leah Turner, co-founder of Owen Froebel, says large corporates are driving the M&A market, alongside new entrants.
‘Larger groups are quite limited in what they will consider,’ she explains. ‘They have a model that works for them, and for a few more years they probably won’t have to shift from that because there’s not enough competition to force them to do so.
‘Obviously, over time, the market will become more of a melting pot, and you’ll finally see larger groups having to look a bit further afield and buy smaller stock or stock that requires more operational support. But, at the moment, it is really the progress of those large group acquisition drives that is pushing the market forward, along with new investors.’
RDK has found a significant decline in single settings, which made up just 38 per cent of private day nurseries in 2023, down from 48 per cent in 2021. Meanwhile, in the same period, groups of 15 or more rose from 10 per cent to 19 per cent of the market.
Andrew K. Steen, RDK managing director, notes that since last spring, when the base rate went up to 5.25 per cent, it has been much harder for smaller operators to secure funding.
‘At that level, it’s become tougher and more expensive, and that naturally translates itself into an inability to compete with the corporate operators paying the multiples,’ he says.
Arun Kanwar, managing partner at Cairneagle, agrees. ‘Clearly one of the benefits of being part of a group is that settings going through a tough time can be supported by the group’s overall balance sheet, whereas lots of single-site operators can’t weather short-term storms. And in the midst of what has been a fairly tempestuous few years, it makes sense that it’s been tough on single sites.’
MARKET SOFTENING
The market is some way off the heights of the ‘golden year’ of 2022, however.
‘There’s little doubt that this year, we’ve seen the headwinds from inflation and higher interest rates hit the market, and debt is more expensive,’ says Nick Brown, director and head of childcare and education brokerage at Christie & Co. ‘But it remains pretty constant.’
Steen says 2022 benefited from a ‘wall of cash’ from the private equity community at a time of low interest rates and pent-up demand following the pandemic.
He explains, ‘Really good operators piggybacked, and you saw consolidation and group acquisitions throughout the year. But the differential was really just the deals that didn’t happen due to Covid in 2021, but did happen in 2022. Since then the market has just softened, rather than slowed.’
Kanwar adds, ‘The large groups are still on average getting bigger, but actually that rate of growth has slowed down. The impact of economic conditions pushed demand for childcare and occupancy down for some, and this, as well as staffing challenges, meant lots of operators saw their margins go backwards against September 2022, which led to a lot of caution. However, a lot of people now feel they have fixed their businesses, addressed those challenges, and are getting themselves ready to go again.’
This sentiment is echoed by brokers, who feel that certain issues, such as staffing, are showing signs of improvement.
‘We’ve not quite seen the back of staffing challenges, but they are less acute than they were 12 to 18 months ago,’ says Courteney Donaldson, managing director of childcare and education sectors at Christie & Co. ‘Equally, however, high costs of other things – utility bills and other operational costs – continue, alongside the high cost of finance.’
MOVING ON
Some of these issues undoubtedly led to the rate of closures accelerating through last year, and Turner suggests there are likely to be many more owners taking their opportunity to exit the sector in the coming months.
‘The last four years have been so extreme, for everyone, that a lot of people have postponed retirement,’ suggests Turner. ‘So now we’ve got a backlog of retirees, which will really hit over the next year.’
With a quarter of nursery owners aged over 60, retirement often drives decisions to sell.
‘It’s a very passionate industry,’ Steen says. ‘It is very rare that people get into this game just for money, so they tend not to want to exit early on. But the age profile is a factor in sales, as well as seeing local nurseries selling, and recognising there’s value there.’
Christie & Co is seeing leasehold sales significantly outweigh freehold deals, which Donaldson attributes to two factors. ‘Against a backdrop of increased cost of capital, acquiring a leasehold is quite a different level of capital outlay in comparison with a freehold,’ she explains. ‘But there is also the fact that a lot of our clients are predominantly either looking to retire, or are at a stage where they want to pursue other interests or have had a change in family circumstances, like health problems.
‘Where they own the freehold, they see merit in retaining it and generating a nice steady rental income from the property. There are lots of parties who want to buy freehold, but lots of sellers who would prefer to retain it themselves.’
EXPANSION PLANS
While the recent changes to funding have not yet translated into high increases in demand or investment, experts predict that September’s further expansion, coupled with a likely drop in interest rates, will see further growth in the sector.
‘The sector has unprecedented tailwinds,’ says Kanwar. ‘There is no other sector I can think of that’s going to see the growth that nurseries will because of the expansion of funding.’
Donaldson echoes this. ‘In certain pockets we are seeing waiting lists for babies that aren’t even born yet because their nurseries of choice have got waiting lists back in place,’ she says. ‘That is something we haven’t seen for a very long period.
‘Nurseries have always been a “green light sector” to banks, but we’ve seen them increasingly keen to support nursery owners because they can see the expansion commitment. I know a number of banks are currently reviewing their credit lending policy for nurseries, and are wanting to do more to help the sector meet parental demand and create more spaces.’
ELECTION FEVER
Of course, this potential all depends somewhat on the political landscape as the year goes on.
While Donaldson says the general election will not necessarily create instability in the market, there are inevitably some questions ahead of a new Government being formed.
‘Ordinarily you have a longer lead-in time to an election, and that can be a problem for markets because the waiting creates a general uncertainty,’ she explains. ‘But in just six weeks, that is likely to be negligible.
‘Policy announcements may impact the sector, however. For example, Labour wants VAT on independent school fees, with that income going towards new teachers in state schools. But where are those teachers going to come from? We might see some early years staff transitioning into teaching.’
Turner agrees the significance of the election for the sector is likely to be limited, at least in the short term.
‘No Government is going to abandon this funding expansion policy,’ she says. ‘It might not look exactly the same, but no-one is really going to change it, they’ll find a way to make it work.
‘More broadly, you tend to get a bit of a boost to the economy with any new Government, but to be honest, in the early years we still have way more buyers than sellers, so we hardly need it.’
CASE STUDY: The Playhouse Day Nursery, Coventry
Anup Chauhan bought The Playhouse Day Nursery in Coventry after the previous owner decided to retire.
A newcomer to the sector, former accountant Anup researched nurseries for over 18 months, learning about the EYFS, early years qualifications and quality childcare.
‘There were a lot of old nurseries that were either closing down or being bought by big groups,’ he says. ‘I realised the groups were mainly buying big settings, because they were more profitable and worked as they were. They could afford to either buy a big nursery or make a brand new one, so I thought there was a gap where I could turn around a small nursery that was really good and had a strong base, and try to make it a really great place.’
As a first-time buyer, however, Anup initially struggled to get banks to approve funding for the 33-place Playhouse setting, particularly at a time of high interest rates. ‘It took almost two years to purchase,’ he says. ‘It was not an easy process. I spent a lot of time trying to convince banks to give me money, filling in forms, doing cash flows, business cases and growth plans, and proving how much I understood about the sector and its challenges. I also had to answer a lot about the nursery I wanted to buy, to show I understood how it worked and what its scope might be. It was very in-depth analysis.’
In the end, he was approved, with what he describes as ‘a big deposit’, although he credits the role of his broker with keeping this sum as low as possible. ‘The main reason I got it in the end was because I bought freehold, so I hedged my risk because I own the building,’ he explains.
Anup proposed a transition period with the former owner over six months following purchase, with six weeks on site and six months of follow-up telephone support. He says this helped the deal go through, but also supported his bedding-in process.
‘It really helped me understand the sector and the employees,’ he explains. ‘An owner could just sign the paper and run out the door, but then you have to unwind their problems. It’s helpful to know what contracts are in place and what makes employees tick, and then you can be prepared to come in as a new owner with your vision, and see it through.’
CASE STUDY: Giggles and Wiggles, Staffordshire
After over 20 years as a nursery owner, Jill Jones sold Giggles and Wiggles, a group of three day nurseries in Staffordshire, to Kids Planet. Two of the nurseries were leasehold and one was freehold, with a total of 234 places and 85 members of staff.
‘It was a difficult decision, but I just felt the stress was beginning to take its toll and the time was right,’ Jill says. ‘I had great managers, but, after surviving the stresses of Covid, I lost my mum and a close friend in 2021 and decided that it was time to reprioritise.’
Jill was approached privately by a number of groups, but after initial conversations decided to find a broker to get a better understanding of the value and process, and says she found a good fit at Christie & Co.
Nonetheless, she found the process nerve-wracking. ‘Even just having agents in to value the business was stressful – obviously it was paramount that the sale remained confidential, so I was very nervous even at that stage. We arranged it out of hours, and once I had made the decision to sell, we arranged for photos and measurements to be done outside nursery hours too.’
Thanks to these clandestine viewings, Jill started to receive offers quickly. Once she accepted, the due diligence process started.
‘I would advise anyone even considering selling to get all their ducks in a row as soon as possible,’ she says. ‘The process is thorough, involving lengthy questionnaires on all aspects of the business, from staff details and contracts to invoices, utilities bills, occupancy levels, Ofsted notifications, bank accounts and more.’
She adds, ‘It can take a while to gather all the information, especially while continuing to do your day job and without anyone knowing.’
She says the secrecy element was the most difficult to manage.
Now, however, Jill says that she has no regrets.
She explains, ‘I was happy with the deal we arrived at, and as worried as I was about how staff might feel, they were all remarkably supportive and understood my reasons. Meanwhile, I’m enjoying an extended gap year with some travel while deciding what’s next for me.’
