Webinar - Back to business

Liz Roberts
Tuesday, August 3, 2021

Despite the ongoing difficulties facing the early years sector, including an increasing number of closures, the UK market has shown a great deal of resilience. Ben Barbanel, head of debt finance at OakNorth Bank, and Cary Rankin, chief executive of Thrive Childcare and Education, joined Nursery World editor-in-chief Liz Roberts for a frank discussion about the business outlook for the early years sector

Thrive Childcare and Education has consolidated its 16 brands into four, including Nature Kindergarten
Thrive Childcare and Education has consolidated its 16 brands into four, including Nature Kindergarten

In a wide-ranging discussion, Cary Rankin explained how Thrive Childcare and Education, formerly the Bertram Nursery Group, had to make some difficult decisions in order to get through the pandemic. The group closed six sites, reducing its nurseries from 42 to 37.

‘Nobody wants to be in a position where you’re talking about closures, but the reality is we have to safeguard the longevity of the business by making some tough decisions,’ he said. ‘I don’t think any group has fared better than any other out of this, I think we’ve all suffered the same challenges.’



Survival

So what has helped nurseries to survive during this period of lockdowns, furloughs, ever-changing guidance, self-isolation and bursting bubbles?

Government assistance has been a vital lifeline for keeping childcare businesses afloat during the pandemic, said Ben Barbanel, citing the furlough scheme, Coronavirus Business Interruption Loans and rates relief, among other initiatives. ‘As difficult as furlough has been administratively to manage, it has been a saving grace for many businesses,’ agreed Mr Rankin.

Mutual support and sharing of best practice has also been a factor in building resilience in the sector. ‘A fantastic group of providers have got together, trying to work out the best solutions to take us through Covid,’ said Mr Rankin. ‘We’re all after the same thing, which is having the best outcomes for children, and a safe environment for our staff to work in.’

Asked whether larger nursery groups were better protected from the impact of the pandemic, Mr Rankin said he did not think that was the case.

‘I think one of the biggest challenges that we’ve all faced, regardless of the size of the group, has been recruitment,’ he said. ‘It doesn’t matter if you’re part of a large chain or a single site – in fact, being a large chain can sometimes go against you.’

Mr Barbanel, however, said he believed that larger groups have some advantages, especially when it comes to local lockdowns. ‘If you’ve got an estate, and some settings are open, some aren’t, you are still generating cash flow to support the group,’ he said. ‘Perhaps in a larger group, you have bigger, more sophisticated management teams who may have more of an idea of how to navigate complex scenarios.’

Growth

While navigating the challenges of the pandemic, Thrive continues to grow and develop as a business. The organisation recently unveiled a rebrand, consolidating 16 existing brands into four – Happitots, Holyrood, Corner House and Nature Kindergarten – sitting under the Thrive umbrella.

‘During the pandemic when we had 90 per cent of people on furlough, we took the time to look at some of those plans that always sit on the back burner because you are so busy with operational things,’ said Mr Rankin. ‘We didn’t sit back and think “well, we’ve nothing to do”, we sat there and said, “What can we do during a period of challenge?”’

Thrive has continued to acquire settings, with its most recent acquisition being Smarties Nursery in Chester. ‘If we can get double-digit site growth per annum, that will be fantastic,’ said Mr Rankin. ‘But those decisions will be made on how we are performing currently and whether we can demonstrate we are resilient and managing to stand strong in the face of a continuing pandemic.’

Nurseries looking for loans to support acquisitions or new developments need to have strong management teams with coherent business plans, said Mr Barbanel. OakNorth considers a wide range of factors, including previous business performance, location, operating conditions, local demographics, supply chains and daily rates. ‘There’s also something that is going to be key for every business, and that is what would a future lockdown look like for the proposed location and demographic,’ he says.

Acquisitions

When it comes to acquisitions, Thrive is looking for settings whose values and ethos are closely aligned with its own, said Mr Rankin. ‘We are looking at a setting’s reputation, its uniqueness, the character of the building, the relationship with families,’ he said. ‘We are on our own journey as a business and actually we want to learn from the businesses that we acquire.’

On the more practical side, the group is focusing on sites with around 70 places, with good outdoor facilities and a well-maintained building, he added.

Covid-19 has affected deal structures in some cases but not all. ‘If we are able to see that a business has really held up and is back to pre-pandemic levels, then it might be that the deal structure is how it was pre-Covid,’ said Mr Rankin. In other cases, the buyer might hold some payment back, to be released when numbers hit an agreed level.



State of the market

While sharing his belief that in 12 months time the sector will be in a ‘much better place’ than it is now, Mr Barbanel warned of a ‘wave of trouble’ that could hit towards the end of the year.

‘There are a number of what I would call “zombie businesses” out there that are managing to get through this based on the immense Government support they are receiving,’ he said, predicting a surge of merger and acquisition activity, with larger players looking to purchase single sites and small groups.

There are some nursery owners who have come to the end of their tether and want to sell up, said Mr Rankin, but ‘equally there is a group of people that might have thought about leaving, who are now thinking, “I need to get back to pre-pandemic levels before I can get the value that I think my business is worth.”’

The future

For some, the pandemic could actually turn out to be a benefit to their business, said Mr Barbanel. ‘They have taken out unnecessary cost, they have made those difficult decisions and become more streamlined and lean,’ he said.

On the other hand, streamlining in the sector can only be taken so far, said Mr Rankin. ‘We have leaned our businesses up to the point that we are at risk of really compromising quality, and that is not what we are here to do,’ he said.

While Government support has been welcome, funding rates continue to lag behind operating costs as nurseries face challenges including rising labour costs and the need to support increasing numbers of children with additional needs.

It is clear that the early years sector has performed amazingly well, through extremely demanding circumstances, but this hugely vital sector needs action from Government and elsewhere so it can continue to support children and families through difficult and challenging times.

The early years sector will be a long-term winner in the post-pandemic world

By Ben Barbanel, head of debt finance, OakNorth

The early years sector was obviously very hard-hit by the pandemic, but overall, nurseries have proven they are resilient and a vital part of UK infrastructure.

Government support has of course played a key role in this, but long-term, the sector will benefit from changes in the way we live and work as a result of the pandemic. With working from home having become the norm, many young families have relocated to rural areas, creating an opportunity for operators in these areas. Early years providers and operators therefore need to be thinking about this when it comes to deciding on new locations to develop or sites to purchase.

There will be numerous opportunities for consolidation over the coming months, and those who successfully consolidate, build a broader base and a wider geographical spread will be that much stronger and well-positioned for the longer-term structural changes throughout the economy.

A good chunk of the funding we have done at OakNorth Bank has been focused on growth – i.e. how can we help an operator get from two or three settings to 15-20 settings with an appropriate structure in place that balances both debt and equity? We have also done several transactions where we have provided roll-out facilities for growth and capital expenditure, as well as refinancing a core estate and putting facilities alongside that to support future growth.

ben.barbanel@oaknorth.co.uk

FURTHER INFORMATION

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