For what it's worth - selling your nursery

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You've built your nursery up over several years; invested your money, time and hard work in it. Now with the boom in childcare provision, you think it is time to sell up and reap the rewards of your labour. So, what is your nursery worth? 500,000? 750,000? Unfortunately, it may be worth less than you had hoped.

You've built your nursery up over several years; invested your money, time and hard work in it. Now with the boom in childcare provision, you think it is time to sell up and reap the rewards of your labour. So, what is your nursery worth? 500,000? 750,000? Unfortunately, it may be worth less than you had hoped.

Typically, nursery operators tend to overvalue their busi- nesses when contemplating a sale, says Ron Cobb, principal valuer at Nurseries Direct, a business transfer agency specialising solely in the sale of day nurseries.

'Many nursery owners value their business on the effort they have put in,' he says. 'Regrettably, the business will only achieve the value that the market is prepared to pay.'

In the hope of achieving the best return, many vendors put their nursery in the hands of the agent giving the highest valuation. However, says Ron Cobb, 'The ideal situation for vendor and agent is to have a number of interested buyers bidding against each other and an overvalued nursery can attract fewer potential purchasers than one valued at market rate. In the end, the sale price of a nursery is determined by what the bank will lend against the business, not the aspirations of the seller.'

Nevertheless, nursery values are still high, although for those offering places for fewer than 50 children, prices may be peaking. A premium is paid for larger nurseries (that is, those greater than 60 places) as they tend to be operationally more efficient, a factor that also applies to purpose-built nurseries.

In Ron Cobb's experience, nurseries registered for more than 60 places carry a greater value with buyers and their funders, and he is now finding that the values for nurseries with fewer than 40 places are dropping, because of lack of demand.

The value of a nursery business consists of three elements:

  •  the property (including any land); 
  • the goodwill (that is, customers and potential customers); and fixtures and fittings.

In the case where the property is leased rather than owned, the property forms no part of the valuation.
Sale price is determined by banks' willingness to lend against the business. While banks are prepared to lend up to 75 per cent of value against freehold nursery premises (because if the nursery fails, they can recoup their loan from the sale of the property), they will rarely lend over 50 per cent of value for the acquisition of a leased nursery. Nevertheless, good nursery premises are hard to find and a long lease (say, 25 years or more) on a well-located nursery is still seen as having considerable value.

However, there is one marker common to all valuations, profit. Profit is measured as annual earnings before interest payments (to the bank or lender) and before paying tax, usually referred to as EBIT (earnings before interest and taxation). Prospective owners must establish exactly what EBIT will be on taking over a nursery.

Once established, a multiplier can be applied to the EBIT figure to give a valuation of the business. The multiple is determined by the market forces at the time of sale. The current market is paying a multiple of 1.25 to 2.5 EBIT for leased premises and 4.5 to 6.25 EBIT for freehold premises.

Therefore, 

  • a leased nursery making 50,000 EBIT per annum, would be worth between 62,500 and 125,000. 
  • a nursery in a freehold premises and making 50,000 per year would be worth between 225,000 and 312,500 for the business.

Note that these figures include the value of the property, and banks prefer the property element to be at least 60 per cent of the total business valuation.

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