How to sell a childcare business in Australia

A childcare business sale is a relatively complicated process compared to other business sales within Australia. Childcare businesses attract buyers due to their governmental subsidies, high barriers to market entry, and recurring revenue models; however, the legal regulation of services approval, licensing, provider changes, and CCS agreements makes it more complicated than any other industry. This means success depends on preparation and timing, and on choosing the right people to assist you with the process. 

If you’re considering selling and would like to discuss this matter with a specialist in childcare business acquisition, contact Benchmark for a confidential conversation.

Preparing your childcare business for sale

The preparation that you will undertake prior to marketing your company will affect your sale price far more than any efforts after listing. Childcare investors are knowledgeable and frequently consult experts. Anything out of order or questionable will be closely scrutinised. Taking three to six months preparing your company for a sale may seem like a long time, but it isn’t wasted effort. It could very well be the best lever you can use when making the decision. In fact, if you have not yet begun considering your timetable and goals, an exit strategy will provide that framework.

Get your financial records in order

The buyers and their accountant will expect no less than three years’ worth of profit and loss statements. They will study these statements line-by-line, so you can’t have messy accounts, and you certainly can’t have personal expenses mixed in with business expenses. This shows a lack of professionalism and will make the buyer lose trust right from the get-go.

Ensure that in your profit and loss statements, the owner expenses are segregated from operational expenses. Have you been running your personal vehicle and family mobile expenses through the accounting system? Ensure that these are cleaned up and presented properly in order for the net profits to be clear. The potential buyer wants to see the adjusted EBITDA figure. They don’t want to do any guessing on their part.

The occupancy report must be done per room and age category, monthly for the last two to three years. Ensure that your revenue has been reconciled with the Child Care Subsidy Payments. Show any gap fees separately.

Secure a long-term lease before going to market

Your lease will be one of the very first things that a potential buyer will be interested in, and a short period left on it can end up ruining any deal you may have had before. Once they see that there is less than ten years left on it, then they are out.

Speak to your landlord before you list the business. In an ideal situation, you should have a lease agreement that runs for about 15 to 20 years. You might have to negotiate with the landlord for an extension or restructuring of the lease agreement prior to listing the business for sale, because it will make it easier to sell the property if the buyer knows that there will be no problem regarding the lease agreement. In particular, child care centres have been purpose-built or fitted-out and losing the property means losing the entire investment. There are also broader considerations around selling a business with a lease that apply here, including landlord consent and the assignment process.

Reduce owner dependency with a management team

If you are the centre director, the educational leader, the one who starts work first every day, and the person parents turn to in case of problems, you will have a business highly dependent on yourself. That limits your buyer pool to people who want to buy themselves a job, and it compresses the multiple you’ll achieve.

Transition from an owner-operator format to a management structure prior to sale is one of the highest-return investments you can make. Hiring a competent centre director and establishing a leadership group that would be able to take control of everyday processes without your involvement extends your pool of buyers to companies seeking to add businesses to their portfolio.

This difference may be quite significant when it comes to valuation. Childcare centres run by their owners usually get sold at the PEBITDA multiple, which is usually lower because the buyer takes on the burden of compensating for the owner’s services. When there is a managerial staff, however, the EBITDA multiple is applied, and it is about 0.5-0.7 times higher than the PEBITDA one. As a result, a business bringing in $400,000 of profit gets valued between $200,000 and $280,000 higher.

How a childcare business is valued

Child care businesses in Australia are valued at multiples which are higher than almost any other type of small and medium sized businesses in Australia. High barriers to entry and the fact that there is a consistent demand for these services due to government subsidisation means that a large number of people are interested in buying them.

EBITDA multiples for childcare centres

Typical values in Australia for childcare centres vary from three to five times the EBITDA, taking into account the financial performance of the centre, location, lease agreement terms, occupancy rates, and the nature of the business management. For example, a business with a management team and good occupancy rate will trade at about four times EBITDA, while top-quality childcare businesses with long leases can reach five times EBITDA and above.

This means, for example, that a childcare centre earning EBITDA of $500,000 could be valued at $1.5 million (3x), $2 million (4x), or $2.5 million (5x). These figures are broad because the multiplier is a measure of the risks associated with owning the property. There’s a vast difference between the two examples mentioned above because one business is relatively low-risk, whereas the other is quite risky. Read our guide to find out all about how to value a childcare business.

Multi-site operators and portfolio buyouts command more than 10 times EBITDA multiples. In the purchase of Young Academics by Seidler Equity Partners a few years ago, the valuation was significantly higher than 10 times EBITDA, but this deal included at least 40 centres and a pipeline for another 50. This is an exception, but it reflects the value placed on scale in the childcare industry.

What occupancy rates signal to buyers

Occupancy is the most reviewed figure when it comes to child care centre valuations. It shows the buyer how many of the licensed seats in the facility are occupied and how much room for increasing revenue there is, without expanding the physical space.

When the facility operates at 85%-95%, it means that it performs really well, the demand on the service is high, and the buyer acquires a business that can barely generate additional revenues, thus minimising the investment risk. When a child care facility works at 65%-75% of its full capacity, then the situation is quite different. Some people may treat it as an investment opportunity, whereas others may include the risk into their offer price. Potential revenues do not represent the intrinsic value of the business until it is realised.

When presenting occupancy, make sure that it is done for each particular age category and each room. It would be possible that the facility works at 90%, but the under-two years room has 60% occupancy due to the staff-to-client ratio. That kind of detail is important to an experienced buyer, and it should be in your information memorandum from day one.

The licensing risk most sellers overlook

This is the point in the sales process which will surprise many owners of childcare businesses the most. In general, when you sell a business, it consists of three parts, namely, the assets, the lease, and the goodwill. When it comes to childcare businesses, however, a sale entails undergoing an inspection that may stall, limit, or even stop the sale process.

Why a sale triggers a regulatory review

In the event that there is a change of ownership of a childcare centre, it is important to note that the service approval is not automatically transferred along with it. In accordance with the Education and Care Services National Law, the transferring approved provider and the receiving approved provider are required to give notice of the intended transfer 60 days prior to the planned date.

In the event that the authority doesn’t step in during the 28-day period, then consent is considered given. However, should there be issues regarding the buyer’s ability to run the service, their compliance with regulations, their financial standing, and/or their understanding of the National Quality Framework, the authority will step in. There are some states, mainly New South Wales and Victoria, where the authority requests that the buyer undertake a written examination proving their understanding of the National Law and National Regulations. There have been verbal examinations in Queensland. If the buyer fails the test, the transfer would be rejected.

Additionally, the receiving provider has to obtain an independent Provider Approval prior to applying for the transfer of service approval. The time taken for a provider approval application can range anywhere from 60 days to more than 120 days. For applicants who do not already have a provider number, the time taken for this process would add on to the 60-day notice period for transfer.

This is the reason why finding qualifying buyers becomes extremely important in such cases. Any broker that has an understanding of the childcare industry would first verify whether or not the interested party has been granted any approval for being a provider and whether or not they have any past experience passing regulatory examinations.

How approved places can change post-transaction

This is the risk that is often mentioned only when it is too late. The number of approved places at your centre (the maximum number of children that can be educated and cared for) depends on space ratios for unencumbered indoor and outdoor space. Regulations 107 and 108 in the National Regulations require that each child is entitled to at least 3.25 square meters of unencumbered indoor space and at least 7 square metres of unencumbered outdoor space.

If there is a change in ownership of the service approval, the regulatory authority has the ability to reassess the ratio according to modern criteria. For centres that have been approved prior to 2012 under former legislation, called “declared approved services”, this process could be quite relevant. Some areas might no longer be counted because of changed regulation.

The result is tangible. A centre that has been in operation with 75 approved places for a while now might be limited to only 60 or 65 places following the transfer process, just because of a reassessment of the space requirements based on today’s standards. The fewer the approved places, the less the maximum occupancy, and the less the revenue potential of the centre, and hence the financial value of the business that was negotiated by the buyer.

A savvy seller is aware of this problem and has the capacity to mitigate this situation even before entering into any negotiations or even putting up the business for sale. By having the space recalculation done by an official building practitioner, the seller will be able to gauge how many approved places he actually has compared to what he originally had. This will provide the seller with adequate time to modify or negotiate with the building authority about possible ways of getting a waiver.

Getting a pre-sale building compliance assessment

One of the best things a childcare centre owner can do is have their building assessed before sale, yet very few people take advantage of the opportunity. A building compliance assessment requires a building professional to calculate and certify the total unencumbered indoor and outdoor area of your centre to the latest standards of regulations 107 and 108.

The assessment tells you whether your maximum approved places are in line with the latest standards (e.g., storage space taking up play area space, verandas being enclosed, or outdoor spaces having thoroughfares that are not compliant with the requirements). It allows you to know what the outcome will be after the transfer applications have been processed by the regulatory authority.

In case the figures work for you, you will have proof of that. In case there are problems, you still get the chance to correct them. Either way, you avoid the situation whereby your approved places get reassessed by the regulatory authority during the transfer process, thus resulting in the buyer renegotiating the prices downwards or even pulling out of the agreement.

Keeping the sale confidential

The confidentiality surrounding the selling of a childcare business is especially delicate compared to any other sector. The employees within your business will most probably consist of those that have been working with you for quite some time now and will know most of the parents in your centre. It is important that no news leaks out prematurely about the sale of your centre. This will cause parents to pull out their children, as well as create instability among your employees.

How your centre is marketed without being identified

The listing should be done in such a way that it would remain “blind,” in which all the important features and other details regarding the centre are listed, but without disclosing its name or providing any information through which it can be identified by any other means. The listing would then be sent to the appropriate qualified buyers database, while the advertisement would be carried out online through business sale websites with a generic description of the business.

Those interested buyers would be asked to sign a confidentiality agreement prior to accessing the complete information memorandum. Under this agreement, they should agree not to divulge the identity of the business and not to contact either the centre’s staff members or its parents. In addition, it would be strictly prohibited to visit the property without any prior appointment.

Managing inspections outside operational hours

The physical inspection of the centre is essential during due diligence, yet it should be done tactfully. Any unfamiliar individual walking around during regular hours of operation, snapping pictures, and asking questions would raise alarms among staff members and parents alike.

Inspection normally takes place during evening hours, weekend periods, or when the centre is not operational. By doing so, the potential buyer is able to view the physical properties of the centre and its layout and condition, both indoors and outdoors, as well as the overall appearance without interrupting the day-to-day operation or drawing suspicion. Should a second inspection become necessary, this too is planned in similar fashion.

When staff and parents are told about the sale

Timing of the disclosure is partially regulated and partly just common sense. In accordance with National Quality Framework amendments that started on 1 October 2023, the transferring and receiving approved providers must inform the relevant regulating body at least 60 days prior to the planned transfer date. Subsequently, the receiving approved provider must write a letter to the parents of all the children currently enrolled in the service at least seven days prior to the transfer date.

Generally, sellers and their agents manage the disclosure process in such a way that the announcement occurs only after the unconditional contract has been signed. This means the discussion is made by the seller in coordination with the owner of the facility. It is generally presented by the continuity approach, where no changes are to occur in the location, the team, and the daily procedures. Employment conditions as per the Fair Work Act are not affected by the ownership transition process.

The parents are advised as per the regulation’s time frame, through a letter signed by both parties, the previous and new owner of the facility. It should be comforting news since everything will remain the same, and there is no need for any change in staff or operations.

Who actually buys childcare businesses

Childcare services benefit from a much wider and more enthusiastic pool of buyers compared to other industry sectors. Knowing your potential buyer enables you to prepare appropriate material for the sale of your centre and determine reasonable expectations concerning price and conditions.

Industry buyers and large operator groups

The most enthusiastic buyers within the marketplace include existing childcare facility operators that wish to grow their business further. These include small childcare facility operators wishing to increase their facility offerings to two or three, as well as large companies like G8 Education and Goodstart Early Learning that purchase facilities in order to grow. Private equity firms are also an increasing presence within the market due to the nature of the business.

Industry buyers act fast as soon as they come across centres that match their buying requirements. They already possess the authorisation from the providers and are aware of the entire regulatory process, and also have enough money to integrate a new business centre into their operations without any problems. For the seller, working with industry buyers would mean having a more trouble-free transaction process. The types of childcare centres that are currently on sale in the market can be seen via Benchmark.

You can see the types of childcare businesses currently for sale through Benchmark to get a sense of what the market looks like from the buyer’s side.

What the right buyer looks for in a centre

More important than the highest offer for your centre is the buyer who is most likely to complete the deal, meet all the criteria set out by the regulatory body, keep your employees on board and continue providing families with the same level of service they have been used to.

Seasoned buyers will be interested in occupancy ratios, staff turnover, your centre’s NQF rating, the current state of the property and its lease, along with the centre’s reputation in the local community. Buyers expect your centre to have a clean slate as far as the accounts are concerned, as well as an effective management system and zero problems with compliance. Such centres fetch competitive offers from multiple buyers. Centres where there are some areas of concern can still be sold, however, the price will factor in the effort required to fix the problem.

Location is a key consideration when choosing what to buy, too. Centres in suburbs with a growth in population of young families, which does not feature much competition in terms of capacity, will sell for top dollar, particularly if the suburb boasts good transport connections.

The sales process from listing to settlement

The sale of a childcare business is always undertaken through a process that follows some strict guidelines, which means that it can take a long time compared to other sales of businesses. The time frame will be about six to twelve months.

Gathering essential documents to go to market

Prior to listing, your broker requires all the necessary paperwork. This usually comprises of profit and loss accounts and tax returns for the past three years, the lease agreement for the property and any variations thereof, the service and provider approval papers, the NQF assessment and ratings for the current year, occupancy records per room per age group, staffing records and qualifications, a copy of the quality improvement plan, insurance certificates, and council/planning approvals of the premises, where applicable.

Preparing all the necessary documents before entering the market will save you time when your potential buyers get interested. Each week of delay during the process of due diligence for lack of any required document means losing out on the opportunity or having second thoughts from the buyer’s side. Our guide on how to sell a business covers the general documentation and preparation steps in more detail.

Letter of offer, deposit, and contract execution

Once there is agreement from the buyer to proceed, they then prepare the letter of offer which includes the selling price, deposit amount, settlement date and conditions if any (i.e. satisfactory due diligence, financial clearance, transfer of service approval). Provided that the offer is accepted by you as the seller, the next step is to make a contractual sale agreement.

The amount of deposit paid varies from 5% to 10% of the buying price, kept in the trust account till the date of settlement. There are certain conditions included in the contract, which must be satisfied prior to making an unconditional sale agreement. When it comes to the sale of childcare businesses, the most significant condition is undoubtedly the transfer of the service approval to the buyer.

Regulatory notifications and Provider Approval transfer

It is at this point when the childcare-specific requirements begin to matter. The person making the purchase must be a holder of provider approval at the moment of submission of the application for transfer. If this condition is not met, it is necessary to submit the application for provider approval as soon as possible; ideally, together with the contract for the transfer.

The joint notification of the transfer to the regulatory authority should be submitted at least two months prior to the transfer date. The authority has 28 days to consent to or object to the transfer. In case of objection, the transfer won’t happen without addressing those objections. The reasons why the authority may object to the transfer are related to compliance issues, financial capability, or insufficient knowledge of the NQF on behalf of the purchaser.

At the same time, it is necessary to apply for CCS (Child Care Subsidy) approval in the Australian Government Department of Education. It should be noted that it is impossible to transfer the CCS approval to a new entity. As a result, the CCS approval is revoked on the part of the old provider while the new one gets its own one.

Planning the handover period

Handover is an essential step that helps safeguard the worth of the business while ensuring that all parties involved have an easy time with the process. Handover normally takes place within two weeks to one month after closing the sale, where the selling party will be present to make introductions to the buyer and guide them through all systems.

In the process of transferring ownership, the incoming owner is responsible for overseeing the running of the business and its staffing, as well as ensuring that compliance with legal requirements and communication with parents are adhered to. In the case of the records of the children who are enrolled in the childcare centre, these are required to be transferred immediately, provided the consent of the parents has been obtained. It is also imperative that the seller settles all account balances with suppliers and insurance companies according to the terms of the agreement.

For asset sale structures, there are additional considerations around what transfers and what doesn’t, which our guide to selling a business as a going concern explains in more detail.

Why the right broker changes the outcome

The sale of a childcare service is different from the sale of a coffee shop or retail store. The regulations alone make it necessary to work with a broker who knows nothing about the childcare industry and can cause you to lose months, money, or even your deal.

An experienced broker within the childcare sector knows how to accurately appraise the business based on the latest information available in the market. They have access to information about who amongst the potential buyers is a certified provider and who among corporations are looking to make acquisitions. They also know how much the market is willing to pay based on occupancy levels and leases offered. The process for transferring the service certification as well as the timeline for submitting applications to CCS (Child Care Services) is well known by such a broker, especially since there are some pitfalls to avoid in the whole process. Our business valuations service can give you a data-driven starting point.

Talk to a childcare business sales specialist

If you are thinking about selling your childcare business, the first thing you should do is have a confidential discussion with a person who is familiar with the process. We can provide you with an unbiased evaluation of how much your facility will be worth on the open market and show you what it takes to sell, and help you determine if you should sell at all. There is absolutely no cost involved, and there is no obligation.

Call 1300 366 521 or request a free, confidential business appraisal through our website.

FAQs

How long does it take to sell a childcare business in Australia?

Generally, the sale process for childcare businesses usually takes anywhere between six to twelve months, from listing to closing. Factors that influence the timeframe include the preparedness of the business for sale, availability of the right buyer within a short period, and the process of seeking regulatory approval. The service approval transfer, for example, is subject to at least 60 days of notice before completion. In case of an initial requirement by the purchaser to seek approval from the provider, the timeframe may be extended by another 60 days to 180 days. For more on business sale timelines in general, see our guide on how long it takes to sell a business.

What multiple do childcare businesses sell for?

Most Australian child care enterprises sell at a price-to-earnings before interest, taxes, depreciation, and amortisation ratio that ranges from 3 times to 5 times EBITDA. The multiple depends on the occupancy level, profitability of the enterprise, lease period, geographic location, and whether the centre is run by a management team or an owner. The centres owned by an individual are valued based on price to EBITDA multiple ranging from 1.8 times to 2.9 times. Centres managed by a professional team are valued using an EBITDA multiple of 2.9 times to 4.5 times and above. Understanding how EBITDA-based valuations work can help you interpret the numbers your broker or valuer presents.

Do I need a broker with childcare industry experience?

It is not necessarily required in terms of the law, but the reality may be different from that. The process of buying a childcare business will encompass several important aspects such as transfer of the service approval, checking provider approval, the process of applying for CCS approval, the NQF issue and the composition of potential buyers that may include individuals and corporations.

Does my NQF rating affect the sale price?

The answer is yes. For example, if you have an NQS rating that is considered “Meeting” or better, then prospective purchasers will take comfort knowing that the facility operates in line with legislation and is efficiently managed. On the other hand, an NQS rating of “Exceeding” can certainly be considered an asset for sale purposes and may appeal more to corporate purchasers who have their own quality standards across all facilities. An “Achieving” rating, while not a showstopper, should indicate to prospective purchasers that there is some work still required in regards to quality standards which can reduce offers.

What happens to my employees when the centre sells?

Under normal circumstances, the Federal government does not have any legal obligation that ensures your employees get automatically taken over by the buyer as part of the process of selling a childcare business via an asset sale. In reality, the buyers normally offer employment to the current employees because their skills and family relationships are what make them valuable to the centre. There are provisions within the Fair Work Act dealing with transfer of business that will depend on how the sale of the business is done.