How to buy a nursery business: acquisition finance and due diligence

A nursery's value sits in three places: a registered, operating setting with children and parents attached; the staff team, whose qualifications determine how many children can legally be cared for; and the premises, which may be freehold, leasehold or shared. Price is normally a multiple of sustainable earnings for a leasehold setting, with the freehold valued alongside it where included. Sellers' accounts often flatter earnings because the owner works as manager without a market salary, so lenders and buyers re-base profit on the cost of employing a manager.

Registration on the Early Years Register belongs to the provider, the legal entity running the nursery. This makes the deal structure unusually important:

• Share purchase. You buy the company that holds the registration, so the nursery keeps operating without interruption. Ofsted must be told about changes to the people connected with the registration, such as a new nominated individual or directors, using its process to report changes to registered people. You also inherit the company's history and liabilities, so due diligence and warranties matter more.
• Asset purchase. You buy the business and assets into your own company, which must be registered as a new provider before it can operate the setting. Completion has to be timed around that, which can mean a period where the seller keeps running the nursery while your application is processed.

Either way, staff move across under TUPE, which protects their terms and continuity of employment; Acas guidance on TUPE transfers explains the duties to inform and consult. Many first acquisitions are share purchases for this reason, although lenders may then want security over the buyer's holding company and the target.

• Funded hours audits. Councils can claw back payments after headcount checks. Ask for remittance statements and any audit findings.
• Parent deposits and advance fees. These are owed back to parents and should be reflected in the price or transferred.
• Holiday pay and accrued leave, including term-time staff, which transfer with employees.
• Room-by-room occupancy and the September leaver profile, to see how many children leave for school and how many are on the waiting list.
• Staff qualifications against ratios, and whether any key person, such as the manager or deputy, plans to leave after the sale.
• The lease: length, rent reviews, break clauses, permitted use and whether the landlord must consent to an assignment or a change of control.
• Ofsted history, including complaints, notifications and actions, not just the headline outcome.

Second and third acquisitions change the lending picture. A group with a central manager, shared systems and several settings can often borrow on combined earnings, but lenders also look at central costs, whether each setting stands on its own feet and how much management capacity is stretched. Funding that worked for one site may need restructuring at three or four; for a growing training business we worked with, a £600,000 facility was followed by further funding, including a £400,000 facility, as it scaled. Planning a facility that can grow with the group, rather than a new loan for each deal, usually costs less over time.

The main risks are overpaying for profit that depends on the seller personally, losing key staff after completion, a lease that does not support the loan term, and funding rates that fail to keep pace with wage rises. Personal guarantees are standard on acquisition debt, and borrowing against the freehold puts the premises at risk if the enlarged business struggles.