How much would you pay for this business?

[inbakumar]

My better half is considering buying a local children's day nursery that has come up for sale. She has prior teaching experience but needs help running the place as regulations relating to such places are high these days. The business was established in 1989 by the current owner/manager and wants to go and do other things. The place received satisfactory reports during the last Ofsted visit.

In terms of financials, the turnover, expenses and surplus for the last three years were as follows:

2002: 118000/88000/30000
2003: 123000/90000/33000
2004: 129000/91000/38000

The business operates from its own freehold premises which is worth around £275000. Salary costs are expected to go up by around £15000 per annum but we believe this can be offset fully by fee increases. The place would probably need a capital investment of about £10000 to justify fee increases.

The owner is asking for £455000. How much would you pay for it? Also is there anything else we need to look into relating to building regs etc?

Thanks in advance for your help and suggestions.

Regards,

[Wolf]

I'm no accountant so will leave the valuation to others, but the building aspects should be carefully considered.

You don't say what the property is, or what it was previously, and over how many levels etc. But start with insurance; that's going to be high for any business that involves having small children running around. Their ability to get into areas they shouldn't is well known, and your insurance will need to include all the risks, likely or not. Go to a specialist broker for advice.

You will be regulalrly visited by the enforcement authorities because of the children. You can expect Local Authority and maybe even HSE involvement at some point. Make sure your necessary building surveys are up to date, you have a good risk assessment procedure (from someone who knows what they are doing), and don't forget fire assessments as fire certificates are about to be withdrawn to be replaced by 'adequate' risk assessments that can be checked by the fire authorities.

Lastly you may wish to consider factoring in some form of premises management if you don't have that knowledge. Good property agents can prevent bigger bills by regular maintenance programs, and not letting a small issue become a large expensive one. Owners tend to ignore such things until the roof is falling down!

Most of all plan this expense in advance to avoid a shortfall in your cash predictions. Good luck.

[Joyous]

Hi Joel

If you ask this question of three different accountants you’ll get three different answers. Business valuation is an art rather than a science. Past profits are only one aspect of the valuation, the bottom line being that the value of a business is whatever you’re willing to pay for it.

To arrive at a figure you’re happy with I’d suggest getting hold of the last three years sets of accounts and looking for the following.

Asset values – Add up all of the assets, take away all the liabilities to get your asset valuation. Are the asset values accurate - the value of the freehold constitutes more than half of the asking price so you’ll need to check this to see if it’s accurate. In addition what other assets does the business have and are they all of value to you. Restate asset values where you can to take account of old equipment that might need replacing or indeed scrapping.

Profitability – Compare the owner’s stated profits with any audited figures and question any differences. If you can, go through the profit and loss account and see if there are any costs that could be reduced under your ownership. E.g. you might know of cheaper suppliers, how have payments to the owner affected the profits. Remember that accounting profits can easily be manipulated so it’s advisable to restate the profits using your own accounting policies.

A business such as a day nursery builds up a lot of goodwill which is presumably reflected in the asking price. So you need to assess how/if this will change if the business changes hands. Has the owner built strong relationships with the parents and will the parents stay once she’s gone. If key staff members leave how will this affect the value. From personal experience with my own children’s day nursery I would take this point seriously.

What about the mix and number of children – nursery fees usually drop once the child reaches 2 years old. Also if you’ve a significant proportion of 4 year olds they’ll soon be leaving to start school. Are there sufficient young families in the area to replace them?

Also look at the child/carer ratios – these are laid down and vary depending on the age of the children. You should factor this into any plans you might have.

These are just a few of the things you should consider as when it comes to a nursery the non-monetary factors are just as important as the monetary ones and you need to go through as many as you can be fore deciding what you’re willing to pay.

Also find out why the seller wants to sell. If it's a forced sale or she's otherwise desperate to sell this will affect the price.

For an investment of this size an importance however I’d strongly suggest speaking to an accountant.

Regards

Joy

[inbakumar]

Phil,

Thank you for your comments regarding the building. As you know, I'm a finance guy so know next to nothing about buildings .

Originally Posted by Joyous

Hi Joel

If you ask this question of three different accountants you’ll get three different answers. Business valuation is an art rather than a science. Past profits are only one aspect of the valuation, the bottom line being that the value of a business is whatever you’re willing to pay for it. Joy

I agree with your comments about accountants (no worries I'm one of them - in my former life, I was the CFO for a listed PLC amongst other things). I know how to price an exotic option but pricing a sole trader day nursery business is proving more difficult. Hence my reason for asking others. I think it is very much a 'gut feel' thing with limited information.

The vendor has given us three years' profit and loss information. Fee income is straightforward and about 55% of it is spent on salaries. The rest is the normal stuff and I don't think one can achieve much savings with them. Building/house is the only asset of any meaningful value.

In terms of future potential one can argue that growing levels of women in the workforce and dwindling levels of new nurseries - the fee income will grow above the rate of inflation. The place is also located in an affluent area. However, the regulation is also getting tougher which means higher costs. All in all, the profits should grow above the rate of inflation. However, my wife is not going into this business to make lots of money.

Moreover, the seller is not in a forced sale situation. She wanted to sell it last year but then changed her mind. You have a point about the staff but I think all the staff would stick around for some time except for the manager/owner.

Any more thoughts anyone? We need to make an offer soon.

Regards,

[PhilWarman]

I think it would be an idea to speak to the local authority and explain that you are looking at purchasing a day nursery and see what hoops you have to jump through with them (police checks etc.).

Insurance - there are specialist schemes available for nurserys, maybe see who the proprietor is covered with - the one I use a lot is called "KiddieCare" operated by a firm called Poundgates & Co, its a cracking scheme with all the cover you would need.

Also, have you considered outsourcing employment law issues? again, we use a company called Peninsula who will write all the SMT'sand handle any employment law issues (tribunals), its worth it especially where you are in an industry where reputation is high (as is demand for staff who will leave at the drop of a hat!)

Good luck!

[MarkD]

Hi Joel,

Business Price £455k
Property Price £275k
Profits of £38k

Goodwill £455k-£275k = £180k

Business therefore valued at (180k / £38k) = 4.7 years of profits (4.7 years to recover your initial investment & ignoring property values!!! )

I think thats a fancy multiple for this kind of business, especially as some one could get a 3 year grant to set up nearby & then undercut you.

I would visit any business transfer agent or get daltons weekly & see what the usual multiple to t/o or profits these businesses usually sell at...