How To Buy A Nursery Business
Learn how to fund a nursery business purchase with Rangewell
Starting a nursery from scratch can take years, requiring extensive planning, financing and regulatory compliance. Buying an existing nursery provides a more direct route to ownership. In most cases, you'll need finance to make your dream a reality.
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In the UK, children’s day nurseries are a flourishing business sector that provide vital early years education to children from all walks of life. As a private enterprise, nurseries can generate significant profit – though they must also comply with Ofsted requirements established in the Education Inspection Framework.
Private nurseries offer parents the opportunity to have their children cared for during working hours, which is an increasingly common demand as more people head back to work as soon as possible following pregnancy.
Running a nursery business is an appealing prospect for anyone with relevant experience and ambition. The complexity and costs of building a nursery from scratch means most people become owners by purchasing an existing nursery business. Buying a nursery carries many unique considerations that can be a benefit or barrier when compared to starting a new one. These include:
- An existing clientele and customer base.
- A brand reputation, which can be positive or negative depending on the business’s past performance.
- A history of Ofsted inspections and ratings.
- Suitable premises – though the lease conditions will impact the value.
- A detailed financial history can help influence lending decisions.
- A roster of employees with relevant experience.
If you intend to buy a nursery, you’ll need to do the right research before you commit to your purchase. Not only should you understand the industry as a whole, you must also demonstrate a capacity for responsible ownership and in most cases, secure a loan from mainstream or independent financial lenders to help fund the transaction.
Here at Rangewell, our experts can help you structure the loans required to finance the purchase of a nursery. We’ll help you polish up your business plan and present your case to lenders, then negotiate finance to buy a nursery with rates and terms that suit your needs.
Buying a nursery: background information
Buying a nursery business could be a good idea, provided you understand the costs and effort involved to generate profit. UK owners are having to hike up fees to cope with rising costs, with the average cost for 25 hours per week for a child under 2 now reaching £7,729.
Meanwhile, rising costs mean owners must budget for around 70-80% of their total revenue going on fixed costs such as staff salaries, utilities, catering and hygienic goods such as nappies.
The fees you set must be carefully balanced between generating profit and not alienating potential customers. If you don’t charge enough, mounting costs will lead to bankruptcy – but if you charge too much, you won’t attract the clients you need to keep the nursery running.
Margins of 20-25% are, therefore the most reasonable expectation.
When buying a nursery, you must also assess your own ambitions and business plan to determine if the investment is suitable for you. A nursery operated from a small leasehold property is unlikely to be ideal for a buyer looking to quickly expand and introduce more spaces for children.
Instead, you should research businesses that match with your goals and plan the acquisition accordingly.
Lenders are generally supportive of the childcare industry, but only to applicants who understand how finance works and can demonstrate sector experience alongside strong business planning.
Nurseries are inspected by Ofsted and must comply with certain requirements set out in the Statutory Framework for the Early Years Foundation Stage. The most relevant issues you need to understand are as follows:
- Providers must have a minimum level of indoor space for each child. These depend on the age of the child:
- Children under two years: 3.5m² per child
- Two-year-olds: 2.5m² per child
- Children aged three to five years: 2.3m² per child
- Providers must have 50% of their staff qualified to full level 2 in a relevant Childcare field. You’ll also need to ensure at least a few members of staff hold a level 3 qualification.
- The appointed officer in charge of the nursery must have several years of experience and the relevant qualifications. You must have a certain number of staff for every child in your nursery. This again changes based on age groups.
- At least one member of staff for every three children aged under two.
- At least one member of staff for every four children aged over two.
- Once children are over three, rules vary depending on the staff member’s qualifications. See the full EYFS guidelines for more.
What do you need to buy a nursery?
Buying a nursery business, like many other business transactions in the UK, has a few significant requirements. You need to be able to afford the purchase – not only the raw asking price but also the ongoing responsibilities of cost such as staff salaries, utilities etc. This typically means approaching lenders for finance – both in terms of business acquisition and also funds for ongoing costs.
You need to have the relevant sector experience to be able to operate the business successfully. This generally means having experience as a nursery manager. However, if you don’t have enough experience personally, you may still be able to proceed with the purchase by appointing an experienced nursery manager.
Researching your nursery purchase
Before committing to any purchases, you need to do your own research into the nursery sector and the process of buying a business. Here are all of the main considerations to take into account when looking into how to fund a nursery business.
Understanding the location
Nurseries are tied to local communities, so the value of each business will depend on the local market. If you’re in an area with lots of competing businesses, it might be harder to attract new clients.
However, competition is not the only measure of success you need to look for. An area with lots of nurseries may still be lucrative if the birth rate is high and the area is affluent. Similarly, an area with very few day nurseries may not be as attractive a prospect if the local populace doesn’t have the income required to pay for childcare.
In addition, you should assess the transport and access considerations of the nurseries you’re interested in. Can parents easily get their children to the nursery via public transport? Is there safe car parking available near the entrance? Does the nursery have access to nearby outdoor areas?
Finding nurseries for sale
The internet has made finding businesses for sale easier than ever. There are plenty of listings available online, which you can browse at leisure and enquire when you want to commit. However, these listings are fairly limited in what information they can convey – so always take time to speak to the seller if you’re interested in learning more.
Conversely, you could also register interest with a selling agent. These are appointed by sellers and will do more to support you as a buyer in terms of supplying information – as they have a vested financial interest in you making the purchase.
Due to the nature of Ofsted and the importance of compliance in the childcare industry, knowing the history of any nursery you’re considering is absolutely essential. As a buyer, you should be able to find out:
- The businesses’ trading history and financial records
- A history of Ofsted inspections and any consequential actions
- Employee records, contract conditions and work history
When buying a business, you need to consider the transition of ownership. When purchasing a nursery, you’ll have to negotiate with the seller and their existing staff to comply with TUPE laws. The Transfer of Undertakings (Protection of Employment) regulations (TUPE) protect existing employees during a transfer and mean you will have to take on the existing contracts of each employee.
When you’re buying a business, you’ll have to discuss the nature of the purchase with the seller to negotiate whether you’re going to buy the shares or the assets. A share purchase sees you buying 100% of the business and its shares, which also means taking on any liabilities.
An asset purchase is simply for the assets, which you negotiate during the sale. The seller will usually want to sell via a share agreement as it is the ‘cleaner’ option for moving on, but if you suspect there are liabilities you don’t want to get involved with then you should push for an asset sale.
A nursery business will be operated from premises that are either owned or rented by the existing owner. In either case, knowing whether the property itself is a freehold or leasehold is the most important consideration.
A leasehold property will have a certain number of years before the lease expires. If you’re buying a leasehold business, you need to ensure that lease has plenty of time left in it, otherwise you may fail to interest lenders and find yourself unable to finance it. Lenders typically want to see at least 15 years on a lease, so you may need to ask the seller to negotiate an extension or talk to their landlord directly.
If the business owns the property and the freehold, you’ll be able to give the lender far more confidence in the purchase as you’ll have the fixed bricks-and-mortar value of the property and land.
The owner of a nursery business must be registered on the Ofsted Early Years Register. This can be a long-winded process, requiring an initial DBS check and then up to 26 weeks of waiting for registration to go through.
As a buyer, you may need to request the seller to not cancel their registration until yours is finalised – this might require some legal agreements to ensure you indemnify them against any legal claims made by Ofsted against the seller until your registration is complete.
How to buy a nursery business: step by step
Once you’ve done the research and identified the ideal opportunity, you need to arrange the purchase with the seller. Here’s a brief overview of how a typical buying process works – though business acquisitions are one of the more complex legal processes in the country, so will vary heavily depending on yours and the seller’s legal team and choices.
- Research the opportunity extensively before committing to a purchase.
- Speak to lenders early to ascertain interest and secure the funding you need. You should provide a comprehensive business plan that outlines your goals and ambitions, as well as provides realistic financial projections.
- Discuss the deal structure with the seller. This will include whether it’s a share or asset purchase, the timeline for Ofsted notifications, any non-disclosure or non-competition agreements etc.
- Your legal team will carry out due diligence on the business, hopefully identifying any potential problems or issues.
- Documentation will be drafted by your legal teams, including a purchase agreement and any warranties. These are statements made by the seller to help protect you from future claims. For example, something like “I warrant that I know of no outstanding legal claims against the nursery.”
- Once both parties are satisfied, the legal team can move on to completion. This involves the final exchange of contracts and the issuing of funds. Any outstanding matters will be dealt with during a post-completion period.
How to finance a nursery purchase
As you can tell from the advice we’ve just given, there’s a lot of complexity involved in the purchase of a nursery business. However, purchasing an existing nursery is generally always a faster and more reliable route to profitable ownership than starting from scratch.
Whatever route you choose, you’ll likely need to source finance from lenders that can provide loans of significant value to help you purchase the business and pay operating costs without eating into your own capital or the business’s revenue.
The right finance for you depends on your own background and the business you’re considering buying. Options include:
- Business loans to fund purchases or pay operating costs.
- Asset finance, which can be used to purchase machinery and equipment such as nursery furniture. Funds are typically secured against the value of the asset.
- Property finance for buyers who want to build or convert property to use as a nursery.
Learn more about finance types for buying a nursery
Visit our Children’s Day Nursery Finance page to find out more about each type of finance and how it can help you buy and run the nursery business of your dreams.