Growing opportunities in childcare

Childcare centres are an essential part of life for working parents and buyer demand for these businesses is strong across the country.

Although the industry is highly-regulated, and the entry barriers high, there are more than 4,500 licensed early childhood education centres in New Zealand, employing around 19,000 qualified teachers, all licensed by the Ministry of Education. It is a growth industry, with much of the recent development in new-builds.

Bayleys business sales expert Prashant Vijan says childcare centres have always been popular as an investment and this is set to continue. We asked him for his thoughts on the market.

Q. Childcare centres are a necessity for many parents, but are they profitable as businesses?

A. They are, although there are increasing pressures. Some of the factors affecting profitability are wages and rents, as they are increasing and there’s a shortage of quality teaching staff. Profit margins range from 15 to 20 percent which, when compared to the spectrum of industry, makes it a very profitable business. An advantage is that much of a centre's income is Education Ministry funded through 20 hours-a-week free care for most children.

Q. How often do they come up for sale?

A. Reasonably often. There is demand in the market and a number of centres are coming up for sale. There is more activity in new-builds than existing centres. There’s massive investment in new commercial developments that may contain a childcare centre and the developer wants active tenants as childcare operators. The supply pipeline for this type of centre is strong.

Q. How much demand is there and what’s shaping it?

A. There is good demand, although in the past 12 months it has dropped away slightly from intense activity. A number of factors are at play – teaching staff availability, wage rises, increasing rental costs and the banks tightening lending. The banks are requiring a lot more information to process loans and that is putting pressure on how quickly the deal can occur. They can normally lend 50 percent of the sale price, but generally people are being more cautious about buying a childcare centre at a premium.

Q. What are the main considerations for buyers?

A. In general terms, buyers look at location, performance of the centre, the dynamics of teaching staff, culture and philosophy, and the financial history of the centre. This is dependent on the capacity of the centre and its occupancy level. The licence is the key component in any buying decision. If it caters for 40 to 70 children, that’s considered a reasonable size. Smaller centres have lesser demand as the cost of doing business can be higher.

Q. Many new centres are springing up. Are they generally successful?

A. Most of them are successful, but it depends on the quality of service they provide, the geographical location, the demographics of the area, the accessibility of the centre – ease of getting in and out – and the concentration of centres in a particular location. Unfortunately, some areas have a high concentration of childcare centres, and in a competitive market it also determines what fees parents will pay for a child at the centre. Better parent fees have a direct impact on the profitability of the centre.

Q. What can owners expect to receive in rents?

A. It varies quite significantly from area to area. Rent can range from $42 a child and go as high as $55 a child in high-demand areas.

Q. How many centres are aligned with a brand?

A. There is about a 50/50 split between branded centres and those that are independently operated, although an independent owner may have two or three centres that are not branded.

Q. There’s clearly demand for places. How can childcare centres provide growth?

A. Sometimes it’s organic growth. Sometimes the centre, for example, might be performing at 70 percent occupancy and the buyer can see potential to increase the number of children by adding more value to business, improving the quality and number of teachers. Others see potential because, physically, there is room to grow the number of children allowed under the licence by building on to the existing centre if there is enough usable land.

If you are the owner of a childcare centre and are considering a sale, careful preparation is essential. It’s important to be clear about the centre’s philosophy, its Education Review Office and Ministry of Education audit status, as well as its financial and performance history – the longer the records you can provide the better. The specialist Business Sales team at Bayleys works closely with clients compiling the required information and preparing a business for sale. The team can help you identify future growth and opportunities for a new owner to add value, which will help you achieve a successful sale and the best price for your business.