If you are interested in the development of children and have a passion for running your own business, then buying a children’s day nursery might be your answer to the ever-elusive question of “what should I do with my life?”
Before you rush off to search for a nursery to buy, you need to understand the compliance requirements attached to making the purchase and the ongoing running of the business.
These five top tips will help make the legal aspects of purchasing a children’s day nursery clear. However, to ensure your purchase goes through smoothly, it is best to instruct a solicitor at the beginning of the process.
Step One – select the right business structure for the purchase
Prior to making an offer on a nursery, it is best to decide the type of business structure you will use to own and operate the venture. Some of the main structures used by entrepreneurs are:
• sole trader
• traditional partnership
• limited liability partnership (LLP)
• limited liability company
Because it is likely you will be employing staff and will need to enter multiple contracts with suppliers, setting up as an LLP or a company might be advantageous. However, you should bear in mind the importance of having a comprehensive partnership agreement or shareholders’ agreement prepared if you intend to acquire the business with a partner.
The structure of your transaction is also important to consider. You need to establish whether you are buying the total issued share capital of the business (referred to as a ‘share sale’) or the nursery’s assets themselves (referred to as an ‘asset sale’). Buying the share capital means, among other things, that you will take on both the present and historic liabilities relating to all aspects of the business. Purchasing only the assets of the business will mean that you will only be responsible for the items that you purchase, but it could require you to re-enter into the nursery’s supplier contracts and contracts with parents.
Step Two – organise your finances
Some nursery purchases are funded through a mortgage or a loan. Instructing a broker may be a convenient way to secure finance with a reasonable interest rate. However, it is prudent to make sure that you have the loan agreement checked by your solicitor to ensure you understand all your obligations and liabilities.
Once you understand the fine print contained in the loan agreement, you can match your repayment obligations against the cashflow and revenue of the business, the details of which you will uncover during the due diligence process. You need to be aware of any late-paying parents as well as the structure of the current fee system within this business in order to assess how easy it is to raise fees so as to ensure you can generate a profit.
Step Three – understand there will be exclusivity and confidentiality agreements in place during the purchase negotiation stage
Parents may understandably become nervous when they discover the ownership of the nursery they rely on to care for their children is changing hands. Therefore, it may be in the interest of both parties to have exclusivity and confidentiality agreements in place prior to beginning the due diligence process and sale and purchase negotiations.
An exclusivity agreement, also known as a ‘lock-out’, or ‘no-shop’ agreement, is a restrictive agreement that provides an exclusive fixed period in which the parties may negotiate and progress a given transaction without involvement from competitive third parties. One of the advantages to a potential buyer of having an exclusivity agreement in place is that they can gain a degree of “breathing space” to carry out due diligence without having to worry about the seller talking to other prospective purchasers and selling the business to them while the agreement is in place.
A confidentiality agreement, also known as a non-disclosure agreement, is an agreement that protects the information which the seller might provide to the prospective buyer so they can complete their due diligence. The agreement would usually stipulate that the information disclosed cannot be used for any other purposes than those which are outlined in the confidentiality agreement itself. If you are party to a confidentiality agreement as the buyer and breach its terms, there may be a risk that the seller could claim damages.
Step Four – carry out correct due diligence
Due diligence is the process of checking the financial and commercial viability of the nursery you wish to purchase, and can be used to help to ensure that you have all the necessary information about the state of the business prior to signing the final purchase contract.
Your professional advisors play a key role in the due diligence process. Some of the factors that they can look into include:
• the financials of the business, including cashflow, profit and loss, and potential student intake numbers
• the various types of insurance that are in place
• existing contracts with suppliers and parents
• the commercial lease agreement for the nursery premises
• the health and safety and risk management procedures currently in place
• current employment contracts and whether there are any ongoing or potential employment disputes
• whether there are any live or potential legal disputes
This list is far from exhaustive, and you may wish to be involved in the process together with your advisors to ensure that you understand the complete picture prior to committing to any potential deal. Although you may be in a rush for the sale and purchase to progress, investing in proper due diligence can save you thousands of pounds overall, should there be a potential issues within the business you were not initially aware of.
Step Five – Understand your regulatory compliance obligations
Strict UK regulations stipulate that all children’s day nurseries must be registered with the Office for Standards in Education (Ofsted). As the new owner, you would be required to go through the registration process, which may take up a number of months to complete. Without Ofsted registration your nursery might cease to be operational when its ownership passes to you after the sale.
A potential solution to this problem is to negotiate with the seller in order for them to provide consultancy services and to operate the business while maintaining their existing Ofsted registration up until the time that yours is issued. In return, you may be required to provide an indemnity to the seller that during the transition period, should Ofsted make any claim towards the seller, you will reimburse them for the claim, and also potentially any costs associated with it depending on the specifics of what is agreed.
It may be advisable to familiarise yourself with Ofsted inspections. If you are on the Early Years Register, there is a likelihood that you may be visited by Ofsted once in the first 30 months of your ownership of the nursery and then once every inspection cycle.
If you intend to serve food at your nursery which is cooked on-site, you might need to register with your local authority and apply for additional licences, including a food and hygiene rating from the Food Standards Agency.
Being aware of these five steps can help you to make the acquisition of a children’s day nursery run more smoothly.
For more information, please contact our office on 020 3588 3500.
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