Your childcare business: does recent legislation mean that now is a bad time to grow?

While promises of free childcare places may put pressure on profits, there are still reasons to be optimistic about the future of your business.

If you are running a childcare business, you may be wondering whether now is a good time to expand your operations. On paper, it looks like you should: the children’s day care market remains active and attractive as demonstrated by the larger corporate demand with acquisitions featuring heavily. 

Underpinning this is the property angle, which makes childcare an attractive sector, since property as collateral reduces risk to lenders. Sector dynamics have been positive in terms of the potential profitability of a well run setting – only enhanced by economies of scale as the operator grows through a number of sites. 

In terms of actual users, post-pandemic bounce back is real as demand for places at well regarded settings increases. But here’s the big question: will the recent government legislation offering further free childcare hours hinder that appeal, as operators are challenged by the ability to make their sites financially viable?

Experience and observations

Change is inevitable, so the strongest operators are those who are strategic in their response to the change in legislation. What can operators do to counteract these new demands placed on childcare businesses?

Operators can work on appealing to a higher value demographic with strategic marketing, implement minimum hours policies and charge for additional services to counter the free hours to be made available. 

There are sound reasons to be bullish about the sector as a whole: demand looks likely to increase as the cost of living crisis continues to bite and parents return to work sooner. The call to return to the office after the post pandemic working from home environment, again may support the sector. 

One barrier to growth is staffing: proactive resourcing and good staff welfare is evident by good operators, but this is where smaller players often lose out to the larger businesses. Nevertheless, smaller operators should think carefully before they plan their exit if they find the macroeconomic influences begin to add pressure to the bottom line, as they may be able to review pricing with the backdrop that their site (or sites) score highly against the key factors of good demographics, low competition, good ofsted ratings, staff retention and continual investment. 

Raising finance for your business

The new legislation takes place from April 2024 and some operators are reviewing their options as a result of the changes. The time to act is now, as the sooner you act, the better position you will be in. 

Many business owners are checking the cost of borrowing and in some cases, the alternative use value of the property. At Swoop, we have been looking at some of the factors that can help make raising finance easier for childcare businesses: 

• Settings with 40+ places are generally more cost effective and hence appealing to both lenders and potential acquirers. 

• As property features in the make up a children’s day care setting, it may have been considered that freehold premises are required to be in a position to satisfy bank lending – but security of tenure with a good lease term mitigates risk for the lender and should not be overlooked. Should leasehold premises form part of an operators group, a valuer, and ultimately a lender, will include the profitability at the leasehold site to attribute overall value and subsequent loan to value.
  
  To counter increasing interest rates, longer loan terms that support cashflow are to be considered by both borrowers and lenders, whether for existing loans or those sought for potential acquisition. Increasing the size of a business can give the operator economies of scale and ultimately improve the overall value.

• Goodwill is an asset that lenders will lend against particularly where there are three or more settings which can be evidenced in the last three years’ trading – allowing for the pandemic period. This is not to be ignored when implementing a financial structure to manage today or the growth of tomorrow, as opportunities are made available.

Wherever you are in your current businesses, it is essential to understand how the new legislation will affect you and how you can strategically use the funding landscape to steer your business through the next year. 

If you wish to remain at your present level of profitability, you will have to find savings elsewhere to counteract the impact of the new legislation; if you are seeking to exit, you will want to increase the value of your current business through smart investments to boost your attractiveness to investors. And if you wish to remain at the helm of the business but take advantage of the opportunities that are on offer, you will need to find ways of making your business more competitive and grow sustainably.

To talk to an expert on commercial mortgages in the childcare sector, talk to Ann Marie