As we head towards the final months of 2013, there is an optimistic feel in the air. The economy is showing tentative signs of recovery, and there is talk of it turning a corner with the latest growth figures for the second quarter of the year showing the fastest rate of growth in three years. This is being echoed in what we are seeing within the nursery sector.
Where nursery operators may have previously retrenched, many we are speaking with now are looking at how they can take their businesses forward in a viable way and are approaching their lenders to support this. The most appealing option is often exploring expansion opportunities through the acquisition of smaller operators. Unlike new developments, acquisitions offer revenue and profit from day one, so there is an obvious, and often instant, benefit for operators to acquire. From a lender's perspective, there is a definite appetite to lend to, and support, strong nurseries as they look to grow.
THREE-PRONGED STRATEGY
Lenders such as Barclays will want to understand a number of key things when presented with a lending application. An understanding of the rationale for the acquisition is fundamental. Why is a particular nursery group, or individual nursery, an appropriate fit for your business? How does this fit with your long-term strategy? What will the numbers look like and how would they combine with your existing financials? What impact would any acquisition have on cashflow - and, importantly, have you thought about whether it would allow you to meet your working capital requirements?
Helping your lender understand your business in this way is essential to enable them to really grasp the nuances of your business and what your long-term objectives are. The key to this is early dialogue. No two operators are the same and each case will be examined on its merits, so it is vital that you speak with your lender as early as possible.
Structuring your dialogue around three key areas will help support this. First of all it is imperative to have a solid, clear and well-presented business plan. This should take a shortand long-term view. This will not only highlight your business's imminent needs, but will focus your thoughts on the financial implications of the acquisition and offer insight on the sort of working capital requirements and liquidity needs you might have. In turn, this will enable your lender to put forward covenants and lending terms that will be most appropriate for the needs of the business.
Your long-term focus should look much further ahead - to the twoto three-year picture. This helps lenders gain a better appreciation of your vision and consequently how they can help support you to realise this.
Take stock. How do your plans fit within the broader industry dynamic? Demand for quality nurseries is on the rise, but have you considered any existing competition that your target setting faces and demographic/economic trends in the area where the setting is based? It is important to show that you are aware of how the market may shift and what your plans are to mitigate these issues.
Last but not least: repayments. Can you afford to undergo an acquisition process, and where will the repayments come from? Consider the various projection scenarios and how you would meet repayments in each case. Your lender must be convinced your business is a solid and viable business to support.
As confidence makes a return and more concrete plans for the future begin to take shape, nursery operators should be thinking about engaging with their lenders as early as possible. Having an open and honest conversation with them will provide them with a vital insight into your business, and therefore puts them in the best possible position to support your business, in the right way.
Further information: www.barclayscorporate.com.
Challenges for the PVI sector
As we enter the final stages of 2013, it is natural to reflect on what has been a busy and evenful year, says Courteney Donaldson (pictured), childcare director at Christie + Co
While much of quarter one was taken up with More Great Childcare, the well-founded concerns and nerves of owners, parents, bankers and investors were comfortingly relieved by a 'U-turn' on ratios.
During the past year, stakeholders have been in focus. In the public eye, primary stakeholders are, rightly, parents and children. Yet while these primary stakeholders are fundamental to the success of day nurseries, little has been mentioned about the interests of other essential stakeholders, notably nursery business owners, and the investors and banks that support them.
While the sector strives to deliver high quality, often in challenging circumstances, there remains a lack of 'joined-up' thinking and consideration for the collective needs of all stakeholders. Government intervention, by way of policy, has wide-reaching implications that need to be carefully considered.
Laing and Buisson's Children's Nurseries UK Market Report 2013 stated that, 'The private sector, comprising for-profit incorporated companies and sole traders and partnerships, accounted for approximately 82 per cent of total UK nursery market value (£3,790m of £4,605m) in 2012/13.'
With such a large proportion of the sector comprising private sector provision, proposed legislation and consultations should consider the implications for all stakeholders.
Based on the experiences of Christie + Co, we would estimate that around 80 per cent of private providers have some form of bank debt, either a term loan and/or overdraft. Banks and investors support the nursery sector with a variety of commercial funding arrangements, be that - for example - term debt of say £500,000 secured against the freehold interest of a 100-place nursery or a £2,000 overdraft facility for a 30-place leasehold setting to assist it in bridging the occasional fee income/salary expenditure funding gap. The vast majority of private sector nurseries rely on, and need the support of, their bank in order to operate effectively.
During 2013, banks' collective appetite to lend to businesses has improved, but the economy has led them to become increasingly risk-averse. Banks want to support good operators that can demonstrate a proven track record. In determining that track record, it is essential for the nursery owner to provide detailed management information to their banker for the bank to be comfortable with facilitating either further advances or refinancing existing debt.
The services of a finance broker - such as our sister company Christie Finance - are highly beneficial and can assist you in securing funding.
