I am currently having daily conversations about the outlook for the UK nursery market, and the appetite for acquisitions and valuations. What I find most interesting in giving my views is how quickly issues are emerging and sometimes even changing over time, which in turn impacts our outlook.
For example, at the beginning of this year, nobody could have predicted the extent of the staffing crisis or inflationary pressures. Another example is that just a few weeks ago, the forecast for the UK was firmly that we are at the beginning of a difficult recession. However, that may now be averted (at least in the short term) on account of the planned capping of energy bills by the new Prime Minister.
Nevertheless, there are some constants in our view. The first is that interest rates are going up and this will in turn slow down mergers and acquisitions activity and valuations (although the best businesses will hold their value and perhaps be even more sought-after).
The second is that despite this, there will continue to be strong acquisition activity in the childcare space on account of its dynamics and because so many funds and operators are already committed to growth, albeit likely at a slower pace than the heights of 2021 and early 2022. The third is that valuation for buyers is as tricky as ever, as there has been so many years of ‘exceptional items’ on performance and there is more to come.
On the back of this, we have advised sellers to be prepared for the fact that:
- Valuations in 2023 might be lower than has been the case in the last couple of years.
- Buyers will need to be more disciplined and want to get more comfortable with performance, and as such, sellers need to be prepared to help them with their understanding and due diligence before and during exclusivity. Particular areas of focus will include post-Covid recovery, staffing, navigating through funding shortfalls, pricing, and cost inflation.
