In any industry, there are absolutes. We know funding is never high enough and a single setting with less than 40 places is not profitable. Large group buyers won’t look at any setting with less than £150,000 in Earnings Before Interest, Taxes and Amortization (EBITDA) and a minimum 50 places.
In a time where more external investment is coming into the sector, we are seeing a trickle down of more business-minded practices which are applicable to the smallest single setting as much as the largest group model. Yet, when we see these practices in place in a small single setting, the general response is an air of disbelief.
This is in part due to our underlying thoughts that smaller settings are run for love, not profit. However, I see a lot of hugely profitable small nurseries.
The problem is when these businesses come to sell. In a consolidating market, there is a changing vocabulary with regards to values and how they are calculated. There is more awareness of EBITDA and what multiples would be applied for particular types of settings in particular areas, and this brings new absolutes.
A common discussion I have with buyers is that they won’t pay more than x times for a middle-sized setting, by which they tend to mean that they would expect a setting of this type to have an EBITDA of maximum 20 per cent, so by setting a particular multiple they are looking at buying on a percentage of turnover rather than at a value that may reflect true profitability.
However, I am increasingly seeing that if a setting of this type has a higher EBITDA, this multiple no longer applies. A setting with an EBITDA of 30 per cent will often have a lower multiple applied to bring it in line with the ‘norm’ valuation that the previous setting achieved. There is not a clear answer as to why, other than the response that this business should not be that profitable and the unspoken implication that they are doing the whole smaller setting thing ‘wrong’. As the market evolves, the absolutes must evolve too.
