Planning for the new beginning…

It is clear that the Covid-19 pandemic has posed an economic and social challenge to the worldwide population, the only cure (Sweden’s view aside) being to revert to medieval style containment measures that drive right to the heart of our modern world. Looking at this from an economic perspective only, the impact on the UK economy and infrastructure will leave a lasting impression, BUT the question now is – how do businesses trade out of the lockdown, with a largely furloughed workforce, a stretched working capital cycle and no end in immediate sight?

In short, how do businesses plan for the new beginning? 

Business owners should take this opportunity to review their core strategic business plans surmising how the post Covid-19 world will require products or services, model various scenarios to understand how this will manifest itself, and in essence, prepare for the worst and hope for the best.

There are numerous repositories of information and advice on what business owners should be doing – most of which concentrate on high level plans. The focus of this article is to get to the heart of the matter and remember ‘Cash is King’ – particularly so for the next 12 months.

In general, Government support for businesses to date has been extensive, and it is becoming easier to access (on the whole) as funders get to grips with the various funding strands and how to apply this to the relevant business situation. Access to funding support (and therefore cash) right now is less concerning than a few weeks ago, but still carries a timeline of uncertainty as everyone is forecasting and estimating an end to the Covid-19 Government actions – an unknown at the current time. 

Looking to the future, the key risks to be considered are now three-fold, all of which are connected:

  1. Covid-19 restrictions go on for longer than you expect;
  2. Working capital stretch as economic activity increases; and
  3. Business failures in supply chains, but more importantly in customers, resulting in bad debts

If we focus on the working capital stretch, as this is something that can be foreseen and therefore planned for. My particular concern here is with businesses utilising working capital style funding lines (e.g. Invoice Discounting). Using Invoice Discounting as an example, the key security for the funder is the customer debt itself. With the current Covid-19 restrictions, we are seeing the following:

  • Customers taking longer to pay, meaning suppliers are waiting longer to get paid (working capital stretch);
  • Invoice Discounting providers are working with their clients by extending the funding period (e.g. 120 days rather than 90 days) such that older debts remain funded.

The above funder response is undoubtedly a positive response to the working capital stretch. However, as time progresses, it may be that some debtors fall outside of the new extended funding period, and credit reference agencies review the credit ratings of certain businesses, potentially restricting access to Invoice Discounting cash advances due to credit concerns or concentration limits. If we also assume that economic activity now begins to accelerate and the business in question now starts to re-open mothballed factories and commence manufacturing products again, we could envisage the following:

  • Suppliers will want payment before releasing new raw materials;
  • Wages will need to be paid for employees now not furloughed;
  • Other manufacturing costs will need to be paid on shorter credit terms than may have historically been enjoyed; and
  • Customers may be more reticent to settle invoices quickly or may be in financial difficulty and fail.

The above is a perfect storm as the working capital cycle expands beyond historic levels and the Invoice Discounting provider is already at the limit of their new extended and revised credit policy.

There are a number of actions that business owners can take to mitigate the above, and indeed access to other sources of funding are certainly currently available in most cases for viable businesses. 

The key takeaway from this article is to ‘plan for the new beginning’ and factor in potential ‘shocks’ to the business via modelling various scenarios. Some funders may not formally request a financial model for the future in assessing the business’ viability for CBILS (or other funding sources), but business owners need to understand the funding that they will require for the next 12 months and beyond, together with the key assumptions that underpin the estimated funding requirement. Keep these assumptions under constant review as they will change, and maintain an open dialogue with funding partners.

It is also important to note that those businesses doing well during this pandemic, shouldn’t think they are immune to the financial risks and working capital issues noted above, and therefore should still plan appropriately. As history proves, businesses can still unfortunately fail on the way out of recession, and so it is essential that all business owners look to plan for the new beginning.

We are here to support businesses and assist in helping business owners understand the key assumptions and working capital drivers applicable to them, not just for the purposes of fundraising, but also to enable them to plan for a post Covid-19 world, and capitalise on the opportunities that they will encounter.

Andrew Feeke

Corporate Finance Partner

andrew.feeke@mooreandsmalley.co.uk

0161 519 5050


Selling your business amid Covid-19

With ‘some’ certainty surrounding Brexit and a clear majority Government, many business owners started out in 2020 contemplating the sale of their business, and then along came Covid-19 and shattered their hopes and dreams. Or did it? Well, there is no disputing that the current lockdown measures have had a significant impact on the mergers and acquisitions market, but how serious is it for SME businesses who are thinking of selling their business? And what can you do now to prepare to sell your business post Covid-19?

Our Corporate Finance team are seeing three types of deals at the moment:

  1. ‘Legacy deals.’ These were pretty much agreed in principle before Covid-19 kicked in. Both the buyers and sellers still wish to conclude these deals without delay, and we’re actively working on these deals to get them over the line.
  2. ‘Delayed deals’ whereby business owners are guarding their relatively stable businesses and waiting patiently for the effects of the government restrictions to be lifted to establish their new ‘normal’ before taking their businesses to market, perhaps later this year.
  3. ‘Abandoned deals’ involving businesses that have been seriously damaged by Covid-19. They first need to concentrate on surviving, before pivoting their business models and demonstrating this works ahead of taking their restructured business to market.

So, yes, Covid-19 is having an impact on selling a business. On a positive note, not all businesses are struggling, but for those that are, when we eventually return to some form of normality many business owners may still want to sell their businesses at the earliest opportunity. As for buyers, funding may be more difficult for some, but plenty will still be active, including Private Equity who need to deploy funds to generate their required returns.

The North West, Manchester in particular, has a Private Equity sector second only to London hence we anticipate a continuation of strong Private Equity backed investment in the region.

So, what three key actions can business owners who have ‘delayed deals’ carry out now in readiness for a future sale?

1. Continue to maintain excellent management information

Yes, I know accounting might be a bit boring(!) but it will be crucial to demonstrate to prospective buyers the underlying strength of the business before, during and after Covid-19. Reliable monthly management accounts will demonstrate this, but also spend some time adding commentary so you’ll be able to easily recall the events and explain the actions you took in carving out a Covid-19 financial impact in presenting the underlying financial performance.

2. Forecast the future

If a seller is confident of the future of their business, then it’s very much in their interest to invest the time to quantify these future upsides to prospective buyers using financial forecasts. This means monthly integrated profit and loss accounts, cash flows and balance sheets, with detailed written assumptions to support the numbers. In the current climate it’s recommended to run two or three scenarios to show you’re considering a variety of outcomes.

3. Start preparing for due diligence now

It’s a pretty monotonous task but rest assured, if you’re going to sell your business, you’ll need to do it at some point. Better to get your house in order now rather than wait for the sale process itself when you’ll be weighed down with a million and one tasks. I have a client who has been preparing his ‘data room’ for over a year and he won’t regret a single minute of this when he’s handling due diligence enquiries for real.

Business owners with ‘abandoned deals’ will need to adjust their business models before considering a sale. Having said that, if a sale is the intended end game, then it’s important to understand how your new business model will be valued in the future. The likelihood is that it will be valued on a multiple of profits, but what that multiple will be depends on a number of factors and will differ from sector to sector. In general terms, the greater the risk the lower the multiple. For instance, a property business would derive a higher multiple on its recurring lettings income as opposed to its one-off agency work. So, knowledge of these future valuation factors should help drive your decision making now.

My Corporate Finance team and I are experienced in advising SME business owners on preparing their business for sale. If you would like to explore any of the above in further detail, then please get in touch.

This article was originally produced by MHA Larking Gowen  

Andrew Feeke

Corporate Finance Partner

andrew.feeke@mooreandsmalley.co.uk

0161 519 5050


How to ensure you secure the funding required for your business – top tips when preparing projections

The Government’s CBILS lending support scheme will require applicants to provide a set of at least 12-month projections.  As most will know, projections are usually a standard requirement when applying for a loan during normal times – but, as we also know, these are not normal times.

We thought it would be helpful to pull together a few key reminders of what a good set of projections should look and feel like – and highlight some of the pitfalls to avoid. 

So, what are the key points and characteristics of a compelling set of financial projections?


They are integrated across the profit and loss account, balance sheet and cash flow statement. 

In other words, if one input is changed in relation to, say, sales volumes, the model is set up so that the impact of this automatically flows through to the balance sheet (trade debtors and cash receipts of course, but perhaps also stock ordering and holding levels and thus trade creditors) and the cash flow statement (the cash implications of these changes). 

There are many proprietary software forecasting packages which can be used for many businesses; but if yours is more complex or nuanced then you should consider having a bespoke excel based model created.


Funders expect that, particularly in the case of complex business models, there will be simplifying assumptions. But you must explain these in the assumptions or covering narrative to the projections so that users can understand the impact. 

Your accountant can advise you on what simplifications are appropriate given your specific set of circumstances.


It is not just about the numbers. You will need to include some narrative.

Not ‘War & Peace’ but enough to scene set (particularly if applying to a funder who does not know your business very well) and explain clearly and concisely what the key assumptions are.


The (cash balance) Devil may be in the (hidden) detail. 

Forecasts are usually prepared on a monthly basis, but your business might have significant cash swings within any one month. That doesn’t mean you must do a weekly or, even worse, a daily forecast; but you must have an awareness of what the impact on the cash position is within any given month –  and discuss this with the potential funder. 

If not, you run the very real risk of quickly breaching the covenant requirements which are part and parcel of any funding. You don’t want to do that as it undermines the relationship with the funder and can quickly erode any goodwill.


If you have a seasonal business, ensure that you have modelled as best you can the seasonality profile of your business. 

This is necessary as it will point to those parts of the year when the cash might get a bit tight,  and forewarned is forearmed for any discussions with funders about what both you and they can do to mitigate the impact of these pressure points.


Your business might be about to experience significant growth as result of receiving the funding; but you must be able to rationally explain why this is so. 

Where is your market research and hard data to support your growth projections (particularly if the growth is significantly better than the current run rates)?

Exponential growth may be possible for a while, but there are whole mountain ranges of business plans which forecast hockey stick growth rates which did not come to pass.


Make sure the projections are logical (much easier if you have followed the first point). 

What we mean is, if, say, sales volumes go up then it is logical to expect your trade debtors to increase pro-rata. If they do not, then you need to explain why.  


Make it very clear how you intend to use the funding you are seeking and what the impact of this will be. 

It may seem obvious, but it does no harm to perhaps bring this out in the narrative to the plan.


Linked to the above, be very clear about the medium-term strategic goals for the business. 

How will the funding move your business nearer to where it wants to be in, say, 3 years? 

Strategic goal setting is a whole other topic but try and keep the goal clear, as well as the pathway to achieving it flexible and able to react to changes (which, as we are seeing, can be significant, unpredictable and swift).


We cannot cover everything in here, but these are some of the more common themes we see when clients ask for our help in preparing projections. For further information on how we can assist you in your funding application please see our factsheet here.  Or contact our specialist members of the Corporate Finance Team on BH@mooreandsmalley.co.uk

The Coronavirus Business Interruption Loan Scheme (CBILS) will require financial projections and cash flow forecasts

More details are emerging regarding the detailed criteria which accredited funders will use when evaluating applications for the Coronavirus Business Interruption Loan Scheme (CBILS).

The British Business Bank which is running the scheme (through the 40 accredited lenders) has been clear in its message that the funding is aimed at those businesses which were viable prior to the impact of Covid-19. We have developed a factsheet detailing the individual criteria from each of the banks on the newly introduced Coronavirus Business Interruption Loan Scheme.

It is important to note that the viability of the business will be evaluated primarily through a review of two key areas:

  1. A review of the recent financial performance of the business, by reference to the recent financial statements, and management accounts (prior to Covid-19). We can assist in the preparation of these.
  2. A review of the projected financial performance of the business for FY2020 and FY2021. It is likely that funders will require 2 scenarios:
    i) The projected performance on a “normal” basis, excluding the impact of Covid-19;
    ii) The expected performance based on the impact of Covid-19.

Therefore it is imperative that businesses looking to secure funding ensure that their management information is accurate and up to date.

Secondly businesses will need to prepare detailed financial projections showing the projected profit and loss, balance sheet and cash flow position on a monthly basis.

The Corporate Finance team at MHA Moore and Smalley is well placed to assist businesses to navigate through these very challenging times. The key areas we can assist include, but are not limited to the following areas:

Financial projections

The team are highly experienced in preparing and reviewing financial projections and business plans (both short and medium/long term) to enable Directors to understand the impact of Covid-19 on their business in the first instance.

We can do this on a ‘light-touch’ basis where the client has a relatively sophisticated finance function and merely needs guidance or on a more involved basis where we compile a detailed financial forecast model for the first time for a business. We adopt an ICAEW approved Flexible, Appropriate, Structured and Transparent (FAST) approach hence our forecast methodology is not just robust but is widely understood and accepted by funders.

Funding

We can utilise our knowledge of the government funding schemes (such as CBILS- the Coronavirus Business Interruption Loan Scheme or CCFF – Covid-19 Corporate Financing Faculty) alongside wider ‘normal’ funding offerings to assist you to understand which funding structures are likely to be relevant to your business.

Government support schemes have captured the headlines, but they remain an application for a business loan and a normal loan application with supporting financials will need to be made.

We have an extensive network of funding contacts, and are therefore well placed to introduce you to other potential funders, additional to the government support schemes.

Project management

In most cases funding will be needed rapidly, and management will need to give their full and undistracted time to focus on managing the actual business through this period. With our significant experience in project managing the funding process and liaising with funders we can ensure the process is completed as quickly as possible with minimum interruption to your business.

Funders are receiving a significant volume of applications therefore ensuring the funding application includes all the relevant information required at the outset to avoid delays and being ‘pushed to the back of the queue’. An application from MHA Moore and Smalley will land more favourably with funders as they will acknowledge and appreciate that we have reviewed/compiled the information first.

Other specialist advisers

We can involve specialists across the firm, such as VAT, as well as our corporate teams who can provide assistance with management accounts and management information requirements.

Whilst we have set out the details of our service proposition, the key point to note is we have a flexible approach, and we will consider carefully the requirements of each individual business.

We have set out below a range of services and associated scope of work for guidance purposes only and to reflect a typical client request, but none are set in stone and each are flexible dependent on the situation. For example in some cases the full scope will be required, in others only elements of the scope will be required. We will tailor our pre-agreed fee to the needs of each business.

To view this information in a factsheet, please click here. 

If you would like to discuss any of the points further, please contact our specialist members of the Corporate Finance Team on BH@mooreandsmalley.co.uk


Threat to buyout firms

Democratic presidential hopeful Elizabeth Warren has recently joined numerous other politicos in the US and the UK. Who over the years have slammed buyout firms as “vampires” sucking the blood from the corporate world. She has even published proposed legislation to be enacted if she is elected. Which does not mince its words: The Stop Wall Street Looting Act. Could a slimmed down version of this proposal gain support in the UK, despite the election of the more pro-business Conservatives?

Warren’s attack on the industry has proved somewhat popular, because of the bankruptcy of a number of private equity owned businesses. Retailers in particular have been affected, with critics claiming that cash was paid out to the shareholders and replaced with high levels of debt. When failure came, the main losers were the lenders and the employees. Warren’s bill would propose the removal of both the carried interest ‘loophole’ and the favourable tax treatment of debt, as well as a restriction on the fees payable to private equity owners.

However, the main focus of her proposal is to force buyout firms to take on the liabilities of portfolio companies that run into trouble. Many in the industry believe that this will be the beginning of the end for private equity and comment that it is a clear assault on the concept of limited liability that has been one of the basic principles of our financial system for several hundred years. Buyout firms strongly feel that it is unfair to attack the whole industry because of a few unscrupulous participants. Many of the buyout firms have worked on significantly reducing the levels of debt in portfolio companies and bankruptcies are actually quite rare, albeit the well-known ones receive lots of press when they happen.

Critics, on the other hand, counter-claim that those firms acting sensibly will not be overly affected by the new proposals, as they will be centred on containing abuses carried out by the less professional operators. The proposals would not for example affect Warren Buffett’s Berkshire Hathaway or 3i, who buy businesses through an insurance company and/or use their own balance sheets. That said, the changes would clearly hit the profitability of the firms as well as the personal finances of their partners, so it is no surprise that most of the industry is currently very unhappy with the proposals.

Andrew Feeke, corporate finance partner, who has specialist knowledge of the buyout market having worked on a number of such deals over the years, commented:

“I think there is a general view that some of the key players in the North West private equity (“PE”) industry have not historically informed the wider public of the benefits that such investment can bring. We see this frequently when discussing equity investment options with clients and prospects, who sometimes refer, albeit in jest but still all the same disappointingly, to ‘vulture capitalists’ rather than venture capitalists. In the North West, we are seeing higher PE activity levels than ever before, with the professional community better versed than ever in the opportunities PE can bring to businesses and business owners.

Whilst countless business owners have a story about a PE failure,  these are relatively few and far between, but unfortunately, they are often unaware of the many success stories in recent years. Business owners desire to speak to private equity investors and/or venture capitalists is often low or not at all and those working in the industry should do more to address this, and really start to make buyouts more of a conversation point. Equity investments into a well-managed business with a clearly defined growth plan and exit strategy, where the owners and the investors are on the same page, communicate well and support each other’s various skillsets, invariably prove to be a success. There are too many financially independent private equity practitioners and ex business owners for this not to be the case.”

This article was originally published in Macintyre Hudson’s Corporate Finance Newsletter, please click here to read the original.

Equity release – is it for you?

Concerns about how the economy has many business owners considering their circumstances. Many have much of their wealth tied up in their business, so it’s no surprise that many are thinking about de-risking. One option is to slow down the growth of your business and postpone reinvestment plans. You can then opt to pay yourself special dividends. In this way, you may free up cash now but you’re also potentially limiting longer-term business value.

Some owners totally de-risk and sell their business. An owner might feel he or she has reached a ceiling in terms of their ability to grow their business so a sale is the best way to realise value. In such cases, if the offer is attractive, it’s often hard to refuse. However, what if the above is not applicable? Are you considering a sale because you think it’s the only way to free up your capital and secure your future financial security? If so then read on because there is an alternative.

It’s not possible to eliminate risk completely from your business life, but you can arrange to have a level that’s comfortable for you. Selling a stake in your business can allow you to make your personal finances far more secure, whilst also allowing your company to continue to grow. Equity release (“cash out”) is a topic that we talk about frequently with business owners. It is the process by which an equity investor buys a stake in your business, while still leaving you with equity that’s also valuable. You can put money in the bank for personal use, while still pursuing ambitious growth plans for your company. It can be the best of both worlds.

When we talk to business owners about equity release, many aren’t aware it’s possible to sell a stake rather than the entire business. Not only can you take money out to do whatever you wish personally, but you can also afford to be bolder in the business, given that you’re more secure personally and have the support of a well-resourced and experienced equity investor beside you.

If chosen carefully, the deal also comes with a new, like-minded equity partner with wide ranging contacts, access to great networks and many years’ experience of growing businesses. An equity investor can introduce new insight, expertise and talent into a business and develop opportunities you hadn’t considered before. Owners often rediscover the enjoyment of running their business once they gain the support of a well matched equity partner. Selling a stake in your business can actually encourage more risk-taking at the same time.

What did our partners have to say?

Andrew Feeke, corporate finance partner, ,commented: “Having an equity partner alongside you who is ambitious for the business allows  you to focus on the key growth drivers, resulting in a significant increase to the value of the company over the following few years, so that when you consider selling a further stake, or the business as a whole, you are in a far stronger position. The risk of not considering a partial value realisation is selling your business too early and failing to optimise the value you’ve created so far. Working together with the right equity investor can advance a business’s growth and future potential exponentially, creating EBITDA and multiple enhancement at exit. It is likely that most of a business owners value is invested in their equity shareholding, hence an ability to drive this value upwards, can be a great opportunity from both a personal and corporate perspective.”

This article was originally published in Macintyre Hudson’s Corporate Finance Newsletter, please click here to read the original.

What next for UK M&A

Now that the election has resulted in a decisive majority for the Conservative Party, there is finally some hope that the Brexit mist will start to lift soon and take some of the economic and investment uncertainty with it. So what is next for UK M&A after a number of sluggish months?

Employment statistics

We are already seeing some increased activity amongst both UK and overseas buyers. Favourable indicators show that the rate of employment is 76% and unemployment is 3.8%. Real (after inflation) wages are increasing and our economy is still growing, despite the effects of much parliamentary indecision on investment confidence over recent years.

Educational statistics

The UK is climbing the global educational ranks (14th in science and 18th in maths out of 79 countries). The NHS still offers free-at-point-of-use healthcare to 67 million people. The under 75’s mortality rate has decreased significantly. Additionally we are making headway with our pension problems, thanks in large to auto enrolment. This is alongside the fact that the UK is seen as a great place to do business.

Legal statistics

Our legal system is still considered one of the best in the world for its independence and its ability to protect ownership rights, corporation tax rates are far from onerous. Our language has become the world’s business language and we have some of the most gifted entrepreneurs running some amazingly successful businesses. So our view is that on balance UK Plc is in good shape.

Housing statistics

As always, there is some bad news: gross government debt at 80% of GDP, housing shortages coupled with high prices, many working people are caught up in the welfare state system and productivity growth is far too low. It is also true that we still have a budget deficit, but we must also acknowledge that the work done over the last decade has seen the deficit fall considerably.

What do our partners say?

Andrew Feeke, corporate finance partner, commented:

“From an M&A perspective, we feel that there is a lot to be positive about in 2020, especially going off the recent M&A report from our international network Baker Tilly International, which suggests M&A activity levels will pick up over the coming months. “

“However, with the Brexit and Covid19 issues we face in the near term, sentiment may take some time to shift significantly.  There is a good deal to be positive about when you look to the medium term M&A market in the UK as healthy and well prepared businesses being offered for sale get bought up quickly by those business owners prepared to get in there early and make things happen.”

This article was originally published in Macintyre Hudson’s Corporate Finance Newsletter, please click here to read the original.

Exit planning considerations for the road haulage sector

The road haulage sector accounts for approximately 77% of all goods moved (c3.7 million tonnes) in the UK. The sector is highly fragmented with the largest player in the market having only a 5% market share, and approximately 85% of businesses having fewer than 5 staff.

The above creates significant opportunities for consolidation, and the Corporate Finance team at MHA Moore & Smalley have advised a number of businesses in relation to their acquisition and exit planning strategies.  

This blog focuses on the key factors which should form part of an exit planning strategy in this sector. Based on our experience the key areas to consider include the following:

Management team

In common with other sectors, acquirors will typically attach more value to those businesses which have strong management teams, and therefore a lower degree of reliance on the exiting shareholders.

This is particularly important in the highly competitive road haulage sector where customer relationships are often critical (and contracts can be difficult to obtain).  Strong 2nd tier management will provide continuity to an acquiror, and therefore lower the perceived risk profile of the potential acquisition.

Management Information

It is important to ensure that acquirors are presented with management information which is sufficiently detailed to enable a clear understanding of the business to be obtained.

The Information Memorandum provided to acquirors should also contain a financial projection. This projection  should set out the projected short and medium term financial performance of the business.

The projection should clearly outline the potential financial impact of future opportunities, and should be accompanied by supporting assumptions. The assumptions provided will need to include clear explanations for significant variances between the projected performance and recent trading performance.

When forming a view on the valuation of the business, acquirors will consider the degree to which they are prepared to take into account future opportunities. Providing the above information  can significantly increase the weighting  which an acquiror will attach to future performance, thus resulting in a higher valuation of the business.

Effective cost control

Effective cost management  is important to the success of road haulage businesses, particularly because one of the main expenses is fuel, the price of which can be volatile.

Fuel prices impact on road haulage to a greater degree than other forms of transport (due to current limitations on vehicle fuel efficiency). Therefore management should ensure that customer contracts incorporate automatic adjustments for changes in key input prices such as fuel.

It is also important to ensure that other costs, particularly those which are subject to less uncertainty, are clearly understood and tightly controlled. This will provide a buffer for unexpected fluctuations in costs such as fuel, which are subject to more uncertainty. C

Consider obtaining long term sales contracts

Acquirors will typically apply a higher valuation multiple to those businesses with future earnings underpinned by contracts.

Environmental factors

Operators are increasingly  subject to regulations on vehicle emissions (such as the Euro VI emission standard). Acquirors will therefore expect owners to be aware of their current vehicle emissions,  to enable the impact of future changes in regulations to be understood

Management should also consider obtaining 3rd party green accreditations as a way to differentiate the business. For example some operators have obtained the Carbon Trust Standard, and obtaining such accreditations can help to enhance the reputation of the business.

Technology

It is important to ensure that the business keeps abreast of key technological changes (such as advanced route planning software to maximise fuel efficiency) and ensure that technology is implemented in the most appropriate way for the business.

This will ensure that the business benefits from improved efficiency and increased profitability, therefore increasing the valuation of the business.

The above are just some of the areas which should be considered as part of an exit planning strategy. If you would like to discuss further, please contact Ian Waddingham from the Corporate Finance team at MHA Moore & Smalley on 01772 821021

Further consolidation expected in nursery sector

Further consolidation expected in nursery sector following latest acquisition by Kids Planet

The children’s day nursery sector has shown strong levels of M&A activity in recent years and the announcement last week that nursery group Kids Planet has acquired North West rival Kids Allowed is likely to be the first of many such transactions in the sector over the coming year.

The latest acquisition by the BGF backed Kids Planet will add another 8 nurseries across Manchester and Cheshire, along with around £11 million additional turnover, and make it the UK’s third largest nursery group, with 52 nurseries in the North West and Midlands, providing care to some 6,000 children.

Kids Planet received an initial investment of £10 million from BGF in 2016, when it had 17 nurseries. It has since trebled its footprint, with BGF’s total investment now at £26m, and the business anticipates more acquisitions in future. Although rapidly growing it remains some way behind the two largest groups in the market, Busy Bees (380 nurseries) and Bright Horizons (310 nurseries).

In the UK, the pre-primary education industry is estimated to be worth approximately £3.6bn with further growth forecast in the sector over the coming years. High employment levels, the increased workforce participation rate of women with dependent children, demographic changes and higher levels of government subsidy of early years education has resulted in increased demand for childcare services amongst parents.

The competitive landscape in the day nursery sector remains highly fragmented, with an estimated 80% of childcare settings still owned by independent operators. As a result, this provides an opportunity for further market consolidation and for larger groups to acquire smaller operators.

There appears to be a healthy appetite across the buyer spectrum – from single site nurseries being bought by small groups, to smaller groups being acquired by large national groups, as well as increasing interest from private equity investors and overseas buyers.

High quality nursery businesses continue to be very desirable to groups looking to acquire. There are several key factors that make a day nursery particularly attractive to potential buyers, these are; good visibility of future income streams, reasonable certainty around occupancy levels, the ability to benefit from cost saving synergies and a solid asset base.

Should you have any questions about this blog, please get in touch with a member of our Corporate Finance team on 01772 821021.