Influenced by economic and social trends and population increases principally in urban areas, the child care industry has attracted significant attention and has seen strong transaction volumes in recent years. Acquiring a child care centre is already a well-established and popular class of investment.
This article summaries the key regulatory and commercial aspects to be aware of if you are considering an investment in one or more child care centres. Please note the below is premised on the acquisition being of the business as opposed to the shares of a company which operates the centre.
How child care is regulated
The child care industry is regulated under the National Quality Framework (Framework) which is administered by the Australian Children’s Education and Care Quality Authority (ACECQA) and State and Territory regulatory authorities. The Framework covers most long day care, family day care, pre-school/kindergarten and outside of school hours care, which are the main types of child care services in Australia.
The Framework comprises a national law and national regulations applied in all States and Territories (with some local variations), a national quality standard against which child care services are assessed and rated, and approved learning programs.
The aim of the Framework is to providing flexibility to deliver better educational and developmental outcomes for children.
What to look for when acquiring a centre
In our experience there are a number of key things to keep in mind when acquiring a child care centre, including the following:
- Valid Provider Approval and Service Approval
Check that the seller has a valid Provider Approval and a valid Service Approval in respect of the centre issued by the relevant regulatory authority. These approvals are mandatory for operating a child care centre. The Provider Approval approves the provider of child care services, so if you are new to the child care industry you will need to obtain a Provider Approval yourself. The Service Approval is in respect of the child care service being sold. The Service Approval will contain valuable information such as the type of service approved (i.e. centre based care), the centre’s permitted operating hours, the number of approved places (i.e. the maximum number of children allowed at the centre) and any conditions such as educator to child ratios or temporary obligations. It is critical to check this information against due diligence information provided by the seller to identify and rectify any discrepancies prior to acquiring the centre. Note that when acquiring a child care centre, application needs to be made to the regulator to transfer the Service Approval from the seller to the buyer, which is subject to a statutory non-objection period.
Check that there is a lease currently in place over the target centre. An occupation right over the premises is required in order to validly transfer the Service Approval. Any existing lease will either need to be assigned from the seller to the buyer, or a new lease entered into with the landlord. In both cases landlord consent is required, so it is very important to engage with the landlord as part of the acquisition process as they will be interested in ensuring that the acquirer of the centre is a suitable tenant, noting that the seller will sometimes want to control the flow of information to the landlord, particularly at an early stage when the acquisition may still be conditional. It is also important that the name of the tenant on the lease is the same as the name on the Provider Approval so that there are no issues regarding the occupation right with the regulator. A critical aspect is to consider the term of the lease (and any option periods) as much of the value ascribed to child care assets is held in the tenure of the lease. Your financer may also require that you negotiate a right of entry with the landlord in respect of the premises.
- Ownership of and security over assets
Investigate the ownership of assets that are included in the business and are necessary for operating the target centre. Check if the seller has exclusive ownership of these assets (some assets are commonly leased, such as printers) and whether there are any security interests over the assets which should be released at settlement.
- Occupancy levels
Check the centre’s current and past occupancy levels, and ensure you have protections in place during the acquisition process if occupancy worsens. Sellers who have a centre under contract sometimes take their ‘foot off the pedal’ and fail to devote sufficient time to marketing the centre and maintaining relationships with parents. Make sure you decide what minimum occupancy levels you will be satisfied with during the acquisition process, below which you can take steps to terminate the acquisition or seek other redress.
- Employee entitlements
Ensure the seller provides you sufficient information as to employee entitlements (such as annual leave, personal/carer’s (sick) leave and long service leave). When acquiring a child care business you will often offer employment to many if not all of the current staff and any entitlements which are not paid out but that as buyer you take on should be identified and then deducted from the purchase price at settlement.
- Development consent
Make enquiries of the local council as to development consents and occupancy certificates over the centre. The development consent should confirm that the premises were approved as a child care centre. In many cases the development consent will also contain maximum child numbers (similar to the Service Approval) and/or age ratios. This can raise issues where a development consent was issued many years ago and the Service Approval is more recent.
Check whether the seller operates other centres and whether you wish to enforce a reasonable restraint so that the seller cannot solicit or compete with your business within a specified period of time from settlement and a specified distance from the centre.
- Conducting other (non-legal) due diligence
Ensure that you conduct due diligence (in addition to legal due diligence) to make enquiries regarding the financial and operational aspects of the centre. In addition, you may wish to engage a childcare specialist which can opine on a number of specific matters such as distance to other nearby centres and catchment areas.
- Foreign investment considerations
If you are a foreign investor considering an investment into the Australian child care industry, you should be mindful of the potential Foreign Investment Review Board (FIRB) implications. In some circumstances, long term leases over the centre may trigger the application of the FIRB framework. Additional attention should also be paid when a child care centre investment involves acquiring residential or commercial vacant land. We suggest FIRB issues be considered at an early stage of the acquisition for any foreign investor.
The child care industry in Australia is booming and like any industry involving an attractive asset class, specialised knowledge can provide a competitive advantage and go a long way to making an acquisition efficient, seamless, cost-effective and ultimately a successful one for the acquirer.