ELC Due Diligence

ELC Due Diligence

Considering purchasing an existing early learning centre? Undertaking due diligence is vital.

If you’ve never purchased an existing centre before, or you’d simply prefer to outsource your due diligence to an expert in the ELC field, the team at 4E’s Consulting can help!

What is Due Diligence?

Due diligence is a comprehensive appraisal of a business undertaken by a prospective buyer, with a particular focus on assets and liabilities and evaluating commercial potential.

In short, due diligence helps you understand if the purchase of a centre is going to be commercially viable.

4E’s Consulting – Experts in Due Diligence

At 4E’s, our consultants are experts in early childhood education, business management and preschool start-up design – and we’ve been assisting centre owners with due diligence for almost half a decade! Working alongside the ECE specialist team at Rubiix Accountants, our experts perform due diligence reviews for early learning centres throughout New Zealand, while empowering business growth for start-up and experienced owners alike.

Due Diligence Examples

If one of our clients is considering the purchase of an existing early childhood education centre, we can help with a comprehensive due diligence audit to help them ensure they’re making the best possible investment. Here are 3 examples amongst many, of things we look for throughout the due diligence process.

Cost Discrepancies

Working with the team at Rubiix, we examine financial paperwork carefully to ensure all of the figures stack up, there are no compounding factors contributing to poor performance (for example fees) and to pick up any discrepancies that may fly under the radar for first-time centre owners such as a large holiday accrual or funding issues.

In the course of a recent due diligence audit, we picked up that a current owner-operator of a preschool for sale was working within the centre and paying themselves a teaching wage rather than a manager’s wage. While the paperwork had initially looked fine to the prospective purchaser, they hadn’t taken into account what the current owner was doing, albeit unintentionally. The due diligence revealed a significant potential for lost wages. The difference of $6 – $10 an hour over the course of a year can mean a centre’s finances are off by around $20K a year, which can have a huge impact on a business’ ability to be profitable.

Genuine Profit vs Paper Profit

Genuine profit and what profit may look like on paper can be very different, which is why a full due diligence review is so important. Our team takes into account factors such as funding bands, wages and occupancy rates, why occupancy rates may be down, what teachers are being paid, as well as attestation rates – the minimum funding rate for qualified registered teachers bulk funded by government.

While the right management has the potential to turn a struggling centre around or increase profits, understanding the ins and outs of those financials prior to sale can give potential buyers negotiating leverage, and ensure they’re not overcapitalising on their investment.

Staffing & Responsibilities

While financials are a vital part of due diligence, reviewing an existing centre’s staffing and staffing qualifications is equally important. In the case of a centre we were called to assist last year, a key staff member had resigned 6-weeks after the purchase by the new owners – resulting in the Ministry of Education revoking the centre’s full license because there was no longer a qualified persons responsible. The new centre owner was required to hire or promote someone into that position – the financial impact being an additional $25-35K a year in the budget to promote internally, or $65-85K annually to bring on board someone new.

In this case a full due diligence had sadly not been undertaken by an expert prior to the centre purchase as the owners were accountants and solely focussed on the financial aspect and not interweaved the operational impacts. Had the new owners invested in due diligence prior to purchase, we may have uncovered that team member’s intention to leave and helped the new owners negotiate an appropriate purchase price to ensure the smooth transition into the business.

Professional Due Diligence = Long Term Savings

We often talk to business owners looking to invest in an early childhood education centre with limited understanding of the investment required. Yes, ELCs can be great businesses – but they require constant reinvestment.

The reality is, without proper due diligence prior to a centre purchase, owners are setting themselves up to fail. ECE centres are seen as moneymaking businesses, but that’s not always the case. If you’re new to the industry and never owned a centre before, it’s vital to consult with an expert and be aware of what you’re getting yourself into. It’s not just about getting the percentages to be right, it’s how to balance the percentages to interact for the best operational outcome for excellent practice.

Due diligence is different for every centre, and anyone offering a cookie-cutter solution is cutting corners. Prospective owners can pay just as much for poor due diligence as they would for a quality service – so if you want to end up with great product, it’s vital that you entrust your due diligence with a professional, industry-approved team.

Doing your due diligence correctly from the get-go will help you determine where to spend and where to save, and investing in that service upfront can potentially save your business hundreds of thousands in the long run.

We’re here to help! Contact the team at 4E’s Consulting today to talk through your due diligence needs and request a personalised quote.

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