Purchasing a Childcare Business

In Short

• Understand Regulatory Requirements: Ensure the childcare centre complies with the National Quality Framework, holds current provider and service approvals, and meets all local zoning laws.

• Conduct Thorough Financial Due Diligence: Review financial statements, occupancy rates, fee structures, and staffing costs to assess the business’s financial health and sustainability.

• Secure Appropriate Insurance Coverage: Verify existing public liability and workers’ compensation insurance policies, and consider additional coverage like personal accident insurance to protect against potential risks.

Tips for Businesses

Before purchasing a childcare business, consult with legal and financial professionals to navigate complex regulations and financial assessments. Ensure all licences are transferable, the premises meet zoning requirements, and adequate insurance is in place. Thorough due diligence and expert advice can help mitigate risks and support a successful acquisition.

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Table of Contents

• Who administers Childcare Laws and Regulations in Australia?
• Financial Due Diligence
• Zoning and Permitting 
• Insurance
• Conclusion
• Frequently Asked Questions

Purchasing a childcare business can be very rewarding. In Australia, childcare businesses are understandably heavily regulated to protect the safety and well-being of children in their care. There are several legal issues to consider when purchasing a childcare business, including licensing, insurance, and zoning requirements that must be satisfied to operate the business in compliance with laws and regulations. This article explores some of the key legal considerations associated with purchasing a childcare business.

Due Diligence Guide for Purchasing a Business

Before buying a business, it is important to undertake due diligence, to verify the information supplied by the seller. This guide will walk you through the due diligence process.

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Who administers Childcare Laws and Regulations in Australia?

At the federal level, the National Quality Framework (NQF) sets the benchmark for early childhood education and care services. This framework includes the Education and Care Services National Law and the Education and Care Services National Regulations. These outline the operational requirements for childcare services, including staffing ratios, qualifications, educational programs, and health and safety standards.

A key component of the NQF is the National Quality Standard (NQS), which sets a national benchmark for the quality of education and care services. The NQS comprises seven quality areas: 

• educational program and practice; 
• children’s health and safety; 
• physical environment;
• staffing arrangements; 
• relationships with children, collaborative partnerships with families and communities; and 
• governance and leadership.

When assessing a childcare centre, pay close attention to its rating from the Australian Children’s Education and Care Quality Authority (ACECQA). Ratings range from ‘Significant Improvement Required’ to ‘Excellent’, with most centres falling into ‘Working Towards’, ‘Meeting’, or ‘Exceeding’ the NQS. A higher rating can be a strong indicator of a well-run centre; however, it’s essential to review the detailed assessment reports to identify any areas for improvement.

Additionally, ensure that the centre holds current provider and service approvals. These are the legal requirements for operating a childcare service, issued by the relevant state or territory regulatory authority. Check that these approvals are transferable upon purchase of the business.

Financial Due Diligence

Conducting thorough financial due diligence is crucial when considering the purchase of a childcare business. This process involves a detailed examination of the centre’s financial health, performance, and potential for future growth.

Start by reviewing at least three years of financial statements, including profit and loss statements, balance sheets, and cash flow statements. Look for trends in revenue growth, profit margins, and expenses. Pay particular attention to the centre’s occupancy rates, as this is a key driver of profitability in the childcare sector. A healthy occupancy rate typically ranges from 75% to 80% or higher, though this can vary depending on location and other factors.

You may also wish to analyse the fee structure and compare it to local competitors, for example:

1. consider whether there’s room for fee increases without risking a loss of enrolments;
2. examine the centre’s reliance on government subsidies, such as the Child Care Subsidy; and
3. wage costs are typically the most significant expense for childcare centres, often accounting for 60% to 70% of revenue.

Further Considerations

In addition, you should consider:

1. evaluate the centre’s revenue per licensed place. This metric can vary significantly depending on factors such as location, quality of facilities, and reputation, but it provides a useful benchmark for comparing different centres.
2. review the centre’s capital expenditure requirements. Childcare facilities require ongoing investment in equipment, resources, and building maintenance. Review recent capital expenditures and assess whether significant investments will be needed in the near future.
3. finally, don’t overlook the importance of working capital. Childcare businesses often require substantial working capital due to the timing difference between fee collection and expense payments. Ensure the business has adequate cash reserves or access to credit facilities to manage day-to-day operations.

By thoroughly examining both regulatory compliance and financial performance, you’ll be better positioned to make an informed decision about the viability and potential of the childcare business you’re considering purchasing.

Zoning and Permitting 

As noted above, the NQF contains the National Quality Standard (NQS), which includes a component focused on the physical environment in which the business operates.

The business’s premises must provide a safe and suitable physical environment that is appropriately designed, fit for purpose, and well-maintained. 

If, as part of the sale, an existing premises or lease is being transferred to the buyer, you should ask your lawyer to consider whether the premises comply with the NQS and the zoning requirements in the relevant state or territory. Ideally, the sale agreement should also contain appropriate warranties that state the premises are fit for their intended purpose and comply with all relevant laws and regulations. 

Insurance

By law, childcare businesses are required to take out and maintain public liability insurance. This aims to protect the business against claims from third parties related to physical injury, accidents, and property damage that occur during the conduct of business. 

The contracts entered into by the business (which you may be acquiring as part of the sale), may require the business to maintain a certain level of public liability insurance coverage (for example $20 million), so you must review these agreements as part of the due diligence process to ensure that you do not inadvertently breach your insurance obligations once the sale completes.

Children tend to be more accident-prone than adults, so it’s also prudent for childcare businesses to take out Personal Accident Coverage. Many insurers offer a Family Day Care insurance package, which includes this coverage. As the buyer, you will need to obtain insurance. We recommend consulting an insurance broker to discuss the most suitable insurance coverage, taking into account your personal circumstances.

Conclusion

Operating an early childhood business is crucial to the well-being of Australian children, families, and the economy. The legal obligations applicable to childcare operators and businesses are extensive and should be treated very seriously.

Before purchasing a childcare business, we recommend seeking legal advice regarding your obligations under the National Quality Framework and the laws and regulations applicable in the state or territory where the business operates. The sale agreement should include protections and warranties to ensure that the buyer’s risk is appropriately limited.

If you have any questions, our experienced childcare lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions

Does the location of the childcare centre matter legally?

Yes. The property must comply with zoning laws and the National Quality Standard for physical environments. If you’re taking over a lease, ensure it permits the premises to operate legally as a childcare service.

What types of insurance are required?

You’ll need public liability insurance and workers’ compensation insurance. It’s also wise to consider personal accident coverage. An insurance broker can help you find the right level of cover for your business.