What do you need to know before buying an early childhood education (“ECE”) business? Childcare centres are heavily regulated by the Government, and there are many key issues to consider before buying a daycare or ECE facility. Whether you are an entrepreneur looking to invest in the education sector or an experienced educator seeking to expand your business, understanding the legal aspects of this transaction is crucial.

So, what questions should you ask? And what provisions should be included in the sale and purchase agreement to protect your investment?

Employees

“Vulnerable Employees”

Depending on whether you are a seller or buyer, there are employment obligations and responsibilities to comply with, as in any business. An example is “vulnerable employees”, a defined class of employees under the Employment Relations Act 2000, that are often employed in ECE businesses. Any employee deemed to be a “vulnerable employee” has the right to choose to transfer to the purchaser on their existing terms and conditions, and their employment is treated as continuous.

This right needs to be factored into any Sale & Purchase Agreement. Purchasers should conduct further due diligence into the number of such employees, their salaries and accrued entitlements, existing employment contracts and employment histories.

Regular Employees

Employees that are not deemed “vulnerable” in accordance with the legislation can be offered employment at the sole discretion of the purchaser on terms and conditions determined by the purchaser. That means, you can decide whether to keep the current employees – but of course, it will be up to the employees to accept the terms and conditions you are offering.

The existing employment contracts will come to an end on settlement date, therefore, if you are intending to employ any of the existing employees, you will need to ensure they sign new employment contracts listing you/the new business name as the employer. These agreements need to be signed PRIOR to settlement. You should have the agreements drawn up by an experienced employment lawyer – or, if you are using the existing employment contracts, we recommend you have them reviewed to confirm they meet legal requirements and/or they offer you the necessary protections.

Building Inspection

You will need to obtain a building inspection report as part of the due diligence investigations to ensure the property is up to an acceptable standard. The building warrant of fitness should also be checked to see that it is current and for the correct kind of premises.

The agreement for sale and purchase should provide a warranty clause from the vendor that the premises are licensed as a pre-school pursuant to the Education (Early Childhood Services) Regulations 2008 or any other statutory provisions or regulations governing pre-schools and nurseries.  Further, to protect you if the Ministry of Education (“MOE”) raises any concerns relating to the centre prior to settlement which requires a correction to make the centre compliant, the agreement should state that the vendor will make the necessary corrections at their cost.

Further considerations include local authority compliance (depending on the zoning), including any required land use consent to run a childcare centre and, any limitation of number of children should also be investigated.

Bulk funding

Apportionments in relation to MOE bulk funded payments need to be calculated as at settlement date, because MOE payments are made partially in arrears and partially in advance – and the settlement date will fall into one of those periods. It is not a simple exercise to apportion the MOE bulk funding. A provision should be inserted into the Agreement that the parties will act in good faith as soon as the MOE has supplied the bulk funding information so the parties can attend to a proper apportionment, with the amount to be paid immediately by one party to the other in accordance with the apportionment.

Consideration should also be given to retention of a certain amount of settlement funds by each party’s solicitor pending completion of the MOE funding for the period which covers the settlement date.

Trading Name

If the childcare centre’s trading name is being purchased, (and included in the goodwill figure of the purchase price), then provisions in the agreement need to be inserted to record the transfer of the ownership and the vendor’s obligation to change any registered company name.

Standard provisions should also be included signing over existing telephone and fax numbers for the business, restraint of trade, approval of lease or assignment of lease.

Competition / Restraints?

The agreements for sale and purchase should contain a non-competition restraint of trade provision, preventing the vendor from setting up another childcare centre, or working in the same or similar industry within a certain radius for a certain amount of time. Any restraint of trade needs to be reasonable to be enforceable.

The restraint of trade should also include a non-solicitation provision, preventing the previous owner/vendor from soliciting staff or parents for a reasonable period of time.

General Business due diligence

When completing due diligence for the purchase of the business, you will also need to consider:

Commercial leases, if not purchasing the premises.

Review the terms of the existing lease, as the lease will need to be assigned to you, with consent from the existing landlord. Alternatively, a new lease may need to be entered into.

Supply contracts

Whether the vendor has any supply contracts and if they are to be cancelled or transferred/assigned to the purchaser on settlement.

Financial viability of the business

You will need to ensure that sufficient working capital funds are available, as the first MOE funding payment may be months away (depending on settlement date) – you should get your accountant to check the business is sufficiently profitable.

Fire Safety Provisions

Checking fire safety provisions of the premises which includes ascertaining fire reports are up to date and have been submitted to Council.

Health and Safety, Licenses and Inspections

Ensure the facility meets health and safety standards to protect the well-being of children in your care and all necessary licenses and inspections are compliant and up to date.

Market Analysis

 Research the local market to understand the demand for early childhood education services. Consider factors such as population growth, competition, and demographic trends that may affect your business.

Are you looking to buy a daycare or early childhood education facility?

Commercial law expert, Kristal Rogers has extensive experience advising on the sale and purchase of early childhood centres in New Zealand. To set up an appointment for further advice and assistance, contact Kristal by phone on 09 837 6896 or email Kristal.rogers@smithpartners.co.nz