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An accurate valuation serves multiple critical purposes:
The current market environment makes accurate valuation particularly important. Research reveals that 199 nurseries closed between September 2023 and the start of the 2024 academic year, highlighting the financial pressures facing the sector and the importance of understanding sustainable business values.
A nursery’s value comprises fixed assets, goodwill, and property (if owned). Each component requires separate assessment and contributes differently to the overall valuation.
Fixed assets include all tangible items owned by the business:
Fixed asset values can be obtained from your most recent full accounts, though depreciation and replacement costs should be considered. A comprehensive inventory is essential, as nursery equipment can run into many pages and represents significant capital investment.
Goodwill represents the intangible value of your business – the premium a buyer pays above the tangible assets for the established business’s earning potential. This includes:
Goodwill is typically the most significant component of value in nursery transactions and the most complex to calculate accurately.
For nurseries operating from freehold premises, the property value forms a substantial part of the overall valuation. However, it’s important to understand that the freehold property is appraised based on its use as a children’s nursery rather than as residential property, even if it operates from a converted house.
The financial performance of your nursery is the single most critical factor in determining business value. Profit is measured as annual earnings before interest and tax, commonly referred to as EBIT.
EBIT (Earnings Before Interest and Tax) provides a clear picture of operational profitability by excluding financial structure costs and taxation.
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) goes further by adding back non-cash expenses, providing a measure of cash-generating capability.
When calculating these figures for valuation purposes, several adjustments are typically made:
Market multipliers vary significantly based on property tenure. Current market conditions see leased premises valued at multiples of 1.25 to 2.5 times EBIT, whilst freehold premises command multiples of 4.5 to 6.25 times EBIT.
Example Calculation:
A freehold nursery generating £50,000 annual EBIT would typically be valued between:
For leasehold premises with the same earnings:
The significant difference reflects the added security and value of property ownership, as well as the fact that banks will lend up to 75% against freehold nursery premises but rarely over 50% for leasehold acquisitions.
The specific multiple applied to your nursery depends on several factors:
Higher multiples are achieved by:
Lower multiples apply to:
Property tenure has a dramatic impact on nursery business valuation, affecting not only the asking price but also the pool of potential buyers and financing options available.
Freehold ownership gives nursery operators exclusive occupation of premises, offering long-term security and the potential to alter or extend the facility. This significantly enhances overall business value.
Advantages for valuation:
Considerations:
Leasehold arrangements limit occupation rights to a specific term. The value attributed depends heavily on lease terms, including remaining duration, rent review provisions, repair obligations, and landlord cooperation.
Value-enhancing lease features:
Value-diminishing lease features:
Some nurseries operate under licence agreements rather than leases, typically in community buildings, schools, or church halls. The temporary and restrictive nature of licence agreements significantly reduces overall business value.
Licenses typically:
Goodwill represents the premium paid for an established, operational business over its tangible assets. For nurseries, goodwill calculation involves several methodologies.
This method applies a multiple to the net profit the nursery generates, typically using a weighted average of recent years’ performance to smooth fluctuations.
Weighted Average Calculation:
Year 3 (most recent): £60,000 profit × 3 = £180,000
Year 2: £55,000 profit × 2 = £110,000
Year 1 (oldest): £50,000 profit × 1 = £50,000
Total = £340,000 ÷ 6 = £56,667 weighted average profit
This weighted average gives more importance to recent performance, reflecting current business trajectory.
EBITDA multiples provide another common approach to goodwill valuation. This method is particularly useful as it excludes capital structure differences between businesses.
When using EBITDA, ensure you:
Some valuations use turnover multiples, though this is less common for nurseries as it doesn’t reflect profitability variations. Industry-specific turnover multiples are typically quite low (generally under 1x) and work best as a sense-check alongside profit-based methods.
Reputation and Brand:
Customer Base:
Workforce Quality:
Operational Systems:
Our comprehensive guide on preparing your nursery for sale will help you maximise your business value.
Location significantly influences nursery valuations, affecting both demand levels and achievable fee rates.
Nurseries in prime locations – such as city centres or near major employers like hospitals – can typically charge higher fees, therefore attracting the highest valuations.
High-value location factors:
The latest Department for Education data shows there are now 1,602,500 registered childcare places in England, up from 1,558,1000 in 2023. However, supply doesn’t always match demand geographically.
Market research should include:
The geographical funding disparities are significant. Some local authorities receive rates as low as £5.47 for three and four-year-olds, whilst others receive substantially more. This directly impacts nursery profitability and, therefore, valuation.
Research shows that just under four in ten nursery closures occurred in the 30% most deprived areas, including parts of London, Birmingham, Liverpool, and Leeds. Nurseries in these areas typically:
Practical considerations matter significantly:
Beyond location and financials, operational characteristics substantially influence nursery valuations.
Registered Capacity: The number of places your nursery is registered for sets the upper limit on potential income. Purpose-built nurseries with optimal space utilisation are valued more highly than converted premises with inefficient layouts.
Larger nurseries generally command premium valuations. Settings with over 60 places tend to be operationally more efficient, a factor that applies equally to purpose-built nurseries.
Current Occupancy: Average occupancy rates across the sector stand at approximately 70-75%. Higher occupancy rates demonstrate:
Room for Growth: Buyers pay premiums for nurseries with capacity to increase occupancy or expand physically, representing built-in growth potential.
Your staffing model directly affects both operational costs and service quality.
Key staffing considerations:
High staff turnover indicates underlying issues that will concern buyers. A stable, well-qualified team adds significant value.
Diversified provision across age ranges reduces risk and maximises facility utilisation:
Additional services enhance value:
Strong financial controls and transparent reporting enhance buyer confidence:
Regulatory compliance and quality ratings significantly impact nursery valuations.
Your Ofsted rating is perhaps the single most visible quality indicator. As of 31 March 2024, 97% of childcare providers were judged good or outstanding at their most recent inspection.
Rating impact on value:
Time since last inspection matters, as does the trend if you’ve been inspected multiple times. An improving trajectory (from Good to Outstanding) adds value, whilst any downgrade raises red flags.
Beyond Ofsted ratings, compliance history affects perceived risk:
Clean compliance records support valuations, whilst issues require disclosure and typically reduce value.
Your premises must meet Early Years Foundation Stage (EYFS) requirements:
Purpose-built facilities designed to exceed minimum standards command premium valuations compared to settings that merely meet requirements.
Understanding the current market environment is essential for realistic valuations.
The nursery sector faces significant headwinds that impact business values:
Funding Pressures: The average funding rate for three and four-year-olds increased by just 4.6% for 2024-25, whilst the National Living Wage rose by around 10%. This funding gap squeezes profit margins, particularly for nurseries heavily dependent on government-funded places.
Closures and Consolidation: The sector continues to see closures despite the need for expansion, with 199 nurseries forced to close between September 2023 and the start of the 2024 academic year. This represents market instability that affects buyer confidence.
Recruitment Challenges: Staff shortages persist across the sector, compounding operational pressures. Wages in the early years sector lag behind education settings, making recruitment and retention ongoing challenges.
Rising Costs:
Despite challenges, opportunities exist:
Demand Growth: Registered childcare places increased by 3% to 1,602,500 in 2024, reflecting underlying demand driven by expanded government entitlements.
Consolidation by Larger Groups: The proportion of group-based providers that are part of a chain has increased from 33% to 34%, indicating ongoing appetite for acquisitions among established operators.
Government Expansion: The extension of funded hours to children from nine months creates opportunities for nurseries capable of delivering expanded provision.
Quality Premium: With 97% of providers rated good or outstanding, the bar for quality is high, but truly exceptional settings can command significant premiums.
The market remains active despite challenges, with specialist buyers including:
Conducting a thorough nursery valuation requires systematic analysis across multiple dimensions.
Compile comprehensive financial data:
Determine normalised, sustainable profit:
Calculate weighted average if using multiple years’ data to reflect business trajectory.
Select earnings multiple based on:
Apply current market ranges (1.25-2.5x for leasehold, 4.5-6.25x for freehold) adjusting within the range based on specific circumstances.
Itemise all business assets:
Use realistic current values, not book values which may be heavily depreciated.
For freehold nurseries, obtain:
Remember that the freehold multiple typically encompasses goodwill, fixtures and fittings, and the property in its commercial use, so avoid double-counting.
Research recent transactions:
Adjust comparable values for differences in size, location, quality, and timing.
Validate your valuation:
Prepare comprehensive valuation documentation:
Understanding common mistakes helps you avoid overvaluing or undervaluing your nursery.
Many nursery owners value their business based on the effort they’ve invested, but the business will only achieve the value that the market is prepared to pay. Your hard work, emotional investment, and personal connection don’t directly translate to monetary value.
Buyers value actual performance, not promises of future growth. Whilst growth potential has some value, it’s heavily discounted compared to proven, sustainable earnings. Focus your valuation on demonstrable track record.
Valuations are time-sensitive and market-dependent. What worked two years ago may not reflect current reality. Stay informed about:
Common property-related mistakes include:
Failing to properly adjust financials leads to inaccurate valuations:
Applying inappropriate earnings multiples is perhaps the most common technical error. Ensure you:
Whilst understanding valuation principles is valuable for all nursery owners, professional valuation services are advisable in specific circumstances.
A RICS (Royal Institution of Chartered Surveyors) Valuation involves detailed analysis of turnover, wage costs, and other factors to arrive at sustainable profit in the hands of a reasonably efficient operator.
When you need a formal RICS valuation:
A market appraisal provides a verbal opinion of the asking price achievable in the market with a view to potentially selling. These are typically provided by specialist business transfer agents.
When an appraisal is appropriate:
The only way to reach a reasonable nursery valuation is by consulting experts within the field who can assess all factors and benchmark against recent prices for similar nurseries across the UK.
Specialist advisors bring:
Selecting a professional advisor:
Valuing a nursery business requires balancing technical financial analysis with sector-specific knowledge and market awareness. The methodology combines quantitative assessment of earnings and assets with qualitative evaluation of location, reputation, regulatory standing, and operational efficiency.
Key takeaways for maximising your nursery’s value:
Whether you’re actively planning to sell, considering your options, or simply want to understand your business’s worth, a thorough, realistic valuation provides the foundation for informed decision-making. In a sector facing both challenges and opportunities, accurate valuation has never been more important.
Understanding valuation is the first step. If you’re considering selling your nursery or need expert guidance on achieving the best value for your business, specialist advice makes all the difference.
Abacus Day Nursery Sales specialises exclusively in the valuation and sale of day nursery businesses across the UK. With deep sector expertise and an extensive network of qualified buyers, we help nursery owners achieve optimal outcomes.
Take the first step towards understanding your nursery’s true worth. Our team provides confidential, no-obligation valuations backed by comprehensive market intelligence.
Contact Abacus Day Nursery Sales to discuss your nursery’s value and explore your options.
If you’ve decided to sell, we provide comprehensive support throughout the entire process:
Learn more about our nursery selling services and how we achieve premium results for our clients.
*This guide provides general information about nursery business valuation in the UK and should not be considered financial, legal, or tax advice. Business valuations are complex and individual circumstances vary significantly. Always seek professional advice from qualified specialists before making decisions
Our comprehensive guide on preparing your nursery for sale will help you maximise your business value.