Understanding EBITDA in Nursery Business Valuations

You are thinking about selling your nursery, and a buyer’s accountant mentions an adjusted EBITDA multiple of 6.5x. What does that actually mean, and what does it say about what your setting is worth?

EBITDA is the measure most buyers and valuers reach for first when they assess a childcare business. It is also one of the most misunderstood, partly because EBITDA in a nursery behaves differently from EBITDA in almost any other sector. Staff costs dominate the cost base, a large share of income arrives through government funded entitlements rather than private fees, and owner specific costs have a habit of sitting quietly inside the accounts of an owner managed setting.

This guide explains what EBITDA is, how to calculate it for a nursery, which adjustments matter in childcare, how government funding shapes the number, and how buyers turn all of it into an offer.

What is EBITDA and Why Does It Matter in Nursery Valuations?

EBITDA stands for earnings before interest, taxes, depreciation and amortisation. Stripped of the acronym, it is a measure of how much cash your nursery generates from the day to day business of caring for children, before the effects of how the business is financed, how it is taxed, and how its assets are written down in the accounts.

Each element is doing a specific job. Earnings simply means profit: your income less the cost of running the setting. Before interest removes the cost of servicing debt, because a mortgage on the building tells you about the owner’s borrowing, not about the nursery’s ability to fill rooms. Before taxes removes variation created by ownership structure, because a sole trader and a limited company running identical settings will report very different tax charges. Before depreciation and amortisation removes non cash accounting charges, so that the write down of your outdoor equipment or your fit out does not disguise how much cash the setting actually produced.

Buyers and valuers care about the result for four practical reasons. It shows the trading performance of the setting itself rather than the financial history of its current owner. It allows settings to be compared with one another on something close to a level footing, whatever accounting choices each owner has made. It gives a quick route to a valuation, because most childcare transactions are priced as a multiple of earnings. And it indicates how much cash is available to service borrowing, which matters enormously when the buyer is funding the purchase with a loan.

Nursery EBITDA does carry sector specific quirks. The cost base is unusually personnel heavy and is directly exposed to statutory wage rises, with the National Living Wage for workers aged 21 and over rising to £12.71 an hour from April 2026 according to the Low Pay Commission’s report on the National Minimum Wage in 2026. A significant share of revenue is set by local authority funding rates rather than by you. And capital spending on play equipment, buildings and fit outs feeds the depreciation line that EBITDA then removes.

EBITDA is not a perfect measure of anything. It is, however, the language buyers and valuers speak in the childcare sector, and it is one of the five approaches covered in our complete guide to how to value a nursery business.

How to Calculate EBITDA for Your Nursery

There are two ways to describe the calculation, and they arrive at the same place.

In plain terms, EBITDA is your income less the operating costs of running the setting, ignoring interest, tax and depreciation. In accounting terms, you start with the profit figure in your accounts and work backwards: net profit plus interest, plus tax, plus depreciation, plus amortisation equals EBITDA.

The second version is the one your accountant will use, because it starts from a number that already exists in your year end accounts. Here is how it looks for a fictional single site nursery with revenue of £500,000.

Line	Amount
Revenue, private fees and funded entitlement income combined	£500,000
Staff costs, including employer national insurance and pension	£300,000
Premises costs, including £3,000 of mortgage interest	£70,000
Utilities, food, consumables and resources	£50,000
Insurance, administration and marketing, including £5,000 of depreciation	£30,000
Total operating costs	£450,000
Profit before tax	£50,000
Add back depreciation	£5,000
Add back interest	£3,000
EBITDA	£58,000

The EBITDA margin is EBITDA divided by revenue, which here gives 11.6 per cent. That percentage is often more informative than the absolute figure, because it tells a buyer how much of every pound of income survives the cost base.

One distinction is worth pausing on, because it trips up owners more than any other. Revenue in a nursery is not a single stream. Private fee income is set by you and can be reviewed. Funded entitlement income is paid at the hourly rate your local authority sets and publishes, and you cannot raise it. Where the funded rate sits below your private hourly fee, every funded hour on the register contributes a thinner margin than a private hour, even though both appear in the same revenue line. Two settings with identical turnover can therefore produce materially different EBITDA simply because their funded and private mix differs.

Finding the underlying figures is usually straightforward. If you trade as a limited company, your statutory accounts include a balance sheet, a profit and loss account and supporting notes, as set out in the government guidance on preparing annual accounts for a private limited company. Small companies and micro entities may file simpler accounts at Companies House, so the public register often shows less detail than the full accounts you hold, which is why buyers ask for the complete set alongside recent management accounts. If you trade as a sole trader or partnership, the figures come from your accounts and Self Assessment return.

It also helps to understand why depreciation is treated as an add back rather than a real cost. Depreciation is an accounting estimate of how an asset wears out. For tax, it is not deductible at all: HMRC gives relief through capital allowances instead, which follow their own rules and their own timing. Because both the depreciation policy and the capital allowance position vary from owner to owner, removing them makes two settings easier to compare.

You do not need to run this calculation yourself, and your accountant will produce it faster and more reliably. Understanding what goes into it is still worth an hour of your time, because it shows you exactly where your setting is strong and where a buyer will press.

Adjusted EBITDA: Removing One-Off and Owner-Specific Items

The EBITDA in last year’s accounts is almost never the number a buyer pays for. What buyers price is adjusted EBITDA, sometimes called normalised or underlying EBITDA: the earnings the setting would produce under a new owner, running it as a business rather than as a personal enterprise.

Adjusted EBITDA takes reported EBITDA, adds back costs that will not continue after a sale, removes income that will not recur, and corrects anything that was priced at other than market rates.

The add backs in a nursery sale are usually familiar ones. Owner remuneration above the market cost of employing a manager to do the same job is the largest and most common. Personal motoring, personal travel, and subscriptions that serve the owner rather than the setting follow closely behind. So do genuinely one-off costs: a redundancy programme, a restructuring, legal fees from a single dispute, or accountancy fees arising from a tax enquiry. Owner pension contributions set well above what an employed manager would receive belong in the same category.

Deductions matter just as much, and owners tend to forget them. One-off grant income received in a particular year, an insurance settlement, a gain on the sale of an asset, or rent from letting part of the building to a third party all inflate reported earnings without telling a buyer anything about the trading business. If the sublet ends on completion, the rent comes out.

Most costs, of course, simply stay. Staff wages transfer with the business under employment law and are adjusted only where they sit above or below market. Utilities, premises costs, food, insurance, training and the ongoing costs of meeting Ofsted requirements all continue under new ownership and remain in the calculation.

An example makes the owner remuneration point concrete. Suppose the profit and loss account carries £60,000 of cost for the owner working as manager, made up of salary and benefits taken through the business. The market cost of employing a qualified manager to carry out the same role is £28,000. A buyer will inherit the £28,000 cost but not the £32,000 premium, so £32,000 is added back to EBITDA. That single adjustment, at a multiple of six, is worth £192,000 on the asking price, which is why it repays getting right and evidencing properly.

One adjustment that owners sometimes attempt should be resisted. Income from the funded early years entitlements is not a windfall and is not temporary. It is a statutory entitlement funded annually through the dedicated schools grant, and it transfers to the buyer along with the children on the register. It belongs in adjusted EBITDA in full.

Your broker or accountant should prepare an adjusted EBITDA bridge: a simple schedule that walks from reported profit to adjusted EBITDA, one line at a time, with a source document behind each adjustment. Ask for it early. Buyers challenge unevidenced add backs during due diligence, and an adjustment you cannot support with a payroll record, an invoice or a bank statement will usually be struck out, taking its multiple with it.

EBITDA Multiples and Nursery Valuations

Once adjusted EBITDA is settled, the valuation itself is arithmetically simple. Value equals adjusted EBITDA multiplied by a multiple. A setting with £60,000 of adjusted EBITDA valued on a multiple of six is worth £360,000. All of the judgement, and all of the negotiation, sits in the multiple.

Inspection outcomes carry real weight here, and the framework has changed. Under the education inspection framework in use from November 2025, Ofsted no longer issues a single overall effectiveness word such as Outstanding or Good. Settings now receive a report card grading several evaluation areas on a five point scale, from exceptional and strong standard through expected standard to needs attention and urgent improvement, with safeguarding judged separately as met or not met. Many settings still carry a legacy single word judgement until they are reinspected, so buyers currently read both, and a setting whose most recent inspection is old attracts more caution than one inspected recently under the new approach.

Location matters, and not only in the obvious London and South East sense. What a buyer is really pricing is the local demand picture: birth rates, housing development, competitor density, and how many settings within a short drive are already at capacity.

Margin and occupancy matter next. A nursery running at a high margin with a stable, full register is a lower risk purchase than one at the same absolute EBITDA achieved through unusually low staff costs or a single large corporate contract. Staffing is part of the same picture. Low turnover, a strong qualification profile and a manager who intends to stay all reduce the risk that earnings fall away in the first year of new ownership.

Market conditions and growth potential complete the list. Lending appetite affects how many buyers can transact at all, and headroom to raise fees, extend opening hours, or register additional places supports a higher multiple than a setting already running at its ceiling.

From our experience at Abacus, standalone nurseries typically trade at around 4.5 to 7 times adjusted EBITDA, with settings in groups of several sites often achieving 7 to 9 times where the group has consistent systems and management depth. These are indicative ranges drawn from brokerage experience rather than published data, and the actual multiple agreed depends on the individual setting and on buyer appetite at the time.

Seasonality deserves one final note. Term time patterns, holiday closures and periods of high illness make any single year’s earnings an imperfect guide. Buyers commonly average two or three years of adjusted EBITDA, or weight the most recent year most heavily, precisely to avoid pricing a peak or a trough.

Government Funding and Its Impact on Nursery EBITDA

No factor shapes a modern nursery’s earnings profile more than the funded entitlements, so it is worth being precise about what they are.

For the 2026 to 2027 financial year, the early years entitlements local authority funding operational guide sets out four streams: 30 hours for qualifying children of working parents from nine months until the child turns two, 30 hours for qualifying two year olds of working parents, 15 hours for families of two year olds receiving additional support, and the universal 15 hours for all three and four year olds plus a further 15 hours for qualifying children of working parents. A 30 hour entitlement means 1,140 hours a year taken over a minimum of 38 weeks, and a 15 hour entitlement means 570 hours, which is why families can stretch fewer hours across more weeks, as explained in the government guidance on free childcare for working parents.

Three features of the funding mechanism have direct consequences for EBITDA. Local authorities must pass through a minimum of 97 per cent of their government funding to providers in 2026 to 2027, up from 96 per cent, applied separately to each entitlement. They must set their local formula and communicate provider rates by 28 February, which gives you a firm date each year for budgeting. And from 2026 to 2027 all the entitlement streams are funded on termly census headcounts, so participation feeds through to funding three times a year rather than once, and occupancy dips reach your income more quickly than they used to.

Two supplementary streams sit alongside the base rate. The early years pupil premium must be paid at a minimum of £1.15 an hour for eligible children on their first 15 hours, worth at least £655 a year, and the disability access fund must be paid at a minimum of £975 a year per eligible child as an unpro-rated lump sum. Both are excluded from the pass through calculation, and both are recurring income that belongs in EBITDA where the eligible children are on roll.

Two further schemes are often confused with provider funding but are not. Tax-Free Childcare tops up a parent’s childcare account by £2 for every £8 they pay in, capped at £500 every three months per child, and the money reaches you as a fee payment from the parent. The Universal Credit childcare element reimburses eligible working parents up to 85 per cent of their costs, capped at £1,071.09 a month for one child and £1,836.16 for two or more, and is paid in arrears after the parent has paid you. Both improve affordability and therefore occupancy, and both introduce a degree of debtor risk on the private fee element, but neither is income the setting controls.

The net effect on EBITDA is a trade off, and buyers understand it clearly. Funded income is dependable, recurring and backed by statutory entitlement, which lowers risk. It is also priced by your local authority rather than by you, which caps margin on those hours. A setting with a high proportion of funded places, which often means a setting in a more deprived area, tends to show a lower margin alongside a more stable register. A setting with a high private fee share shows the opposite. Neither profile is inherently more valuable, but they are valued differently.

Common Mistakes When Calculating or Interpreting EBITDA

The first mistake is treating profit and EBITDA as the same thing. An owner sees £50,000 of profit in the accounts and quotes it to a buyer, when depreciation of £8,000 and interest of £3,000 sitting inside those accounts mean EBITDA is £61,000. On a multiple of six, that misunderstanding is £66,000 of value left on the table before negotiation even begins.

The second runs in the opposite direction. An owner who takes £30,000 more than the market cost of a manager, and does not adjust for it, presents a setting whose earnings look lower than they will be under new ownership. Overstating the add back is equally damaging, because an adjustment that cannot be evidenced in payroll records tends to be removed during due diligence, and its removal often costs more credibility than the adjustment was worth.

The third mistake is adjusting out funded income. Owners occasionally treat entitlement income as a temporary policy that a buyer should discount. It is recurring statutory funding, it transfers with the register, and stripping it out simply undervalues the business.

The fourth is ignoring seasonal shape. A setting reporting £60,000 of annual EBITDA on the back of a strong autumn and a thin summer is not the same as one earning the same figure evenly. Buyers normalise for this, and the normalised figure may be closer to £50,000. Better to model it yourself than to discover it in due diligence.

The fifth is confusing margin with scale. A nursery turning over £500,000 at a 12 per cent margin and one turning over £400,000 at 15 per cent both produce £60,000 of EBITDA. Their earning power today is identical. Their risk profiles are not, because the higher margin setting has more room to absorb a wage rise or a period of low occupancy, and buyers will often pay more for it.

None of these are exotic errors, and an experienced broker or accountant will catch all of them. Knowing about them in advance simply means you arrive at the conversation already prepared.

Bringing It All Together: From EBITDA to Valuation

The path from your accounts to an asking price is a sequence: reported profit, then EBITDA, then adjusted EBITDA, then a multiple, then a valuation. Here is that sequence applied to a second fictional setting, a good quality nursery in the South East.

Step	Amount
Reported net profit	£45,000
Add back depreciation	£6,000
Add back interest	£2,000
EBITDA	£53,000
Add back owner remuneration above market rate	£8,000
Deduct one-off grant income received in the year	£5,000
Adjusted EBITDA	£56,000
Multiple applied, reflecting inspection outcome, stable margins and location	6.0x
Indicative valuation	£336,000

That £336,000 is a starting point, not a settlement. The final price moves with what due diligence uncovers, how many buyers are competing, whether the property is included or leased, how the deal is structured between cash and deferred consideration, and how lending conditions look on the day. A setting with an unresolved staffing gap or an inspection due within months may find the multiple pushed down; a setting with two credible buyers may find it pushed up.

It is also worth remembering that EBITDA is one lens among several. Asset backed settings where you own the freehold are often cross checked against net asset value, and settings with unusual growth profiles may be tested against a discounted cash flow. Our guide to valuing a nursery business sets out how the five methods interact and when each carries the most weight.

Key Takeaways for Nursery Owners

EBITDA is the metric buyers and valuers use to understand what your nursery is truly worth. It is not a complicated concept. It is your profit, adjusted to show the cash generating ability of the business under new ownership. Once you understand how it is calculated, which adjustments apply to your setting, and how buyers translate it into a multiple, you can approach a sale conversation on equal terms.

The single most useful step is to ask your accountant to prepare an adjusted EBITDA bridge six to twelve months before you intend to sell. That lead time lets you evidence your add backs, tidy your records, address anything unexpected, and see your real earning power rather than a guess at it. Funded entitlement income is stable, recurring and transferable, and it should sit prominently in that picture rather than being explained away.

Finally, keep EBITDA in proportion. Inspection outcomes, location, staff retention and parent satisfaction all shape what a buyer will pay, and a strong earnings figure attached to a fragile team is a harder sale than the number alone suggests.

If you would like to understand your nursery’s adjusted EBITDA before entering the sale market, our valuations team can prepare a detailed financial bridge for your setting. Contact us for a confidential discussion.