Key Considerations for Childcare Business Acquisitions

New South Wales has, in recent years, experienced strong demand for childcare services, owing to factors such as growing workforce participation and government initiatives. This demand has continued to attract investors, drawn by historically reliable income streams, attractive returns, and the stability of the sector.

The purchase of existing childcare businesses can present lucrative opportunities; however,prospective purchasers should be aware of the intricate legal considerations that are unique to this industry. Some key considerations include:

1.      Licensingand Regulatory Compliance

In New South Wales, childcare centres are regulated under the National Quality Framework, overseen by the Australian Children’s Education and Care Quality Authority (ACECQA) and governed by the Children (Education and Care Services National Law Application) Act 2010. These regulatory frameworks seek to protect the wellbeing, safety, and health of children in early childhood education and care services.

Early childhood education and care providers in NSW must currently hold two licenses issued by the New South Wales Department of Education (‘the Department’) to operate a childcare service:

a.      Provider Approval

A Provider Approval is an essential requirement under the National Quality Framework (NQF) for individuals or organizations seeking to operate an early childcare education and care service (such as a childcare centre) in New South Wales. Provider Approvals are issued by the Department, authorizing an approved provider to manage and run one or more early education and care services.

Either an individual or non-individual (i.e. a company) can hold a Provider Approval. The Department considers several factors when determining whether to approve an applicant, including:

·        The applicant must demonstrate that they are fit and proper to be involved in providing an early childhood education service.

·        Applicants must demonstrate an adequate understanding of their legislative obligations under the National Law.

·        The applicant’s history of compliance with current and former education and care services law, children’s services law, or education law.

·        Factors such as criminal history, financial situations, medical conditions and management capability are taken into consideration.

A decision must be made by the Department within 60 days of a complete application being lodged.

b.      Service Approval

Upon obtaining a Provider Approval, a provider must then hold a Service Approval issued by the Department, which is specific to the childcare service being operated.

There are several factors which are taken into consideration by the Department in determining whether the applicant could be successful in obtaining a service approval, including:

·          The suitability of the service premises and location,including a legal right to occupy the land (such as a lease);

·          Whether the applicant is an Approved Provider;

·          The applicant’s financial capacity and management ability to operate the service.

·          Any suspensions or conditions on the applicant’s Provider Approval and their compliance history with the National Law.

A decision must be made by the Department within 90 days of a complete application being lodged.

2.      Transfer of Service Approval

When purchasing an existing childcare business, the transfer of an existing Service Approval from the seller to the purchaser is required (the purchaser must first obtain a Provider Approval). It is essential that the transfer of the Service Approval is adequately covered under the relevant business purchase contract, as a condition of the sale.

This process involves both the transferring and receiving approved providers jointly notifying the Department of the proposed transfer at least 60days before the intended effective date.

The transfer can only be completed with the Department’s consent, which is deemed granted if the Department does not inform the providers of any intention to intervene 28 days prior to the intended transfer taking effect. Reasons for intervention may include the provider’s capacity to operate the service,financial capacity, fitness, management ability, and compliance history.

3.      Lease Responsibilities

Prior to purchasing an existing childcare business, it is also crucial for prospective purchasers to have existing or proposed leases reviewed by a legal expert with strong knowledge of childcare leases, as these can have a significant impact on the operation and future viability of the business.

Key lease provisions to be aware of include those relating to compliance withauthority and Department requirements, rent calculations and fluctuations basedon approved child place development consent vs Service Approval, make good,alterations, maintenance and repair responsibilities – particularly in relationto outdoor play areas and structures/surfaces.

Navigating the complexities of purchasing an existing early childhood education and care service can be challenging. It is essential for prospective purchasers to consult with experienced legal and financial advisors to ensure a smooth and successful acquisition process.

At HFK Lawyers, our commercial team are experts in childcare centre transactions, including acquisitions, construction, and lease arrangements. For further information or assistance in this regard, please contact Jim Koukouras and James Hatzopoulos on(02) 9307 8900 or by email at j.koukouras@hfklawyers.com.au and j.hatzopoulos@hfklawyers.com.au.

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