Childcare Centres are childs play, but be careful

In recent times we have seen childcare centre businesses being acquired more and more by larger organisations that operate a number of centres. Sometimes the large operators are backed by private equity or venture capital funds.

When an operator of a small or mid-sized group (e.g., between 1 & 15 centres) sells off one or more centres, they sometimes engage brokers to assist with pairing them with a buyer. Once a buyer is found and initial due diligence is undertaken, the buyer and seller may then enter into a term sheet, which can be the precursor document to entering into a formal contract of sale of business.

A term sheet can be very important. The core commercial terms and conditions of the transaction will usually be contained in the term sheet. Depending on the sophistication of the buyer, the term sheet may include certain caps and collars as to financial performance of the business that can impact on the ultimate purchase price to be paid for the business. If contained in the term sheet, these caps and collars will then likely make their way into a formal contract of sale of business, even if the term sheet is non-binding.

Recently we acted in the sale of a childcare centre where certain terms and conditions in a non-binding term sheet entered into by the buyer and seller, made their way into the formal contract of sale, following insistence by the buyer.

Shortly after the buyer, a fund, attempted to rely on certain wording to allege a material adverse change in circumstances of, what our clients contended, was a cyclical change in revenues based on the time of year – the commencement of the school year which can impact childcare centre headcount in the short term.

In this instance, the ambiguity of the buyer’s material adverse change provision, which emanated from the term sheet, caused the buyer to become unstuck in their attempt to allege a material adverse change – and reduce the purchase price.

Key takeaway is that careful consideration should be given to the drafting and negotiation of term sheets as they can form an integral part of the business sale transaction and the negotiation of binding transaction documents.

Queries

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Disclaimer

This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.