Where ABC went wrong (Part 1)

This question is one I get asked most and between myself and respected colleagues previously associated with ABC Learning I have come up with a list of reasons where their eventual demise was always likely to happen.

Personally I was not affected by their downfall other than the loss of an exceptional client but very good friends of mine have suffered and still do today. What took place was terrible and while many people in Australia feel grateful the largest child care provider in the world collapsed they do not realise the implications it has caused for families along the way.

Let’s not get into the right and wrong of profit in the daycare sector but ABC did do a lot of good in improving the quality of daycare in Australia and paved the way for many successful developers and childcare operators along the way.

If we simply value every individual affected by the value of 1 there are way too many good employees, families and shareholders related that have been severely affected.

I’m getting off track here but just want to make that clear… What took place was not good for Australia and if people feel satisfied for a few peoples failure you should think of the other thousands that are doing it tougher.

Where did they go wrong? Let’s not beat around the bush, acquisitions.

The going rate for an acquisition in day care for Australia has always been between 3-5 times EBITDA (Earnings before Interest Tax Depreciation and Amortization for those who don’t know!). Whilst this may not sound that expensive even at 5 times, you have to take a look at where the actual EBITDA is coming from.

EBITDA should come from actual financials whether that be last year’s financials, current years or even projected by the vendor’s accountant. ALL elements of the previous year’s performance should get taken into account when determining the accuracy of the numbers you see and what adjustments are made.

How ABC worked centres EBITDA out was far simpler and although it made for many acquisitions just wasn’t accurate at all…

We would simply multiply the number of licensed places (not occupancy!) by the daily fees and multiplying that number by the number of expected days (M-F) in a year to get the gross revenue.

Once we had the gross revenue it was pretty straight forward from there. Input the actual rent, estimate the wages (never review actual) at 50-55% and assume 15% in other cost and presto you have an EBITDA!

From there it simply came down to making sure it was below our maximum of 5 times and you have a deal.

Apart from the obvious flaws in this approach that any daycare will know, the fact of the matter was most cases the EBITDA that we had estimated was double what the vendor’s numbers showed. You can guess how much some of these acquisitions were costing but the problems didn’t stop there…

I have just as much obligation to shareholders as anyone else at ABC but when you are given parameters to acquire in excess of 250 – 300 centres a year with a market of probably 1000 centres that fit the criteria you take the lesser evil and buy under their terms than risk not making the markets expectations. Was it the right way to do business? I think we know that answer but would it be done again? Never.