Leena Birdi, partner at law firm Birdi & Co, assesses the impact of changes to employer contributions to National Insurance – what will this mean for smaller providers?

Nursery owners in the UK are facing one challenge after another. Rising costs, workforce shortages, and now, recent changes to National Insurance (NI) rates. For smaller, single-site nurseries, the pressure is reaching boiling point. These increases could be the tipping point for many, with some nurseries struggling to keep their heads above water. So, what does it all mean for nursery owners, and the wider sector?

Rising costs and tighter margins

Let’s face it – nurseries were already working with slim margins. Staffing costs are the biggest chunk of a nursery’s budget, and with wages rising in response to ongoing recruitment challenges, this has become an even bigger burden. Now, with the new NI rates coming into play, those costs are about to increase even more. This will put significant pressure on nurseries that are already juggling rising energy bills, insurance premiums, and general operational costs. Profit margins, already tight, are getting even tighter.

Some nurseries may look to increase fees to cover these higher costs, but there’s a catch. If fees rise too much, they risk pricing out parents, making childcare unaffordable for some families. This creates a dangerous cycle: higher fees could lead to fewer parents signing up, which only makes the financial situation worse.

A sector under strain

It’s clear that the rising costs, combined with staffing shortages and increased financial pressures, are creating a perfect storm. For many small, single-site nursery providers, the reality is that they might not be able to continue operating in this environment. The cost of running a nursery is becoming unsustainable for some owners, and we may start to see closures or insolvencies in the sector.

If nurseries close, the options for parents become more limited, further tightening an already competitive and scarce childcare market. But these challenges are also creating ripple effects further down the line.

Consolidation: an opportunity for some, a threat to others

For larger operators or those with the financial backing to weather the storm, this period of pressure could present an opportunity. With smaller providers struggling, there’s a growing chance that they’ll look to sell their businesses. For buyers and investors with deep pockets, this could open up opportunities to acquire smaller nurseries at lower prices, and consolidate the sector even further.

In fact, this is exactly what we are starting to see – larger nursery chains are looking to snap up single-site operators in a bid to expand and strengthen their position in the market. But, as is always the case in M&A, there are risks involved. Buyers will need to carefully assess the long-term viability of the nurseries they are looking to acquire, considering factors such as the impact of increased fees on demand, potential service reductions, and the ongoing regulatory pressures that could further squeeze margins.

What this means for existing nursery owners

For existing nursery owners, the financial pressures brought on by these changes will require careful navigation. Some owners may decide that selling is the best option, particularly if they are finding it difficult to maintain profitability. Those who are thinking about selling will need to consider whether now is the right time to get out of the market, given the current climate and the impact of these NI changes.

On the flip side, for nursery owners who are planning to hold on, it’s important to take a step back and assess the longer-term outlook. What can you do to strengthen your nursery’s financial position? Can you absorb the cost increases without passing them all onto parents? Can you find ways to increase efficiency or reduce overheads without compromising on quality?

What does the future hold?

These changes to National Insurance rates are going to have a lasting impact on the nursery sector. While it’s undoubtedly a tough time for smaller providers, it also marks a period of transition. There will likely be more opportunities for buyers, but this could also mean that some smaller businesses will need to consolidate or close.

Whether you’re a nursery owner looking to adapt to the new normal, or a potential buyer looking to seize an opportunity, understanding the shifting landscape will be key. Now more than ever, it’s important to make informed decisions. Seek out professional advice to navigate these challenges and ensure your business remains resilient in these turbulent times.

If you’re uncertain about how these changes might affect you, or you’re considering buying or selling a nursery, now is the time to get the right legal guidance. The decisions you make today could shape the future of your business for years to come.