Due Diligence Checklist for Buying a Childcare Centre

Most childcare centre deals that collapse don’t fail at negotiation. They fail at due diligence — because the buyer didn’t know what to look for, didn’t look deep enough, or discovered a problem too late to fix. In our experience across dozens of transactions, the buyers who get the best outcomes aren’t the ones who move fastest. They’re the ones who ask the right questions before they commit.

This is your practical due diligence checklist — the same areas we advise our clients to investigate before exchanging contracts on a childcare acquisition. For a broader overview of the buying process from search to settlement, see our complete guide to buying a childcare centre on childcarelink.com.au.

Financial Due Diligence: Follow the Money

Financial due diligence is where most buyers start — and where the most expensive mistakes hide. You’re not just reading the profit and loss statement. You’re testing whether the numbers the vendor presents will hold up under your ownership.

What to verify:

• Three years of financial statements — profit and loss, balance sheet, BAS lodgements, and tax returns. One good year can be an anomaly. Three years show the trend.
• Adjusted EBITDA — the gap between stated and adjusted EBITDA on a childcare P&L can be 20–40%. Owner salaries, above-market rent, one-off maintenance costs, and irregular CCS income all need stripping out before you have a reliable earnings figure.
• Revenue by funding source — break down income into CCS payments, gap fees from families, and any additional income. Understand how dependent the centre is on each stream.
• Occupancy verification — don’t accept headline enrolment numbers at face value. Request actual attendance records (sign-in/sign-out data) for at least 12 months. A centre can have 80 children enrolled but only 55 attending on any given day.
• Debtor ageing report — outstanding parent fees are common. A $30,000 debtor ledger signals collection problems that become your problem on settlement.
• CCS reconciliation — verify that CCS payments match enrolment data. Gaps may indicate reporting issues, session changes, or families with subsidy problems.

Operational Due Diligence: What’s Happening on the Floor

A childcare centre’s operations tell you more about its future performance than its financials tell you about its past. Staffing, compliance history, and quality ratings are the operational fundamentals that either protect your investment or quietly erode it.

What to verify:

• Staffing roster and tenure — request a full staff list showing each educator’s qualifications, employment type (permanent, casual, agency), tenure, and current pay rate relative to the Children’s Services Award. High agency reliance is a red flag — casual premiums of 25–35% above permanent rates eat directly into margins.
• Staff-to-child ratio compliance — confirm the centre meets mandatory educator-to-child ratios for every age group, every session. Non-compliance isn’t just a fine risk — it’s a condition of service approval.
• Qualification compliance — at least 50% of educators must hold a diploma-level qualification and the remainder at least a Certificate III. The Educational Leader must hold a diploma or higher.
• NQF rating and compliance history — request the centre’s most recent Assessment and Rating report from ACECQA. A centre rated “Working Towards” is not necessarily a deal-breaker, but it affects both parent perception and potential resale value.
• Enrolment pipeline — is there a waitlist? How long? What’s the enquiry-to-enrolment conversion rate? A healthy pipeline means revenue stability.

Lease and Property Due Diligence: The Asset Underneath

For leasehold acquisitions — which represent the majority of childcare centre sales — the lease is arguably the most important document you’ll review. Its terms directly drive the centre’s value and your ability to operate profitably.

What to verify:

• Remaining lease term plus options — a lease with less than 10 years remaining significantly reduces the centre’s resale value and may make financing difficult. Lenders typically want at least 15 years of total term.
• Rent per licensed place — calculate the rent on a per-place basis and compare against market benchmarks. Metropolitan Sydney typically ranges from $4,000 to $6,000 per licensed place per annum.
• Rent review mechanism — understand how rent escalates. Fixed increases of 3–4% per annum are common, but CPI-linked or market reviews create different risk profiles.
• Assignment clause — confirm the lease permits assignment with landlord consent that cannot be “unreasonably withheld.”
• Make-good obligations — check what the tenant must restore at lease end. A make-good clause requiring full strip-back could represent $200,000–$500,000.
• Permitted use — ensure the lease explicitly permits use as a childcare centre or “education and care service.”

For freehold acquisitions, the property due diligence shifts to building condition, zoning compliance, council DA conditions, and any easements or encumbrances on title.

Regulatory Due Diligence: Approvals and Transfers

Childcare is one of Australia’s most heavily regulated sectors. Getting the regulatory transfer wrong doesn’t just delay settlement — it can collapse the deal entirely.

What to verify:

• Provider Approval — before you can operate a childcare centre, you need your own Provider Approval from ACECQA. Allow at least 60–90 days for processing.
• Service Approval transfer — both parties must notify the regulatory authority at least 42 days before the intended transfer date using the SA04/05 notification form.
• CCS approval — separately from ACECQA, you need approval from the Department of Education to receive Child Care Subsidy payments.
• Council compliance — verify the centre operates under a valid Development Approval and all conditions of consent are being met.
• Working With Children Checks — confirm all staff hold current and valid checks.

Legal Due Diligence: Contracts and Liabilities

What to verify:

• Employment contracts and entitlements — accrued entitlements transfer to the new owner. For a 60-place centre, accumulated employee entitlements can easily reach $80,000–$150,000.
• Existing contracts — review all supplier agreements, maintenance contracts, food service agreements, and any management or franchise agreements.
• Litigation or disputes — request disclosure of any current or pending legal proceedings, parent complaints, or workplace disputes.
• Insurance — review current coverage and confirm adequacy for childcare-specific liability risks.

The 48-Hour Test: What to Check on Site

Documents tell one story. The physical centre tells another. Visit at least twice — once announced, once unannounced during operating hours.

• Building condition — check roof, plumbing, electrical, HVAC systems, and any signs of water damage or structural issues.
• Outdoor play spaces — verify they meet the minimum 7 square metres per child requirement with compliant fencing, shade, surfacing, and equipment.
• Indoor spaces — confirm 3.25 square metres per child and appropriate configuration for licensed age groups.
• Staff interaction — observe how educators interact with children and families during an unannounced visit.
• Neighbourhood context — assess competing centres, proximity to schools and residential growth, traffic flow, and visibility.

Key Takeaway

Due diligence on a childcare centre isn’t a single event — it’s a structured process across financial, operational, lease, regulatory, and legal dimensions that typically runs four to eight weeks. Cutting corners here costs more than the time you save. The best deals we see are the ones where the buyer knew exactly what they were buying before they signed.

Considering a childcare centre acquisition? ChildcareLink’s specialist team can guide you through every stage of due diligence. Visit childcarelink.com.au or contact our team directly.

Sources

• ACECQA — service approval transfer process and provider approval requirements
• HFK Lawyers — childcare business acquisition considerations
• Corestone Lawyers — buying a childcare centre in NSW legal guide
• ACCC Childcare Inquiry Final Report 2024 — occupancy and cost benchmarks
• Fair Work Ombudsman — transfer of business employee entitlements
• ChildcareLink transaction advisory experience.

Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.