Finance

Another childcare company collapses as questions mount on corporate childcare business model

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A second major childcare company has been forced into administration, with CFK Childcare Centres appointing accounting firm BDO Kendalls as voluntary administrator.

A second major childcare company has been forced into administration, with CFK Childcare Centres appointing accounting firm BDO Kendalls as voluntary administrator.

CFK operates 36 centres in Sydney and country New South Wales.

The collapse is directly related to the demise of ABC Learning – CFK had been set to sell a parcel of centres to ABC for $8.5 million before ABC collapsed earlier this month.

That sale had been one of the preconditions of the company’s stand-still agreement with its bank, NAB. As well as losing NAB’s backing, director Doug Lomas has also withdrawn his financial support and terminated a working capital loan he had given the company.

Other asset sales have become impossible.

“The uncertainty bought to the childcare market after months of speculation about the financial health of the largest operator ABC, followed by the appointment of administrators to that company, has materially impacted CFK’s ability to sell other centres and has caused a devaluation of CFK’s assets,” the company said in a statement.

“CFK simply does not have the means to finance its current operations to enable this to occur without support from its current shareholders, bankers or another alternative financier. The board has determined that, following the collapse of ABC, the required support is unlikely to be given.”

CFK says is it currently losing around $400,000 a month and says it will work with the administrator to keep as many centres open as possible as it continues to try and sell centres.

The collapse of ABC and CFK has bankers, investors and insolvency experts questioning the corporate childcare business model. That so many centres within the ABC and CFK networks are unprofitable indicates that the model is badly broken.

Helen Kenneally, executive director of Childcare Associations Australia, which represents independent not-for-profit and for-profit childcare operators, argues that running a childcare centre requires extremely close management. Owners must cultivate relationships with their local communities, tightly control costs, and manage the delicate balance between occupancy rates and fee structures.

“You can actually run a model where you can make a surplus but the margins are very, very, very tight, let me tell you,” she says. In most cases the surplus is small, which is often re-invested in the centre. “It’s a living, not a big profit,” Kenneally says.

But under the corporate model, the surplus demanded by shareholders must be paid out in dividends.

Kenneally says running small groups of centres is possible, although she stresses that as a group gets larger – say, above 20 centres – it gets harder to exercise that tight managerial control.

That could make the job of selling stricken ABC and CFK centres even harder than it already is.

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