Prepaid Fees, Deposits and Subsidies at Completion: Who Keeps What?

Who keeps the deposits and prepaid fees when a centre is sold?

Whoever takes on the obligation to teach the child or refund the parent should end up with the money, so deposits and fees paid in advance either pass to the buyer with the cash or come off the price.

Every education business holds parents' money that it has not yet earned. A childcare centre holds enrolment deposits and, often, fees paid ahead of the month. A tuition centre may collect a term's fees upfront. An enrichment school may sell lesson packages or holiday programmes weeks in advance. When the business changes hands, the children keep attending, so someone has to honour those payments. If the seller keeps the cash and the buyer delivers the lessons or refunds the deposit, the buyer has paid twice. That is why the treatment of this money is a standard item in every Sale and Purchase Agreement.

Why are deposits and prepaid fees treated as liabilities?

Because the business owes either a service or a refund for them, they sit in the accounts as amounts owed to parents, not as income.

A deposit is usually refundable or offset against the last month's fees when the child leaves. ECDA's Code of Practice recognises this offset: where the last payment of fees is offset by the initial deposit, the centre must keep a receipt clearly showing the amount offset (s8.5.2). Fees received for a month, term or package not yet delivered are income received in advance. Until the service is delivered, both are obligations.

In a valuation this is handled outside the earnings figure. Buyers value the business on its normalised earnings, then move from that business value to the price for the shares or assets by adjusting for cash, debt and debt-like items, and fees collected in advance are one of those debt-like items. Our guide to normalised EBITDA covers the earnings side.

How are prepaid fees handled in a share sale and an asset sale?

In a share sale the obligations stay inside the company, so the price is adjusted; in an asset sale they move to the buyer, so the seller passes over the cash or accepts a lower price.

Share sale. The company keeps its bank accounts, its deposits and its obligations to parents. The buyer inherits all of them. The usual protection is to agree how much cash must be left in the company at completion, or to deduct the deposits and fees received in advance from the price, so the buyer is not paying for cash that is already owed to parents.

Asset sale. The seller's company keeps its bank accounts, but the buyer's entity takes over the children and therefore the obligations. The common options are for the seller to transfer an amount equal to the deposits and unearned fees to the buyer, or for the price to be reduced by that amount. A third option, refunding every parent and having the buyer collect fresh deposits, is simple on paper but means more disruption for parents during a change of operator.

Our guide to share sales and asset sales explains the two structures.

What items need to be settled at completion?

Anything the business has been paid for but not yet delivered, anything it is owed, and anything it owes for the period before completion.

How are ECDA subsidies handled when a childcare licence is transferred?

ECDA can withhold subsidies once a transfer is applied for, requires an audit of subsidy claims at the transfer, and holds back one month of subsidy until that audit is in, so the agreement must say who receives each payment.

The ECDA Code of Practice for Operators sets out the mechanics:

• Withholding on application: ECDA may withhold Government subsidies where the licensee has applied to transfer its licence (s8.7.3). While subsidies are withheld, the licensee must still collect only the fee net of subsidies from parents (s8.7.4).
• Audit at transfer: a certified auditor must audit the centre's subsidy claims upon cessation of the business, including where the licence is transferred (s8.9.1), and the audited statement must be submitted within 3 months of the transfer (s8.9.2).
• One month held back: for centres pending licence transfer, one month's subsidy payment is withheld until the audited statement is received; all withheld subsidies are forfeited if the audited statement is not submitted within 2 years of the transfer (s8.9.3 and s8.9.4).
• Bank account: the outgoing licensee must keep its bank accounts open for at least 2 months after the transfer to receive subsidies withheld before it (s8.9.4).
• Overpayments: ECDA can require a licensee to refund subsidies it was not entitled to (s8.8).
• Records: on a transfer, the licensee must hand over all child-related forms, attendance records and invoices to the new operator (s8.10.2).

In practice, the seller should receive subsidies for the months before completion, bear any recovery relating to its own claims, and complete the audit; the agreement should say so. In a share sale there is no transfer application, but the company keeps its subsidy history, so any future recovery for past months falls on the company the buyer now owns. That is a matter for warranties and an indemnity. Our guide to the ECDA transfer of licence covers the wider process.

What is a completion statement?

A completion statement is the schedule that turns the headline price into the amount actually paid on the day, after deducting or adding the agreed adjustments.

For a small education business it is often a one or two page list: the agreed price, less deposits held, less unearned fees, plus or minus any apportioned items, giving the net sum payable. Larger deals sometimes use completion accounts instead, a balance sheet drawn up as at the completion date after completion, with the price adjusted once it is agreed. Either way, the method should be written into the Sale and Purchase Agreement before signing, including the cut-off date, which records are used (the deposit register, the fee ledger and, for childcare, the subsidy reports in ECDA's system) and how disagreements are resolved.

A cut-off at a month-end usually makes the arithmetic easier, because most fees are billed monthly or termly.

What does this look like for a childcare centre and a tuition centre?

The principle is the same; what differs is the type of money held.

Childcare. The main items are enrolment deposits and fees for the month after completion. In a transfer of licence the new licensee takes over the centre's existing fee structure, and changes to fees or deposits can only be made after the transfer and subject to ECDA's notice periods (s3.3.7 and s3.3.8), so parents' existing arrangements continue. Subsidies add the timing points above.

Tuition and enrichment. The main items are term fees and lesson packages paid upfront. The buyer will want a schedule of each student's remaining lessons or weeks, any make-up classes owed, and any promotions promising free lessons later in the term. These are not regulated by ECDA, so the agreement and the records are what count.

What should sellers prepare?

• A deposit register showing each child or student, the amount held and the refund terms.
• A fee ledger showing what has been billed, collected and is outstanding for the current period.
• For childcare, the subsidy reports and any open queries with ECDA.
• A list of lesson packages, credits and promotions still to be delivered.

Clean records shorten negotiations, because the buyer does not have to estimate the numbers or hold back money for uncertainty.

How Edugrow helps

Edugrow has advised on 70+ education business transactions in Singapore since 2014. We agree how deposits, prepaid fees and subsidies will be treated at the heads of terms stage, so the price the seller expects is the amount they actually receive. Edugrow can draft a neutral Sale and Purchase Agreement, including the completion mechanics, and coordinates with lawyers where they are involved. If you are preparing to sell, start at selling with Edugrow.