Splashbaby Swim School Pty Ltd

You are a recently qualified Chartered Accountant who works at Quantum Leap Accountants (QLA). QLA is a small, two-partner firm based in Melbourne with a team of 14 employees comprised of accountants, bookkeepers and administration staff. Jack McSweyn established QLA as a sole practitioner in 2003, with Wendy Wilkes joining as a senior tax manager in 2008 and entering into equal partnership with Jack in 2010.

You started working at QLA seven years ago while you were studying full-time at university. At first, you worked at the firm on a part-time basis as an administration assistant, then you moved into a bookkeeping role. On completion of your degree, you started in a full-time graduate accounting role at QLA and commenced your CA Program study shortly after.

Background

QLA is a small business that works predominantly with other small business clients as a trusted adviser, providing tax, business advisory and bookkeeping services. One of its clients is Splashbaby Swim School Pty Ltd (SSS), which has been a client of QLA since 2019.

Initially, QLA only prepared annual financial reports and income tax returns for SSS; however, over time QLA expanded into providing it with ongoing business advice, bookkeeping and management reporting services. For the year ended 30 June 2024, services provided to SSS comprised 6.3% of QLA's total client revenue, making SSS its single largest client for the 2024 financial year.

Jack has been the main QLA partner involved with SSS, working particularly closely with its owners in recent years, as they have expressed their wish to transition to retirement and plan for succession of the business. Recently, a large player in the swim school industry, Rescue Me Swim School (RMSS), has been acquiring swim schools throughout Australia. RMSS has an aggressive growth strategy, which it achieves through acquisitions and lower pricing, and it aims to become the dominate swim school in the industry. RMSS has approached SSS with an offer to purchase the business. The shareholders of SSS have been looking at succession plan options, so they are very interested in RMSS's offer.

Jack has been working with SSS on readying the business for sale, as well as preparing information in relation to appropriately valuing the business and assessing the prospective buyer's offer. You have been assisting Jack with some of this work, including learning a lot more about the SSS business and the swim school industry.

Splashbaby Swim School Pty Ltd (SSS)

Splashbaby Swim School Pty Ltd was founded by the parents of Craig Lilly, SSS's Chief Operations Officer. They were swimming coaches and had taught their son to swim from infancy. This early swimming education started a lifelong passion for Craig, who swam competitively during his childhood and teens. He joined the family business as a swimming coach, and when his parents retired, he continued running the business.

Craig's parents currently continue to support the business by being shareholders, but they are not involved in the day- to-day running of the business. Craig has continued to employ the 'family recipe' of specially structured learn-to-swim programs for babies and toddlers, through to school-age children.

In 2020, Harry Borland became a shareholder in the company. His ideas for expanding the business came to fruition through his combined expertise in business and swim coaching, and he helped SSS to expand and they now operate at three locations in Melbourne. The business has long-term rental agreements in place on the three buildings and owns the state-of-art filtration systems that are installed in each pool.

SSS's mission is for Australian children to learn correct swimming technique, so they can carry personal aquatic health and safety skills with them throughout their lives. Its class sizes are limited to ensure that personal attention is provided for each child, and all pools are heated so classes can be attended all year-round. In addition, the pools contain a special blend of minerals that sanitise the water, provide health benefits for human skin and are more environmentally responsible than traditional chlorine or sodium salt.

Students generally attend one class per week, and there are programs for each age and experience level to ensure all children learn the tried-and-true technique. The series of structured programs developed by SSS facilitate high customer retention, as the children move through the programs as they grow in age and experience. There are family discounts, so siblings can progress through every stage of their programs.

All staff must have current first aid accreditation and hold 'blue cards' - a prevention and monitoring system run by the Australian government that regulates individuals working with children and young people to ensure safe environments. Swimming teachers must be accredited with the swim coaching authority, Swim Coach and Teachers Australia, and undergo specialised training in the Lilly Learn-To-Swim programs and technique.

Customers consistently give positive reviews, and SSS has a strong reputation for providing quality education and enjoyable student experience.

SSS leadership team The SSS management team is comprised of:

• Harry Borland, Chief Executive Officer (CEO),
• Craig Lilly, Chief Operations Officer (COO)
• Alyssa Wood (Craig's wife), General Manager - Sales & Marketing

Craig and Alyssa are heavily involved in the day-to-day operations of the business, including management and staffing of the swim schools. Harry has never been involved in this capacity, as his role has always been more strategic, and his skills and interest are more around business growth. He was integral in identifying appropriate locations for new swim schools and developing properties for building the pool infrastructure in those locations.

Current strategies

Alyssa has been instrumental in the employment of Bianca Fernwood as a permanent part-time marketing manager who commences full time work on 1 July 2024. Bianca's role is to review the business and develop an effective marketing strategy, aiding SSS in realising its significant growth potential.

During her earlier internship at SSS, Bianca identified the need for enhanced brand recognition and an expanded digital presence to drive increased enquiries. Historically, the average number of enquiries for SSS was 10 per month, and these resulted in an average 70% rate of conversion from enquiry stage to commencing classes. The following marketing initiatives will commence 1st July 2024 as part of Bianca's marketing strategy:

• Website update, including mobile-friendly design, and links to the online booking system app.
• Traditional marketing, such as flyers, radio advertising, signage in local shopping centres and, refer-a-friend discounts.
• Search Engine Optimisation (SEO) strategy targeting keywords.
• Digital and social media advertisements and regular posts on social media platforms.

The marketing strategy is expected to increase enquiries by at least 40%. There was no additional cost of hiring Bianca, as her employment allowed Alyssa to reduce her working hours. The cost of a new external provider managing the search engine optimisation / digital advertising is valued at $3,000 per month.

Current challenges

Craig and Harry's relationship has deteriorated somewhat in the past two years. They often find themselves disagreeing on appropriate decisions or actions in relation to different aspects of the business, with Craig imposing his opinion on areas that have traditionally been Harry's domain - such as where the next pool location should be - and conversely, with Harry intervening in a staffing situation, which has always been Craig's responsibility.

Additionally, Harry and Alyssa do not get along well. QLA's partner, Jack, has been navigating this complex relationship and managing to be the voice of reason between Craig and Harry, who have relied on Jack to be objective in his role as adviser for the business.

Craig, Alyssa and Harry have indicated that it may be time for them step aside and let others take over the running of the business. The SSS leadership team discussed the potential sale of the business with the existing shareholders, and all are willing to help support such a sale occurring.

SSS is relatively well differentiated in the swim school market, particularly due to its small classes. However, SSS does try to keep pricing similar to major competitors. Student numbers across all swim schools spiked post-pandemic in the 2022 and 2023 financial years; however, with rising interest rates and cost of living pressures, customer numbers have dropped in the 2024 financial year. SSS has also experienced significant increases in operating costs, particularly wages, insurance and utilities.

Swimming teacher's wages have been a particularly challenging area for SSS. The wages are regulated by the Australian Government through the Fitness Industry Award. The award rates increased by 5.75% in the year ending 30 June 2024 and 5.5% in the prior financial year. There is a further negotiated increases of 5% per annum approved for the next five years. SSS has found it difficult to recruit and retain swimming teachers in the tight labour market, so they have always offered wage increases above negotiated award rates. In this industry, swim teachers are a predominantly casual workforce, so many qualified teachers left the industry during pandemic closures and have not returned. The wages paid to swimming teachers to deliver lessons makes up the majority of the Cost of Sales figure in the Statement of Profit and Loss.

There have also been issues with casual staff not turning up for shifts, with little or no notice. To try and improve reliability in the casual staff, SSS has recently implemented an incentive system, whereby staff are paid a higher rate of pay in any week where they complete of all their rostered shifts.

SSS's current average lesson price for the year ending 30 June 2024 is $21.87. According to a report released by Royal Life Saving Australia in September 2023, the national average swim class price for the 2023 financial year was $18.43 (prices ranged from $13.50 to $22.00). However, in a more recent informal survey of swim schools in the areas where SSS operates, the average was $19.40 (prices ranging from $15.00 to $24.00).

Recently SSS has made the decision to increase prices from 1 July 2024; however, the increase has been limited to try to minimise any drop-off in customer numbers. There was significant debate and discussion between Harry and Craig about this decision. Harry feels it was reasonable to raise prices to cover increased operating costs and that this would be accepted by customers given other costs were also rising. Craig feels this would put pressure on families already suffering from higher cost of living and preferred to try and increase revenue instead by growing their customer numbers. Historically, there has been a small drop-off in customer numbers following any price increase.

Over the next four years, SSS will need to invest significantly in upgrading the filtration systems in its swimming pools. This is required to meet changes to government pool filtration compliance requirements and to ensure SSS continues to meet the health benefits promised to its clients. These projects will be funded using long-term debt and during this work the pools involved will be closed.

Details of these planned upgrades are detailed as follows: