What you need to know to come with a value when buying or selling a childcare.
How to value childcare business accurately is essential if you are serious about buying or selling your school. Naturally, the Buyer’s Valuation is usually very different from what the Seller believes the school is worth. There is not a precise method for arriving at the correct value, but here, we will explain how we can arrive at a more realistic number.
Owners are usually emotionally attached, and they factor their years of hard work into their calculation, but these emotions get in the way of an accurate Childcare Valuation. The first step to successfully arrive at a price is to make sure that we look at the business impartially.
All those years of hard work you put into the business will not add value. A school that looks better than others or upgrades made in the past should be already giving you benefit, reflected in revenue and profit of the company, therefore are part of the valuation from the financials. – However, improvements needed to keep the school open, especially if required by the city or other regulatory agency will likely impact an offer.
The “Potential” of the business– a common mistake.
An experienced buyer who might be looking for opportunities, and it is common for the Seller to promote the “potential” of the business as an asset and, they expect to get more money for it. However, the fact is that any potential that the school has, the Buyer will have to implement, take a risk, and wait for profits or losses. Having potential is not much different from having an empty school to fix and fill with kids. Too many changes to a childcare center is a turn down for most buyers. If they realize that the Seller is promoting potential but never implemented that potential and profit from it, this makes him or her question why the Seller is missing that opportunity.
A center for sale that has room to grow or improve is more attractive to buyers that could take advantage of that potential but is also a risk. The Buyer needs to implement changes and often invest money, with the expectation of having a reward after doing so. Expect that an educated Buyer is going to base the offer on the current situation of the company.
Still, some times, having a childcare center that offers excellent upside potential with minimal changes, or a very well run school could result in a 10 to 20 percent premium payment from a buyer.
Childcare Valuation based actual numbers
A proper school valuation is usually based on financial records. There are several methods to arrive at a realistic value. To start, we use the last three years of taxes and financial statements. These are some of the “Rule of Thumb” for how to value childcare business. It is crucial to look at every rule that applies to the center before deciding.
The EBITDA multiplier.
- Use a multiplier of 2.5 to 4 times the EBITDA for business only.
- For business and Real Estate, this multiplier is up to 7.
- The Seller’s Discretionary Cash Flow (SDCF).
- Small childcare centers, under 100 capacity, 2 to 2.5 times the SDCF.
- For the Valuation of centers with a licensed capacity between 100 and 200, between 2 to 3.5 times the SDCF.
- To value enters with 200+ capacity, 3 to 4 times the SDCF.
Annual revenue multiplier.
The annual income multiplier is less common but sometimes necessary to see the whole picture of a specific center Valuation. Between 30% to 45% for business, and 140% to 300% of the yearly revenue for the company and Real Estate Included.
A multiplier of the EBITDA and SDCF are the most commonly used methods for Childcare Valuation, but the final price depends on things like the condition of the real estate building, (if applicable), the number of locations, and years in business, among others factors.
Based on License Capacity
License capacity is also a good indicator of how to value childcare business. For centers, without Real Estate, the factor is between $1,000 and $2,500. For Business including Real Estate, $6,000 to $14,000.
All of this, of course, is a guide to set a reasonable on how to value childcare business. The Seller must expect a lower offer than the original price and needs to be ready for negotiations. The final price depends on variables like the market, “supply and demand” at the moment, motivation from the Buyer, financing options, among other things.
Other important factors that affect value.
Additional factors that could affect the price and make it easier or harder to sell the business; these are some examples:
Taxes. Cooperation is a crucial element.
The disposition and acquisition of an asset will trigger significant taxes for the Seller and sometimes for the Buyer. A tool used often to differ those taxes is the use of the 1031 exchange. This strategy allows the taxpayer to defer capital gain and depreciation recapture taxes by exchanging assets, including Real Estate and business like-kind.
For a successful 1031 transaction deal, Buyer and Seller must be willing to cooperate. A “Qualify Intermediary” must take the title of the property and hold all proceeds from the sale. Additional cost from attorneys, among other things, therefore depending on who will benefit from the deal price could be affected.
Keep clear and straight forward financial records; this is vital to support value. The need to explain to possible Buyers those costs that are not related to the business or intermingling expenses between two or more locations generates doubts, and could potentially weaken the possibility of financing the deal.
The first step that your childcare broker will do is to prequalify the potential buyer and have them sign a non-disclosure agreement. Immediately after that essential first step, the broker must facilitate up-to-date records, or the Buyer will walk away. Documents should be easy to understand. The following are some of the materials needed, and your broker should have handy:
- Three years of business tax returns.
- List all perks and other expenses that would not be relevant to a new owner.
- Give the Buyer a description of the facilities, the number of bathrooms, showers, playground size, and other relevant information.
- Produce information on Governmental programs that are in place like VPK and school readiness.
- Print the last Payroll report (redacting SSN or other personal information).
- Provide Leasing information including landlord information, (Buyer will be instructed not to contact the landlord) years left on the lease, any options to renew, and any additional relevant information.
- Finally, if Real Estate is for sale, provide information about the assumable loans, condition of the building and age of the roof.
For additional information on how to handle a sale, read our post written by an experienced childcare broker on Selling a Childcare center.
Installment Sale (Owner financing)
There are many advantages for the Seller when he or she finances the sale of the childcare or school. The Seller usually offers to finance with a balloon payment after 3,5 or 7 years with interest rates from 6.5% to 10%
Receiving the entire purchase price at closing represents the most significant tax exposure for the Seller and will likely push you into higher tax brackets. When you sell a highly appreciated asset Capital Gain Taxes, and Capitalization Recapture Taxes could be triggered. A deferred payment plan will allow you to defer some or all Capital Gain until you receive the money and will help you control your tax rate by managing the portion of the sale price received every year.
More leverage to negotiate a better price
Sometimes the only way to sell a business is by offering a financing option to a Buyer, or at a minimum will position you better at the negotiation table. Almost every Buyer would like the idea of Seller financing rather than a bank; because it is usually easier for them to qualify and represent a faster and less expensive closing. As a result, some Buyers might be willing to pay more for the opportunity that it represents.
A childcare broker could explain and calculate to the potential Buyer as well. The return on his on her investment is usually more attractive than paying all cash.
More profits for the Seller
In an owner financed business, the portion funded by the Seller will generate interest. That interest could be tens of thousands of dollars a year and even hundreds of thousands over five years. As a result, the total cash flow received by financing the deal will be certainly much higher and often very attractive. Lastly, consider this, a part of the cash used for the financing of the sale is deferred Capital Gain Taxes; you will be making interest on that money. The result is a yield that is greater than the interest rate applied.
An important notice: We are a commercial Real Estate firm and do not provide tax advice. The analysis we could offer to you is customary projections based on standard calculations. Please review all the information provided to you by a CPA for consultation.
The importance of a specialized childcare broker
Having an experienced business broker that knows the childcare industry doing the valuation will give you the best chances of arriving at a fair and best possible price. At Lluna Investments, we look at the company from a professional and impartial point of view, we understand the market and will recommend the best possible price. Contact us regarding any questions on buying or selling a school with full confidentiality.
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