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Refinance Your Franchised Childcare Center at a Very Low Interest Rate – 3.7% to 4% fixed rate!
The amount of refinancing is up to 80% or 85% of the value of the real estate, plus 80% of the value of the business value!
For example: If the real estate appraisal is $2.5 million, and the business is valued at $1,000,000, then right now, a borrower could refinance up to $2,925,000 = ($2,500,000 x 85%) + ($1,000,000 x 80%)
Since many lenders just refinance based on the real estate value, and do not consider the business value, refinancing can happen much earlier, so the borrower can save money starting next month instead of waiting a few years.
- Loan Terms:
- Real estate: 20 year term and amortization
- Business: 7 year term and amortization
- $5 Million maximum refinancing amount
- Only for owner operators – not investors
- Borrower’s home not taken as collateral
- Requirements for refinancing:
- 3 years in business
- Good Liquidity – $300k is good
- Profitable – a 1.25 Global debt service coverage
- Positive trends in Enrollment
- Closing time from when Lender gets complete loan request:
- 3 to 4 weeks for refinancing when the loan is just based on the business value (i.e. no real estate) – no business valuation required
- 6 to 8 weeks for when there is real estate – business and real estate appraisal required
- Lender Origination fee: 0.5% of loan amount + closing fees ($5k to $10k)
How Much You Can Save By Refinancing Your Current Loan? Submit your information online if you are interested in refinancing an existing Childcare Center loan.
Complete an online application and submit it now.
Have questions on refinancing? Contact: JayWhitney@ChildcareBrokers.com 770-410-7582
The Growth And Decline In SBA Loans To Childcare Centers That Were Written Off By Lenders
During the last recession, the childcare center industry was hit hard and lots of childcare centers were closed down. Below is the number of SBA 7(a) loans to childcare businesses that were charged off by lenders. These charge-offs were from SBA 7(a) loans issued since 2000. The number of bank charge-offs for childcare center loans is down considerably from the peak in 2010.
| Year | # Charged off by Lenders |
| 2001 | 2 |
| 2002 | 8 |
| 2003 | 11 |
| 2004 | 19 |
| 2005 | 22 |
| 2006 | 84 |
| 2007 | 60 |
| 2008 | 163 |
| 2009 | 101 |
| 2010 | 243 |
| 2011 | 176 |
| 2012 | 109 |
| 2013 | 68 |
| 2014 | 76 |
| 2015 | 146 |
| 2016 | 99 |
| 2017 | 42 |
Even though the childcare industry in general is doing well, there are still a number of bank foreclosures of childcare centers.
| Amount of loan | # Charged off by Lenders |
| $0 to $100k | 870 |
| $100k to $250k | 215 |
| $250k to $500k | 142 |
| $500k to $1m | 132 |
| $1m to $2m | 68 |
| $2m to $3m | 1 |
Most of the SBA 7(a) loans for childcare centers that have been charged off are the smaller ones.
The Growth in SBA loans To Childcare Centers Each Year
November 3, 2017
Most childcare center owners can see that their childcare center is doing well and that the childcare industry is a growing industry. Industry growth demands capital and loans. The question is, “How much is the lending volume increasing to the childcare industry in relationship to previous years?”
The last few years were good years for the childcare industry in getting additional growth capital. The number of SBA 7(a) loans in 2017 was 55% higher than the number of loans in 2010.
| Childcare Centers financed each year with a SBA 7(a) loan. | ||
| Year | Growth in number of loans as % of 2010 number of loans | Average Loan Size |
| 2010 | 100.0% | 340,000 |
| 2011 | 110.9% | 580,000 |
| 2012 | 102.5% | 550,000 |
| 2013 | 103.8% | 610,000 |
| 2014 | 119.8% | 670,000 |
| 2015 | 143.0% | 760,000 |
| 2016 | 153.2% | 810,000 |
| 2017 | 155.7% | 850,000 |
The average loan size has increased substantially from $340k in 2010 to $850k in 2017. This indicates that larger childcare centers are being acquired or built. These loans also include loans for working capital, so it may also indicate that there are fewer small loans being requested for working capital.
What Interest Rates Are Childcare Centers Paying On SBA 7(a) Loans?
October 27, 2017
In the last six years, on a national basis, there have been 5,477 SBA loans made to childcare centers. The interest rate that borrowers pay on a SBA 7(a) loan (the most common type SBA loan) is typically a variable interest rate based on the current Prime Rate (now 4.25%) plus a percentage that has a maximum of 2.75%. So currently, the maximum interest rate on a variable rate SBA 7(a) loan is 7.00%. The Prime Rate has increased in the last year by 0.75%.
About 36% of all SBA 7(a) loans are made at the maximum rate. The below chart shows the percentage of SBA 7(a) loans issued at various interest rate percentages over the Prime Interest Rate in the last six years:
| Percent of SBA 7(a) Loans Issued | Variable Interest Rate % Over the Prime Rate |
| 3.4% | Under 1% |
| 4.2% | 1.00% to 1.24% |
| 3.1% | 1.25% tp 1.49% |
| 7.0% | 1.50% tp 1.74% |
| 6.8% | 1.75% to 1.99% |
| 13.5% | 2.00% to 2.24% |
| 13.4% | 2.25% to 2.49% |
| 13.0% | 2.50% to 2.74% |
| 35.7% | 2.75% |
Over the last six years, about 62% of all childcare centers which received a SBA 7(a) loan, got one at a high interest rate (the Prime Rate plus 2.25% to 2.75%). About 18% of all childcare centers received a SBA 7(a) loan at under the Prime Rate plus 1.75%.
At today’s rates, refinancing a successful childcare center will typically reduce interest rates to a fixed rate of 4.5% to 5.5%.
By refinancing a $1.0 million outstanding loan balance, a childcare center paying a high rate can typically save $75k to $300k in interest expense over the remaining life of a loan, or reduce the monthly loan payments by $1,000 to $2,500 per month.
Nationwide, Childcare Brokers ONLY Finance Childcare Centers!
Gainesville / Northeast Georgia – Educationally Focused Childcare
Price: $499,000
Gross Revenue: $236,000
Cash Flow/Adjusted Profits: $69,000.
Real Estate: $550,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $75,000
This school has an excellent reputation. They take children from infant to 12 years old and offer before school and after school programs. They are educationally focused and have the best looking childcare center in their market area. They are licensed for about 65 children. The Childcare center has the GA Pre-K program.
Real Estate was appraised on 10/27/2011 at $475,000. Current estimated Real Estate value is $550,000. In an effort to present a very attractive opportunity for a new owner, the fully furnished and operating school is being offered at a price lower than the current Real Estate value alone.
Listen to my interview on the “School For Startup” radio about “How to Buy/Sell a Business!”!
Jay Whitney, a principal of Childcare Brokers, is on the radio! Listen to my May 20, 2015 interview on the “School For Startup” radio along with the author of “Shark Tank”. I talk about how to “Buy/Sell a Business“! On the radio program, my interview starts at minute 31:45 and lasts for 23 minutes.
I talk about:
Only 5% of potential buyers interested in buying a business actually buy a business! Find out why?
Business Values: How to increase the value of your business? How does the buyer’s viewpoint of a business value differ from the seller’s viewpoint of a business value?
Enhancing the value of a business: What can be done to increase the value of a business if a business owner doesn’t want to sell for a few years?
http://schoolforstartupsradio.com/2015/05/michael_parrish_dudell_jay_whitney/
Profitable Childcare Center * Southwest Metro Atlanta Georgia
Price: $2,700,000
Gross Revenue: $1,065,000
Cash Flow/Adjusted Profits: $390,000 and growing.
Real Estate: $1,900,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $150,000
Enrollment is 220 children! This education focused childcare center still has the ability to grow enrollment by up to 74 full-day kids and up to 65 after-school kids! It is also open during the evening and has the ability to grow during the evening!
Here’s a great opportunity to take over a very successful and profitable daycare center in a southwestern metro Atlanta suburb
The school currently offers a very high education focus and many of their kids when they start kindergarten are reading at a 1st grade level. The center has a great reputation.
Weekly rates of $140 for 3 year olds. Owner is planning to institute a small tuition price increase before a buyer takes over…. which will add additional revenue and profits. School has been pre-approved for a bank loan for a qualified buyer. Continue reading
Profitable ChildCare Center * Northwest Georgia
Price: $2,099,000
Gross Revenue: $737,000
Cash Flow/Adjusted Profits: $360,000 and growing.
Real Estate: $1,200,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $105,000
This is very profitable and a new owner will likely be able to put about $225k of money in their pocket after making the estimated yearly payments (estimated at $135k) for a bank loan to buy this center.
Here’s a great opportunity to take over a center that was absentee owned earlier this year (due to health issues) and during that time, the director ran it well! It is a very successful and profitable daycare center in Northwest Georgia.
The center is licensed for about 200 children. It has the Georgia Pre-K program.
The school currently offers a Christian based curriculum and has a great reputation. Excellent director and assistant director in place. Very clean books and records.
School has been pre-approved for a bank loan for a qualified buyer.
24 SBA Loans to Childcare Centers in Georgia in 2014
Including both 7a and 504 loans, there were 24 SBA loans for a total of $29.4 million given to childcare centers in GEORGIA in fiscal year 2014. The largest loan was $3,615,000 to a childcare business in Atlanta, and the smallest was a $75,000 loan. For the 7a loans, the initial interest rates ranged from a high of 6% to a low of 4.75%. For the loans involving real estate, most of the loans were for 25 years while a small minority of the loans were for 20 years. Continue reading
Marietta Childcare Center Building – Licensed for 55 to 60 children – $225,000 – next to Elementary School!
Price: $225,000
Gross Revenue: NA
Cash Flow/Adjusted Profits: NA
Real Estate: $225,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: NA
Own a Marietta childcare center building for only $225,000!
1516 W. Oak Drive, NE, Marietta, GA 30062
The Childcare center is located ¼ mile from Sawyer Road Elementary school. Continue reading
Southeast Atlanta Childcare Center – Large Elementary School is next door. Licensed: 229 children – Current enrollment: 157
Price: $1,690,000
Gross Revenue: $640,000
Cash Flow/Adjusted Profits: $130,000
Real Estate: $1,500,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $95,000
If you want to START a FRANCHISED childcare center, instead, consider buying this ESTABLISHED FRANCHISED childcare center and you will likely save $500,000 in the startup costs! If you START a brand new childcare center, you will likely take a year or two to increase the enrollment to the enrollment this one already has! By STARTING a childcare center, you will lose money until you get to the break-even point. Buy this center, making $130k in yearly profits from day one, and start growing your preschool from a base of 157 children enrolled already.
This is a beautiful established Franchised Childcare Center in a desirable growth area of Southeast Metro Atlanta. Licensed for about 229 children with a current enrollment of 157 kids. The school has 3 Georgia Pre-K classes and the food program. The school is educationally focused. Staff is stable and experienced. Has an active after school program. Large Elementary School is next door. Continue reading
Very Profitable Childcare Center * Real Estate – Northeast Metro Atlanta (Gwinnett County)
Price: $1,529,000
Gross Revenue: $704,000
Cash Flow/Adjusted Profits: $237,000
Real Estate: $1,500,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $125,000
This is a very established center with a great reputation in the community. The school is licensed for 235 with a current enrollment of 165. They have 3 Georgia Pre-K classes. Very stable staff with great teachers and a Director and Assistant Director in place. Continue reading
Absentee Owned Child Care Center * South Metro Atlanta * Real Estate – Henry County
Price: $1,790,000
Gross Revenue: $719,000
Cash Flow/Adjusted Profits: $301,000
Real Estate: $1,250,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $115,000
Here’s a great opportunity to take over an absentee owned, very successful and profitable daycare center in South Metro Atlanta. The center is licensed for 223 children with 167 enrolled. It has 3 Georgia Pre-K classes and the food program. The school has a great reputation and has an excellent director and assistant director in place. It’s next door to an elementary school. Very clean books and records. Lots of professional parents. Continue reading
Beautiful Child Care Center * Southeast Metro Atlanta * Real Estate – Henry County
Price: $1,690,000
Gross Revenue: $640,000
Cash Flow/Adjusted Profits: $130,000
Real Estate: $1,450,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $95,000
This is an unusual opportunity to take over a beautiful established Franchised Childcare Center in a desirable growth area of Southeast Metro Atlanta. Licensed for about 229 children with current enrollment of 157 kids. The school has 3 Georgia Pre-K classes and the food program. Offers a very desirable curriculum for children from Infant to School-age. Staff is stable and experienced. Has an active after school program and has bus pickups from various local schools. Large Elementary School is next door. Continue reading
Bank Foreclosure: Matt Hwy (Hwy 369) Cumming Georgia – Childcare Center (closed)
Price: $1,000,000
Gross Revenue: NA
Cash Flow/Adjusted Profits: NA
Real Estate: $1,150,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $125,000
Original owners invested nearly $2,400,000 to open the school in 2007. Great opportunity for a new owner to acquire this school at 1/2 price.This was originally built as a Discovery Point Franchised center. It has a great location off of Matt Highway and is nearly across the street from a large Elementary School. Continue reading
Bank Foreclosure: Fayetteville – Childcare Center (closed)
Price: $995,000
Gross Revenue: NA
Cash Flow/Adjusted Profits: NA
Real Estate: $2,000,000
Furniture, Fixtures & Equipment: $100,000
This was a Discovery Point franchised center before it closed. A buyer will likely open an independent, non-franchised school. Beautiful property in great location… Licensed for 229 children.
This location failed in May 2013 – a period with higher unemployment than the current rate.
In July 2013 – unemployment rate of 7.5%
In March 2015 – unemployment rate of 5.2%.
The center is beautiful! This is a first class childcare center which the current owner paid $2,405,000 for in January 2008. The center has a great location.
Continue reading
Bank Foreclosure: Dawson Outlet Mall – GA 400 – Childcare Center (closed)
Price: $900,000
Gross Revenue: NA
Cash Flow/Adjusted Profits: NA
Real Estate: $2,000,000
Furniture, Fixtures & Equipment: $100,000
This 10,100 sq. ft. childcare center is near Dawson Outlet Mall and GA-400. Customers would include Dawson county and those commuting south on GA-400 toward Atlanta. It is located near the movie theater, and many physician and dental offices. The childcare center is easy to get to from Georgia 400 (with a daily traffic count of 20k vehicles) and GA-53 (with a daily traffic count of 12k vehicles). The center is beautiful! This is a first class childcare center which the current owner paid about $2,000,000 for right before the recession started. The center has a great location.
Continue reading
Bank Foreclosure: Middle to Upper Middle Income – Cumming – Childcare Center (closed)
Price: $1,200,000 This is a bank foreclosure.
Gross Revenue: When it was open, it had revenue of over $600,000
Cash Flow/Adjusted Profits: When it was open, it had profits of over $200,000
Real Estate: $2,000,000
Furniture, Fixtures & Equipment: $100,000
This 10,000 sq. ft. childcare center had served a middle and upper middle class community in the Cumming suburbs of Metro Atlanta. The center is beautiful! This is a first class childcare center which the current owner paid about $2,000,000 for right before the recession started. The center has a great location.
This is an closed Center that is a bank foreclosure. Continue reading
Bank Foreclosure: Middle to Upper Middle Income – South Suburbs of Atlanta – Childcare Center
Price: $799,000
Gross Revenue: $9,000 per month lease from tenant ($108,000 per year)
Real Estate: $1,800,000
For 5+ years, this 14,000 sq. ft. childcare center has served a middle and upper middle class community in the south suburbs of Metro Atlanta. The center is beautiful! This is a first class childcare center which the current owner paid $1,800,000 for right before the recession started. The center is located on a highly visible location which is right off a main artery road with great access.
The building owner is in bank foreclosure. The long-term tenant operates a childcare center out of the facility. The tenant pays a monthly rent of $9,000 to the landlord ($108,000 per year). This tenant has a profitable business and is current on the rent. The tenant pays for building repairs. The landlord pays the property tax of $19k per year.
The tenant is a very strong tenant and owns two additional childcare centers. Continue reading
Top Quality Childcare Center * South Metro Atlanta * Great Real Estate – Fayette County area
Price: $1,649,000
Gross Revenue: $866,000
Cash Flow/Adjusted Profits: $188,000
Real Estate: $1,625,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $150,000
This is a beautiful childcare center with an excellent reputation in/near Fayette County. Everything is upgraded compared to a typical center. It has a current enrollment of 128 children with the capacity to grow by about 50%. This childcare center commands high rates in the area and is positioned for a new owner to take over and continue the growth. It has a very successful private Pre-k. Continue reading
West Cobb Childcare center with parking lot connected to grocery shopping center – Foreclosure (closed)
Price: $995,000
Gross Revenue: When it was open, it had revenue of around $700,000
Cash Flow/Adjusted Profits: When it was open, it had profits of over +$240,000
Real Estate: $1,649,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $80,000
Address: 8486 Hiram Acworth Hwy, Dallas, GA 30157
This childcare center closed in May 2013 – a period with higher unemployment than the current rate.
In July 2013 – unemployment rate of 8.0%
In March 2015 – unemployment rate of 5.3%.
In 2008 to 2010 it had revenue of $690k to $730k and was very profitable. The revenue in 2011 was $600,000. In the years of 2008 to 2011, adjusted profits of the center was always in the range of $244k to $310k. The center had two GA Pre-K classrooms. It has a capacity of 190. When it was open, their rates were $175 for infants and $155 for other ages… which is competitive in the area…not the most expensive and not the cheapest. This is an excellent location with good road frontage and the childcare center is adjacent * with connected parking lots * to a nice shopping center with grocery shopping, restaurants, and other shops.
Continue reading
Gwinnett: Long-Established Daycare with Potential – Price: $250,000 – Cash Flow: $74,000
This Childcare center is located in Northeast metro Atlanta. The current Owner has always kept the Center’s prices to be the lowest of ALL competitors. This business is well located on a main street with high traffic count and good access.
Licensed Capacity: 118, Total Enrolled: 59 (including full-day (35 kids) and after-school (24 kids)). Rates for infants: $155, Rates for 3-year-olds: $135. Has one GA Pre-K classroom and the food program.
Real Estate was acquired by the current owner in 1999 for $425,000. The value of the Furniture, Fixtures, & Bus is $50,000. Square feet of facility: 6,000, six classrooms, ¾ of an acre of land, one large bus with a capacity of 36 passengers. Building was first used as a childcare center in 1975. Center has 10 employees plus owners.
Continue reading
Alpharetta/Cumming (Closed Center)
Price: $1,095,000
Gross Revenue: When it was open, it had revenue of over $700,000
Cash Flow/Adjusted Profits: When it was open, it had profits of over $200,000
Real Estate: $1,700,000
Furniture, Fixtures & Equipment: $100,000
This is a bank owned foreclosed childcare center. This center has 10,000 sq ft. It has a great location.
For this location, at this price, this is a good opportunity! Continue reading
Foreclosed Childcare Center with 250 Capacity and 150 Enrolled – Atlanta area – Clayton County
Price: $719,000 (This Childcare center was acquired by the previous owner for $1,700,000 in 2004.)
Gross Revenue: $598,000
Cash Flow/Adjusted Profits: $150,000
Real Estate: $1,500,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $50,000
This childcare center is being operated by a court appointed receiver and has 150 children currently enrolled!
Reason for Sale: The previous owner acquired the center in 2004 and was supposed to be paying over $11k in monthly mortgage payments. It was difficult for the previous owner to pay such a high mortgage.
A new financially qualified Buyer will likely have a lower monthly mortgage payment which will be the very manageable considering the current adjusted profits of the business.
Who should buy this center?
- Real estate investor – The receiver has engaged a third party as on-site Manager/Director. The Director would like to lease the center from the Buyer.
- Existing Childcare Centers Owner – If leasing the center is not an option, the Director would like to continue as the Director for the Buyer.
- Owner Operator – If you ever wanted to own a large profitable childcare center, but you cannot afford the $1.5 million to $2.5 million price which many large profitable childcare centers sell for, this is your opportunity to buy a low cost center.
Northwest Atlanta Childcare Center that can be very Profitable – (near I-575)
Price: $1,325,000 (This Childcare center cost $2,350,000 when built six years ago.)
Gross Revenue: $630,000
Cash Flow/Adjusted Profits: $145,000
Real Estate: $1,600,000 – Included in the Asking Price
Furniture, Fixtures & Equipment: $100,000
In 2009 the Adjusted Cash Flow to the Owner was $210,000 on revenue of $670,000. In 2010 the Adjusted Cash Flow to the Owner was $165,000 on revenue of $630,000. In 2011 the Adjusted Cash Flow to the Owner was $172,000 on revenue of $630,000. In 2012 the Adjusted Cash Flow to the Owner was $145,000 on revenue of $617,000. The owner is making improvements and expects to make profits in 2013 equal to the 2011 figures.
This business is well located at the entrance of a BIG subdivision (with many tennis courts/swimming pools) that for the last few years has been on hold because of the recession. Continue reading
Exit Planning Case Study: Underfunded Retirement
At our initial meetings with a childcare center owner, the Owner (age 68), told us that her childcare center was worth $1.5 million. We questioned her on her goals. She was ready to retire soon and needed the money from the sale of her childcare center to fund her retirement. Unfortunately, our valuation of her center indicated that it was only worth $1.0 million. She had two basic options: 1) continue running the center until the value increased, or 2) sell now, and retire – but not in the style that she was expecting.
We gave her some ideas as to how she could increase the value of her business. Some of these ideas could be implemented in the short-term (Like painting a house can be done quickly when trying to sell a house) and some would require work over a long-term. For some ideas that can increase the value of your childcare center, please refer to other articles on our website, or contact us and we can send you a report on on Exit Planning and how to increase the value of your center.
If you are thinking of retiring within the next 5+ years and want to know now what your center is worth instead of what you think it is worth, contact Childcare Brokers. Do not be surprised. We can help you better plan for retirement.
Positioning Your Center To Sell
Before bringing your most valuable asset, your childcare center, to market, you should be aware of know how to maximize your business’ value. Childcare Brokers can work with childcare center owners to make your center more valuable and better posisitioned to sell. You can start turning your childcare center into the ideal business to sell by considering some advice from Childcare Brokers. Just read or click on the below videos to watch a 1-2 minute video clip on each of these topics:
Well-Prepared Documation can Increase the Price
A well-prepared and supportive package to defend the Seller’s Valuation – may help reduce emotional arguments and uncertainties.
Supporting material acts as a great “confidence builder” between the parties.
The less the potenital buyer’s percieved risk, the higher the price they will pay.
Reduce Taxes on the Business Sale
Issues to address before the sale:
Defined-Benefit Plan – to shield pre-tax profits
Personal Goodwill – to avoid double taxation on a C-Corp
Installment Sales
Taxes-Deferred – If you are looking to buy a larger childcare center, you can use a Like-Kind Exchange to use your equity on a tax-deferred basis where the capital gains tax is deferred.
Converting “C-Corp” to “S-Corp” can significantly reduce taxes
Best time to convert is when profits are low
If the owner’s net worth is high enough that retirement needs are taken care of, then taxes could be reduced on one’s estate through:
Gifting to family – use valuation discounts, Family Limited Partnership, Grantor Retained Annuity Trusts, …
Charitable Remainder Trusts
Structure can allow lower taxes.
The Impact of Time on Selling Price
Timing the business sale to favorable economic market and industry conditions can increase predictability and valuations.
Risks to a Company’s Value controlled by others:
-New significant Competitive Threats – example: a new childcare opening up nearby
-The Economy
Seasonality
Rising value of business (sales are increasing)
Declining value of business (sales are falling)
Waiting too long to Sell can Reduce Selling Prices
Is it better to sell when a childcare center is doing well.
Waiting can lead the childcare center owner to sell quickly and move on because of burnout, health, or death.
With a successful childcare center, a owner sometimes coasts along, taking the eye off the ball and leading to downward spiral or languishing business
If you have decided to sell your childcare center, you will likely get a better price if the center is being proactively marketed for sale. If you are only reactive and wait until potential buyers give you offers, you are less likely to find the ideal deal and it will likely take a longer time.
Deal Terms Effect Selling Price
Structuring a Transaction to increase after-tax valuations:
• Seller financing over a longer term can increase the purchase price.
• Longer term loan amortization permits a higher price. Have business acquisition loan pre-qualified by lenders before buyer looks at business. Give the buyer those lenders (all other terms being equal) with the longest amortization period.
• Often the Seller’s CPA does not allow asset step-up to avoid higher tax on depreciation recapture…the price goes down
• Deal restructuring to consulting payments (with a 5 year payout) instead from goodwill (with a 15 year amortization) will increase the price. This may more than offset the added tax burden to the seller.
• Stock price is usually lower than Asset Price due to tax considerations (For the same balance sheet and assuming zero risk of unknown liabilities)
• A strategic buyer will pay a higher price if he is willing to pay for the synergies.
What factors effect selling price?
Terms other than all cash at closing:
Seller financing
Third party lenders
Earn outs
Non-competes
Extended employment
The longer it is “for sale”, the greater its perceived problems
The longer a childcare center is “for sale”, the greater its perceived problems from potential buyers
Identify problems and potential problems.
If a potential purchaser uncovers these items during due diligence, the potential purchase may think that you are hiding things and lose interest in the transaction.
Clean Up Financial Statements
Most every privately owned business has some expenses that are business expense per the IRS, but are discretionary and would not likely have been incurred except that it benefited the owner personally. In some cases, it is more difficult for a buyer to justify adding back these expenses to the profits to determine the adjusted profits. If there are expenses like this in your business, clean them up in the two or three years before you want to sell to get the most for your company.
Use Experienced Professionals
Use professionals that are experienced in the issues involved in selling a business. Professionals could include: broker, CPA, attorney, appraiser, personal financial planner. Professionals should work as a team.
Business buyers that have a chain of childcare centers are sophisticated buyers who have often bought several other childcare centers before. The seller need a team of professionals to level the playing field
Factors that Increase Childcare Center Valuations
If one of a childcare centers operating parameters change, its value change
- Sales and profit growth over several years can increase the price because historical growth justifies forecasts of future growth. Decreases in sales and profits can likewise reduce values.
- A good business, predictable performance, and fully informed buyers help increase the price because it reduces the percieved risk and reduce the Return on Investment (ROI) expectations of the buyers.
- Long-term employees – If your center’s director has been there for many years, and a potential buyer does not want to take over the role of director, then the price that one buyer is willing to pay can increase because of the increased likelyhood of the director staying with the buyer.
If Two Childcare Centers are otherwise Identical, Changing one of these Factors will Impact Childcare Center Values
- Management Depth – Childcare centers with a good director and assistant directors are worth more. Experienced/ Skilled Staff are also worth more.
- Accurate and timely management reports add value. A center where the owner makes all the management decisions by the seat of his/her pants is worth less. Good system & procedures add value.
- Customer Loyalty – A childcare center that has long-term customers/children is worth more than a center that has lots of turnover. This is because of the long-term recurring nature of the revenue.
- Customer Diversity – A center that has a significent percent of customers from just a one or two nearby corporations is less valuable because if those few corporations layoff employees, it could significently reduce revenue in one occurance.
- Stability of Earnings Historically – The last few years before retirement is not the time to slow down. Do not “hide” profits. Up/down sales history & unpredictable profit margins hurt values.
- Quality of Financials – Having the accounting records in a shoebox increase the potential risks to a buyer and reduces valuations.
- Little or no accounting system -> Limited information system -> Adequate information system
- Unreviewed books & records -> Unreviewed financials with the ability to review -> Reviewed financials
- No management team depth -> One or two person senior management team -> Some management team depth
- No professional accounting staff -> Controller on staff -> Full-time CPA/CFO on staff
- A multiple-location childcare center business with a dominate position in a small, fragmented market is more valuable because that center can more likely control pricing.
- Licensed capacity far exceeds enrolled children – If enrollment can increase significently at a facility, that adds value
- Expansion of Facilities – If a childcare center building can be expanded it adds value (The more growth the facilities will support, the better.)
- Geographic Location – For example, there tends to be more buyers looking to buy a childcare center in North Atlanta than in South Atlanta or rural Georgia.
- Franchise Agreement that can be cancelled or near the end of the term of the agreement – This could either be a positive or negative effect on the value. If a potential buyer experienced in the childcare industry could expect to purchase a childcare center and not loose any children if the franchise was not continued, that buyer could likely add $50k to $70k in profits because they would not be paying franchise fees.
- Obsolete computer equipment that needs to be replaced soon reduces value
- An automatic payment system that debits the customer bank account or credit card. This adds predictability to the revenue and increases a center’s value.
- Advertising Campaigns – If the center has a strong advertising campaign that works, it adds value.
- Value & Appearance of tangible assets – Centers look nice already or will not require much of an expense to make it looking nice… will be worth more money
- Having a written growth plan – If a childcare center has been following a business plan for several years and has been tracking preformace to the plans, it add believability to the forecast for the future which can increase the price.
- Pending Litigation/ regulatory Issues can reduce value
- Industry Ratio’s – If a childcare center’s financial ratios are significently different from industry ratios, values will be effected. For example, if a center’s labor expense is 30% higher than industry averages, a potential buyer who knows how to manage childcare care center labor expenses to industry ratios, can value the center higher because that particular buyer will be able to reduce labor expenses.
For larger chains of childcare centers, the following show the progression in financials that add value:
The value of a childcare center is generally based on the most recent three years of financial results with the most recent year’s performance being the most important. Therefore, if you have thought of slowing down or taking your eye off the business, wait until after you sell the business. If you slow down before you sell, it may severely affect the value of your childcare center.
Factors that Increase/decrease childcare center values
Reduce or delay taxes on the business sale
Use professions – cpa, attorney – (broker – package to support value,
Identify due diligence problems first
Increase profits – see
The longer it is for sale – buyers see potential problems
Who the Owner sells to effects valuation – family low, partner FMV, employee expect less, 3rd party, liquidation, competitor various – you have high labor – they have low labor,
When you sell effect valuation – doing well, announcement of new compitor low risk, death/disability, lending evniroment – hard to get money fewer buyer, low interest rates price increase,
Increase after-tax valuations (through terms)
A therical approach to valuing childcare centers.
Should I Sell for the Fair Market Value of my Childcare Center?
The term “Fair Market Value” (FMV) of a Business is defined by the Internal Revenue Service (IRS) laws and regulations. The FMV value is required by law to be used if a question of value is before the IRS or the court. The FMV is also often used if a business value is in dispute between two business partners.
You have to ask yourself if you are fine with the IRS specifying the exact procedures used to determine how valuable your childcare center is. As business brokers representing childcare centers, we know that a FMV will rarely match the price and terms which a buyer will pay for a childcare center. Continue reading
Why Not Use a Traditional Real Estate Broker When Selling or Buying a Center?
Traditional read estate brokers know real estate, but they do not understand how to value and sell businesses. Most do not know how to read the financial statements of small businesses… which would make it extremely difficult to value goodwill (which is primarily based on the profitability of a business). So, they are likely to value a childcare center business either too high or too low. Continue reading