Buying a Childcare Center

Top Nine Mistakes Childcare Center Business Buyers Make When Buying A Center

By Jay Whitney

Buying a childcare center business is often a long and very time-consuming process that can be confusing and difficult. Most people trying to buy an operating childcare center fail to buy one. Very few go through the process enough to really become comfortable with the ins and outs of buying a center successfully.

I, Jay Whitney, provide Business Acquisition Consulting and Loan Broker services to childcare center buyers. I have helped people buy and sell over 100 childcare centers. Here is my list of the top nine major mistakes that childcare business buyers should avoid when trying to buy a center.

9. Not directly contacting childcare owners yourself. Many buyers only use business brokers and websites like to FIND sellers.However, of all operating childcare centers that are sold, only 20% are sold through business brokers. Since 80% of all operating childcare center sales are NOT through a broker, if you don’t try to find the childcare owners who WANT to sell, but, are NOT listed for sale, your chance of finding a great center to buy are greatly reduced.

8. Using a broker to FIND childcare center owners who are currently “NOT listed for sale”, but who WANT to sell. Of course, to buy a center, you should look at the centers already listed by brokers. But, if a childcare center owner has NOT already listed her center for sale, why involve a business broker (who often has a large commission (up to 10% of the sales price)) into the transaction? Contacting existing childcare owners yourself, with the assistance of a business acquisition consultant (paid hourly), will usually save 75% to 90% of a typically high broker commission. When a buyer directly contacts a seller, few sellers will then go ahead and hire a business broker and agree to pay the broker a large commission because the broker will not be “finding” the buyer. Without the need to pay a large broker commission, a seller is often more willing to sell for less.

This opens up the potential for a purchase price to be little bit less (than what a seller would accept when required to pay a broker), but, the seller still nets about the same amount because the seller doesn’t have a large broker commission expense. This makes it more likely for the buyer and seller to agree on a price… so, a sale/acquisition is more likely to happen … and happen sooner!

7. Over-Paying for a Center. When a buyer overpays for a center, it negatively effects the center for many years because the center’s overhead expenses are often too high because of the high loan payments.

When buying a profitable center, at the most basic level, the Adjusted Profits must be high enough to pay for three things: 1) the monthly debt service payments to the buyer’s lender, 2) provide for an Internal Rate of Return on the money the buyer invests, and 3) the buyer will often be working in the center to replace the time worked by the current owner. A buyer’s time is valuable, and the buyer needs to be compensated for her time.

6. Relying on a broker for advice who is BIASED and NOT working in the buyer’s best interests. This includes both relying on a Listing Broker who is working for the seller, and relying on a Buy-Side Business Broker who receives or is paid a commission ONLY if you buy a business (even if it is the WRONG business or you overpay)! Will a biased broker: A) Suggest a higher offer price because it makes a deal more likely to close? (Even if a correct valuation does not support a higher price.) (See Mistake #7)

B) Fail to recommend a complete due diligence investigation be performed? Fail to point out the missing steps of a complete due diligence investigation that should be done? Fail to point out potential areas of concern that should be looked at in due diligence? Fail to help identify weaknesses and areas of concern? When areas of concern are identified, will a biased broker minimize the importance of those weaknesses? (See Mistake #1)

5. Not using a business acquisition consultant who understands the business aspects of the childcare industry. An experienced business acquisition consultant should: 1) know how to contact childcare owners to help you find those owners who are thinking of selling but are not listed for sale; 2) be experienced in valuing childcare businesses; and 3) be experienced in helping buyers conduct a comprehensive due diligence exam. A good one will also be able to suggest tax planning ideas that a buyer’s CPA can put into place.

CPAs are good for some due diligence, but, there are aspects of running a childcare business that a CPA not knowledgeable of childcare business will not know and therefore will not be effective in due diligence.

4. Devoting a considerable amount of time and efforts to find and buy a center, but not buying one because: A) The buyer can’t find a good center to buy at a fair price because of a poor acquisition search process; B) The buyer doesn’t realize that a fairly price center really is fairly priced and therefore, the buyer doesn’t buy; and C) The buyer spends too much time and efforts evaluating the wrong potential acquisitions targets that should have been more quickly rejected because they are substantially overpriced, or there is little likelihood of the seller accepting a fair offer. Too much time spent evaluating the wrong centers can prevent a buyer from having the time to buy a good center.

Some buyers spend over a month to examine a center, and contemplate if the seller’s asking price is a fair price. After the month, they come to me and ask for a valuation so they can make an offer. At times, the difference between a fair valuation and the seller’s asking price is so great, that the buyer realizes that the last month would have been better spent searching for other centers to buy.

D) Not maintaining the momentum of a deal once it is apparent that both the buyer and seller are both interested in a deal. Acquisitions are not easy, and many potential transactions “crater” several times before closing. (Mistake #4 is why most of the buyers who try to buy a center and don’t buy one, fail to buy.)

3. Not Doing Tax Planning BEFORE Buying. Unfortunately, most CPAs are good in tax PREPARATION, but not planning. Tax planning at the time of acquisition includes: 1) deal structure, 2) allocation of the purchase price, and 3) entity structure. I have talked to over 50 childcare center owners at the time they were selling their centers who would each have to pay an extra $50k to $150k in taxes in the year they sold their centers just because they did not do proper tax planning before they acquired their centers.

2. Trying to get a SBA loan with the wrong lender, or getting a SBA loan at a HIGHER interest rate than the interest rate that another lender would have offered. There are about 6k SBA lenders. Each lender is different in terms of: 1) what loan amounts they like to lend, 2) what industries they like and dislike to lend to, 3) what interest rates that like to lend at, 4) what collateral requirements they require, and 5) what experience, credit score, and liquidity after a business is acquired they want the buyer to have.

Unless a buyer knows which SBA lenders have made many loans to childcare centers at low interest rates, and are therefore the best lenders to initially contact to get financing, a buyer can waste a considerable amounts of time with the wrong lender only for the loan request to be rejected; or the buyer is forced to accept an unfavorable loan offer because if the buyer doesn’t accept it, the buyer will need to find a new lender, and therefore the transaction closing date will be delayed, and consequently, the buyer may lose the deal as the seller may sell to someone else.

(Buyers should use a Loan Broker who specializes in the childcare industry to introduce them the best lenders at the earliest possible time to prevent Mistake #2) The difference in monthly loan payment between a low and a high interest SBA loan can be as high as $1,400 for a $1 million loan. Finding the best lender is very important!

1. The single biggest mistake a buyer can make is not doing a complete due diligence investigation after an offer is accepted by both the seller and buyer, but, before the transaction closes a few months later. The purpose of due diligence is to confirm if the information that the seller provided to the buyer BEFORE the offer is accurate and identify any unknown negative issues not communicated by the seller. A detailed due diligence examination looks at bank statements, credit card statements, detailed General Ledger, ProCare records (or whatever system the seller uses), food program & DFCS reports, attendance records, payroll records, etc. These documents are compared to tax and financial reports to confirm the financial information.

Expense levels should also be compared to benchmark data for similar sized centers to identify expenses that appear to be unreasonable low (and therefor may not be accurate). Due diligence also should review over a dozen non-financial items.

The worst thing is for a buyer to get a nasty surprise AFTER she/he has bought a center and only post-acquisition discovering the negative issues. (Examples: Full time equivalent enrollment is much lower than what the seller told the buyer. One member of the owner’s family works as a teacher in the center without pay. A buyer will have to replace that family member with a paid teacher.) The goal of due diligence is to identify negative issues (or the absent of) so that the buyer can either confirm that their accepted offer price is a fair offer, or reconsider their offer price and either renegotiate the price down, or cancel the acquisition.

Get Started with Business Acquisition Consulting and/or Loan Broker services. Contact Jay Whitney 770-410-7582

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