Increase the Valuation of a Childcare Center

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.

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.

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.

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 a childcare center is “for sale”, the greater its perceived problems from potential buyers

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.

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 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

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.

For larger chains of childcare centers, the following show the progression in financials that add value:

• 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.

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.