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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
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|
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.
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|
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.
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|
|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%|
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!
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?
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
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.
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
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
Many deals do not happen even after there is an agreement as to the price, so it is important to anticipate potential deal breakers and prevent them from occurring. Examples include: Continue reading
The right business broker can be very valuable to a childcare center owner in many ways. When selecting a Business Broker, childcare center owners should consider if the broker has the experience, services, and the right philosophy to meet their needs. Some questions to ask, and why they are important: Continue reading
I have heard off-the-cuff opinions such as:
- Only when you get the highest Price.
- I will not sell unless I get all cash.
- Do not sell unless you know what you want to do next.
- Everything is for sale… for the right price.
- If it is a good business that makes money, then don’t sell.
The above answers just address the price and terms…but there is much more in a childcare business owner’s decision to sell. Continue reading
If you decide to not sell your childcare center now and instead decide to exit your business later…
Remember that A bird in the hand is worth two in the bush. So, … in other words, a buyer will value any changes that you make that better your business instead of giving the potential buyers the “opportunity to better the business”.
Increase Prices. The opportunity for a buyer to increase prices to the level charged by other competitors is not worth as much as if you successfully increase prices. The reason day care centers charge less then competitors is because with an increase, there is a real risk that the decrease in enrollment
Reduce Labor. Once the children in a room gets to the level for one teacher to leave, have that teacher leave. Do not have them on the clock for another 30 minutes. This can cut labor expenses.
Space Allocation. Once successful childcare operator I know evaluated the capacity of each room and the space allocation of each. He determined that each Georgia PreK program contributed about $20,000 each year to cover overhead expenses. He was to able to inexpensively reconfigure his space to fit one more Georgia PK into his facility without effecting the effective capacity of the other rooms.
Playground. If putting down wood chips costs $1,000 per year, and can increase enrollment by one child, it is worth it.
Improve the Center’s Initial Impression. Some of the items that create a negative first impression by a buyer are: the ceiling and walls are covered by old tape used to put up children art, paint rooms, and center has a lingering diaper smell. This could involve inexpensive things.
Financial record is poor conditions. Clean financial statements. You may have expensed your “vacations” and your meals because your CPA told you that you could if you did a certain minimal amount of business
Increase the ability of a buyer to get a loan to buy your business. The last two years of Income tax returns are the most important to a bank To provide the most loan, banks will want to see at least two years of good
All of these action items are done with successful childcare centers where the Owner is very involved in the business.