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.
  • 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.

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