Is Your Childcare Center Not Making As Much Money As It Should? Or, Is It Losing Money?
We know the childcare industry, and have provided profit improvement consulting to many childcare centers that identified profit improvements of $20k to $30k, and up to $100k. By improving the profits of a childcare center, we are also increasing its value. For example, a $100,000 increase in value could be the result of increasing profits by $30,000 to $40,000. A $300,000, or more, increase in value could be the result of increasing profits by $100,000.
There are two main areas to improve profits:
- Labor expense – The childcare industry’s average labor expense, for a childcare center with an owner-operator, is 35% to 50% of revenue. We have seen childcare centers’ labor expense at 60% to 70% of revenue.
- Increase Revenue – Increases in revenue can occur through: increase students enrolling, decrease students dropping out, increase weekly tuition prices, increase government funding, …
We exam all cost areas, but, these are the primary drivers that determine a childcare center’s profit or loss.
Typical uses are as follows:
- Childcare owners who want to increase profits – The increased profits may also allow the owner to secure refinancing at a lower interest rate (to save more money) and/or increase the value of the childcare center
- Childcare owners who want to present “Profit improvement” opportunities to potential business buyers as a way to negotiate a higher price.
- Childcare Center Business buyers who want to identify potential “Profit Improvements” in a center that are thinking of buying. These potential profit improvements could help the buyer decide to buy a particular center because of the opportunity, or secure a lower interest rate on an Acquisition Loan
Information on the Center needed for the Basic Consulting to Increase Profits service:
- Ideally, a monthly Income Statement (the format ideally should be 13 columns across the top of the page – one for each month and a total) for the last year and YTD – If Monthly financials are not available, then Quarterly or Yearly income statements.
- Income Tax Return – The last year or two.
- A completed Childcare Broker Business Value Form.
If we don’t provide you childcare business profit improvement recommendations that will likely income profits by over $1,499, we will refund the $1,499 purchase price for the Basic Profit Improvements consulting.
Detailed Profit Consulting service
Our childcare center Detailed Profit Consulting service involves two steps:
From a detailed high-level business owner’s point of view, we review a childcare business so that we can understand the problem areas that are holding down profits in the center, and recommend solutions.
- Detailed analysis of financials statements and other financial information – To identify cost areas for the childcare center that are higher than norms in the childcare industry.
- Review of enrollment and staffing to identify areas where there are opportunities to reduce labor costs.
- Evaluation of competitors, marketing, and the local area – To recommend changes to marketing or rates. We have seen what marketing works and what does not work in many childcare centers.
- Review of your use of Tax Credits when hiring staff – For, about 20% to 25% of the staff in a typical childcare center, when a childcare center hires those staff members, the childcare center can receive a federal tax credit of $2,400 per qualified employee hired.
- Review of your use of other tax credits. For example, in Georgia, a childcare center with a capacity of approximately 200 kids can typically get $30k to $40k from tax credits that help parents who may not be able to completely afford your private pay tuition rates and want a little help.
- Refinancing your loan – If your loan is a variable rate loan, we can help get you a lower variable interest rate, or, a fixed interest rate when interest rates are expected to increase. For each $1 million of outstanding loan, if we can help you refinance the loan, we can typically save you $75k to $300k over the life of the loan, or reduce your monthly loan payments by $1,000 to $2,500.
The second phase of the profit consulting is the operational or director’s level point of view profit consulting. We have sold many successful childcare centers. We send a former childcare owner into the client’s center for a week to observe the operations of the childcare center and make recommendations. This includes the areas of:
- Staffing levels on an hourly basis – and it relationship to kids present in the center on an hourly basis.
- Handling prospective parent’s phone calls, parent tours, and follow-ups – If the contact management with prospect parents needs improvements, we can make recommendations in this area to increase enrollment.
- Management Control Systems & Procedures – To improve the daily and weekly reporting to the owner.
- Any other area that could cause profits to increase.
By having a successful former childcare owner preform this consulting, the director and owner will learn some differences in key areas as to how a successful childcare center manages staffing levels. We can work with the owner and the current director to put in the type of daily and weekly reporting system that quickly identifies problems affecting profits, so those problems can be addressed immediately and those problems do not reduce profits on a long-term basis.
We have examined hundreds of childcare centers and talked in depth with their owners. We can provide childcare industry knowledge on the business aspects of childcare centers to what is done, or not done, with successful childcare centers.
Our very detailed profit consulting report is 30+ pages. This report will provide insights, or a roadmap, as to what should be done to make the client’s childcare center profitable. To prepare our report, we will conduct our own research, as well as work with the center owner and the director to gather information, as well as contacting competitors (to gather competitive information on them).
Story of a Childcare Center:
The real estate cost $2 million when built a ten years ago. If the real estate were to be sold, it would have be sold for substantially less than the $2 million because the profits of the childcare business were so low that they did not support a $2 million price. The business had no value and would have to be included with the real estate when sold. I am familiar with childcare centers that cost $2.0 million when new, but, that sold for $1.4 m to $1.5 million because they were not very profitable. Potential buyers generally want the profits to support three things:
- The monthly debt service that the buyer will need to make on the loan that they will use to buy the center.
- An Internal Rate of Return (IRR) on the equity the buyer invests into the business.
- Compensation for the buyer’s hours that she/he will work in the business to replace the hours that the current owner works in the childcare center.
By increasing profits by $100,000, the profits were high enough so that the real estate can be sold for $2 million. Future additional profit improvements would cause an additional increase in the business value.
Total benefits: $700,000 so far. This is composed of operating with $100,000 higher profit for two years, plus a $500,000 increase in the value of the school.
After the completion of our two step profit consulting, Childcare Brokers will guarantee to identify profit improvements for the client that at least equal the fees paid to Childcare Brokers for identifying the profit improvements, or Childcare Brokers’ fee will be reduced to the amount of the identified profit improvements.