The owner of a Childcare Center will often sell her center by herself in two circumstances:
1. A buyer has approached you, the childcare center owner, about buying your center.
- I often talk to childcare center owners who have confided that they has been approached by someone wanting to buy their childcare center. Typically, the owner had been thinking (in the back of her mind) of selling her center, but the owner did not have the center “listed” for sale because she was afraid that people (employees, parents, competitors) would find out. The owner doesn’t want to lose an opportunity to sell, but, wants to approach the opportunity cautiously.
- It is estimated that 10% to 15% of all business owners get an unsolicited offer to buy their business each year. If the business owner is approaching retirement age, it will likely happen more often!
- If you, as the Childcare Center owner, are thinking of selling, but you don’t feel prepared to sell, it may still make sense to at least talk with a potential buyer as a way to come away with a better sense of what your business is worth, and use the process as a way to understand how you really feel about the prospect of a sale.
2. You are thinking of selling your center, and you know of one or several potential buyers.
- If you, as a childcare owner, think about it, the most obvious buyer for your center is someone who is in the childcare industry (ex. another center owner who you have heard is, or has been, interested in opening, or buying, another center), or one of your center’s parents who may have previously mentioned that they like to own a childcare business because they could both work in their own center, and have their children cared for in that same center. Other potential buyers that you may know of (that would not involve using a broker) could include: Your director, your family, (if you are a franchised school) referrals from the franchisor, and referrals from your CPA.
- If the potential buyer is another center owner, not only are they likely already qualified to buy your business, but you likely already know quite a bit about them. You can trust that they understand the ins and outs of the market because they are running a center similar to you.
- An advantage to selling your childcare business to someone you know is that it can free up a significant amount of your time during the sales process because the buyer understands the childcare business and/or your center.
- Since business broker fees for selling a business can often be as high as 10% of the sales price, it can make financial sense to directly contact those few buyers, without the aid of a commission based business broker, and get offers. Directly approaching, without the aid of a business broker, a few potential business buyers also happens fairly often with all types of businesses.
If someone approaches you with an interest in buying your center, or you want to approach a few potential buyers yourself (without the assistance of a business broker), do you know what to do? If you receive a fair and reasonable offer for your center, would you give it serious consideration? If so, below is the basic sales process to sell your childcare center yourself:
Key Documents When Selling a Childcare Center:
- Non-Disclosure Agreement: Protects confidential information.
- Letter of Intent Agreement: Key Terms of the transaction. This is a non-binding agreement.
- Purchase Agreement: Binding agreement prepared by attorneys.
- Closing Documents: Transfer ownership, transition/training between seller & buyer, may include other matters such as consulting agreement, lease, financing (promissory note).
Sales Process – Overview:
- Pre-First Date: Potential buyer signs a Confidentiality agreement. Is buyer financially qualified to buy?
- FIRST DATE STAGE: Limited information disclosed by seller – Is the buyer’s “ballpark valuation” close to (does not have to match) the seller’s valuation expectation based on providing just a limited amount of information necessary for the buyer to make a preliminary assessment?
- THE COURTING STAGE (Wine & Dine) – Seller provides more information in enough detail so to convince possible buyer that the buyer should buy the center, and so that the buyer can make an informed valuation and offer.
- LET’S GET ENGAGED – Buyer provides a Letter of Intent Agreement (LOI) and Negotiations occurs
- WE ARE NOW ENGAGED (Can’t date others)
- LOI signed
- Due Diligence – Buyer exams all aspects of the business in great detail. Seller had provided information to the buyer before the LOI Agreement. The due diligence period is where the buyer really gets to understand the business in abundant detail.
- Financing – Buyer secures financing
- As you know, the longer an engagement goes on without a wedding ceremony, the more likely THE DEAL CAN FAIL
- Purchase Agreement is prepared by attorneys and wording agreed upon. Signed by both buyer and seller.
- Landlord / franchisor approval (if there is a landlord or franchisor)
- Licensing – All childcare licensing forms are prepared by the buyer (usually with the assistance of a licensing consultant and/or Seller)
- THE WEDDING
- All other Closing Documents are prepared and finalized
- A cut-off date must be determined whereby all monies coming to the school belong to the Seller, and all monies after that date belong to the Buyer
- All the agreements are signed & seller is paid (or, the wedding could get postponed)
- The Sale Has Closed. What Now?
- Introduce the new buyer to the employees. Training & transition of new buyer. Assist, if needed, with government forms for transfer of ownership.
- For a short time, the Center will continue to receive revenue for services provided under the seller’s ownership. The Buyer promptly provides that money to the seller.
- For a short time, the Seller will continue to receive invoices applicable to the period of the seller’s ownership. The seller pays these invoices as they were purchased or rendered before the cut-off date.
- All utilities are transferred to the buyers.
Sales Process – Steps in Detail:
- CONFIDENTIALITY AGREEMENT – Everything must be kept confidential to just the buyer and center owner (and their financial/legal advisors)
- A Confidentiality agreement must be signed by the buyer. The seller should also have some reasonable assurance that the buyer is financially qualified to buy the center.
- When my clients look to me for advice, they want to know “How do you distinguish credible buyers from tire kickers?”. Understand why the potential buyer likes your business, and why they want to buy your center.
- If a center owner wants to approach just a few potential buyer(s), it is best for the owner herself to not approach the buyer(s), instead it is best to use a consultant to contact the buyer with a confidential agreement. This is to prevent the potential buyer from knowing the center’s identity before the confidentiality agreement is signed. The consultant should be paid on an hourly basis, and not as a percent of the sales price as a commission. (You don’t want to incentive a consultant to recommend you sell your childcare center, if really it would be in your best interest to not sell, or not sell to a particular buyer.)
- If a potential buyer approaches the center owner, the buyer should provide a confidentiality agreement to the owner before any confidential information is shared by the seller.
- FIRST DATE STAGE: The goal of this stage is to determine the buyer’s value expectations before progressing any further. The seller should just provide to the buyer limited information necessary for the buyer to make a preliminary assessment. By the end of this stage, the buyer should provide a “ballpark valuation”, provide information on how the price will be determined, or typical valuation methodologies the buyer will use. This stage is not a negotiating stage because not enough information has been released to the buyer for the buyer to provide a definite valuation.
- In this stage, the seller should also find out more about the buyer, because you will want to leave your childcare center in good hands.
- If the buyer’s “ballpark valuation” is less than your expectation, there is no reason to continue the discussions. Of course, often a seller’s value expectation will never be reached by any buyer because the seller does not know how childcare centers are valued, and the seller’s expected value is too high. If this is the case, consult a valuation professional.
- If the buyer does not give a clear answer as to their “ballpark valuation”, it could be because they are not a serious buyer, they don’t know how to value a center, or their intentions aren’t true. (ex. They may want to just get competitive information about your business.)
- The process of selling and buying a childcare center can take many hours, and it does not make sense to continue the process if the both the buyer’s and seller’s valuations are not reasonable close. Valuations being reasonable close is all that important at this point because the buyer will not have gotten the detailed information necessary to determine a more precise valuation and offer price.
- Should the seller have an asking price? (That is told to the buyer.)
- When the center owner is approaching potential buyers directly (or preferable, though a consultant), the seller should have prior to a contact with a buyer, determined the center’s valuation and the asking price. This is because most buyers do not know how to value a center, and without an initial asking price, most buyers will not know what to offer, and therefore, often no offer is every made.
- When a potential buyer is directly contacting a center owner:
- Experienced buyers will know how to value a childcare center, and it is up to the buyer to provide a valuation and offer price. A seller doesn’t need to give an asking price, instead the seller just responds the buyer’s offer.
- Inexperienced buyers do not know how to value a childcare center, so therefore, the seller will need to give an initial asking price.
- A major reason why many childcare center owners fail to sell their centers (even though they want to sell) is because their asking price is not close to be rational and the buyer dismisses the opportunity. If the seller does give an asking price, consult a valuation professional before you give it to the buyer.
- THE COURTING STAGE: More detailed financial information and information on the business is shared.
- Both information that enhances the center value and negative information is shared. The information shared must be detailed enough for the buyer to make a good offer. This includes financial information for the last three years and YTD financials.
- It is always best to share the negative information at this stage because when a buyer finds out, for the first time, significant negative information during the due diligence phase, a buyer will always pull-out of the deal, or reduce the offer price. Since both the seller’s and buyer’s time is valuable, it is best to disclose negative information early in the process.
- LETS GET ENGAGED: The buyer provides a valuation and, if the buyer wants to make an offer, the buyer provides a non-binding Letter Of Intent (LOI) containing key deal points. It is non-binding because this agreement is just to see if the buyer and seller are in agreement as to the business terms of the deal. A signed LOI is a sign that the buyer and seller are committed to making a deal happen. Legal terms of the transaction will have to be worked out latter by attorneys.
- WE ARE NOW ENGAGED:
- Due Diligence – Assuming the buyer and seller are in agreement as to a price and terms, in this stage, the buyer does a complete due diligence investigation of the center and the business. Note that confidentiality is maintained and neither the center’s employees, nor anyone, else should know that the center’s owner is even thinking of selling.
While opportunities to sell your childcare center without a business broker happen fairly frequently, it’s difficult to say whether taking that first meeting with an interested party will result in the sale of your childcare center. But, by following the above steps, if is in your best interest to sell to a buyer when you are in the driver’s seat, a deal is more likely to happen.
- If you, the owner of a Childcare Center, is considering selling your center by yourself, contact Childcare Brokers to help you through the process. We can provide hourly consulting to you to help you prevent mistakes (valuation, selling your center when you really should not sell, selling your center to a particular buyer when you really should not, …). Click the “Add to Cart” button and then go to the Checkout at the bottom of this page to enter the number of hours before submitting your payment. Before submitting your payment, you can also go to the Request a Childcare Valuation page to select the type of valuation you would like.
Contact us if you have any questions on the process of selling your childcare center by yourself. JayWhitney@ChildcareBrokers.com 770-410-7582