By Jay Whitney.
Selling a childcare center business is often a confusing and difficult process, and most business owners only do it once in a lifetime. Very few go through the process enough to really become comfortable with the ins and outs of selling a center successfully.
A childcare center is a special use property and the best use for the real estate is as a childcare business. Potential buyers need to completely understand of the business before they buy the center. Very few brokers understand the childcare business enough so to increase the likelihood that a center will sell, and to potentially increase the value of the center.
I, Jay Whitney, provide Business Sales Consulting and Loan Broker services to childcare center sellers. I have helped people sell and buy over 100 childcare centers. Here is my list of the top ten major mistakes that childcare business owners should avoid when it’s time to take an exit.
10. Not planning for sale. Planning for a sale, and taking actions on those plans, over the 2 to 3 years before an expected sale can often increase the sales price and after-tax proceeds of a sale by a VERY significant amount. Often, just spending a few months to improve the center before starting the marketing process can increase the value of a center.
9. Not selling when you are burnt out and it is unlikely that you will regain the right motivation to better your business. I have seen too many business owners who have rejected good offers only to see their business values decrease over the next few years.
8. Selling when you are burnt out, but, you believe that you can regain the right motivation to improve the valuation of your business. I have seen many business owners sell only to have a buyer who is motivated to improve the business do exactly that …. and double profits within a few years.
7. Using a broker with a high broker commission to FIND buyers. 80% of all operating childcare center sales are NOT through a broker. Contacting existing childcare owners confidentially through a Business Sales Consultant (paid hourly) will save the seller 75% to 90% of typically high broker commissions. Using a consultant who understands the childcare center industry is far more effective than using a broker who is not experienced with the childcare industry to attract buyers because the consultant understand exactly what buyers are looking for when thinking of buying a center.
6. Not knowing the business value of the center. Too many business owners believe that their centers are worth far more than the price any buyer would reasonably pay. Therefore, when they get a great offer, they don’t sell. (See mistake #9).
5. Only advertising the “childcare center for sale” to the potential buyers who are currently ACTIVELY looking to buy a center instead of ALL the potential buyers. (Many existing childcare center owners want to buy an additional center, but, they are too busy managing their center to be always ACTIVELY searching for a center to buy. Childcare center owners (who are not direct competitors) should always be contacted.)
4. Not having a “Confidential Selling Document” that covers, in detail, all the reasons why the center is valuable to buyers and how a buyer can improve the center. Each buyer needs to know that all other potential buyers are aware of all the opportunities to improve the center or else each buyer’s offer will likely only consider the center’s historical profits and not the opportunities to increase profits.
3. Not Being Prepared for Due Diligence – Every business acquisition process includes a due diligence phase where the acquirer examines all the documents and details to make sure that they are getting what they are paying for with no nasty surprises. All sellers should prepare for this by conducting a pre-due diligence review to identify and correct (or explain in the Selling Documents) any potential “nasty surprises” before the buyer finds them.
The goal of a buyer’s due diligence exam is to confirm if the information that the seller provided to the buyer BEFORE the offer is accurate and identify any unknown negative issues not communicated by the seller. A detailed due diligence examination looks at bank statements, credit card statements, detailed General Ledger, ProCare records (or whatever system the seller uses), food program & DFCS reports, attendance records, payroll records, etc. These documents are compared to tax and financial reports to confirm the financial information.
The worst thing for a seller is that buyer’s due diligence exam identifies negative issues that cause the buyer to reconsider their offer price and either renegotiate the price down, or cancel the acquisition. This can waste lots of the seller’s time as the sales process has to start back from scratch.
2. Not getting the center pre-qualified for a SBA loan, or getting it pre-qualified with the wrong lender BEFORE you approach potential buyers. The difference in monthly loan payment between a low and a high interest SBA loan can be as high as $1,400 for a $1 million loan. When a buyer expects a lower monthly loan payment when the price is being negotiated (because it was prequalified for financing), a buyer is more willing to offer more for the center.
There are about 6k SBA lenders. Each lender is different in terms of: 1) what loan amounts they like to lend, 2) what industries they like and dislike to lend to, 3) what interest rates that like to lend at, 4) what collateral requirements they require, and 5) what experience, credit score, and liquidity after a business is acquired they want the buyer to have. Most buyers do not know which SBA lenders have made many loans to childcare centers at low interest rates, and are therefore are the best lenders to initially contact to get financing. Therefore, many buyers can waste a considerable amounts of time with the wrong lender only for the loan request to be rejected; or the buyer get unfavorable loan terms (and tries to renegotiate to lower the price and/or increase the amount of seller financing). A buyer could also try to find a new lender (therefore the transaction closing date will be delayed).
(Seller should use a Loan Broker who specializes in the childcare industry to pre-qualify the center to the best lenders early in the selling process to prevent Mistake #2)
1. The single biggest mistake a business owner can make is accepting an offer that seems fair or even really attractive without the proper preparation. When you accept an offer and establish exclusivity with a single potential buyer and begin to iron out the details, you are stuck and you have little leverage in the negotiations that occurs between the initial acceptance of an offer and the transaction closing a few months later. The good offer that you start with never goes up, but it can easily go down as the process unfolds. You may be watching the price grow smaller because of the buyer’s due diligence investigation. (See mistakes #3 & #4)
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