What is a Childcare Center Business Valuation?
Valuating a childcare center business is a process where current elements of the business are analyzed to determine a value range for the business. This will be an informed opinion of what the childcare business is worth in the market. The two main factors considered to determine a valuation are: the expected profitability of the childcare business and the risk that expectations won’t be reached. If a potential buyer has another alternative investment where, with the same risk, she can get more profits, she will take it.
Sometimes, when a childcare center owner is informed about her center’s business value, her immediate response is: “for me, it’s worth more”.
For the founder and owner of a childcare center who has devoted many years of her life to the center, the business owner often has an inflated expectations about its value due to emotional variables.
Therefore, if you are a seller, put yourself in the shoes of the buyer. Buyers will think to themselves: “If I pay all this for the childcare business, how am I going to earn money?”
Value And Price
Although a childcare center’s valuation is usually a good estimate, it is an opinion, where the final price will be reality! In sales negotiations, there are different values depending on the interests of the potential buyers and according to how well a particular childcare center fits into their needs.
When neither the buyer, nor the seller, is familiar with how childcare center businesses are valued, the parties can decide to base the price on a valuation by an experienced 3rd party.
The Usefulness Of A Valuation Report
Childcare business valuations are not based on an exact science. Nevertheless, if an owner want to sell her/his childcare center, it is fundamental to complete a rigorous valuation that will prepare the seller for a good negotiations with potential buyers.
- To state the intrinsic or logical value of a childcare business. There is a logical value range for the business and an estimation of the most likely valuation. This tells the seller how much the business is worth and how much the buyer should be asked to pay in order to receive reasonable value.
- To get an insight into the variables that create value, and how the improvement or worsening of those variables can effect value.
- To prepare a favorable negotiation. The valuation helps maximize prices as it lets the seller prepare logical and numerical arguments based on facts and preparation.
- To determine profit improvements that are reasonable and through these calculations, know how much more the childcare business is worth for the buyer.
Potential buyers should also also complete a rigorous valuation to get an insight into the variables that create value, so to prevent overpaying for a childcare business.
Reasons Why a Childcare Business Should Be Valued By a Professional Who Specializes In Childcare Centers:
Mistakes Childcare Center Owners Often Make When Valuing Their Centers:
- A childcare center’s CPA may have told the center owner that the business is worth this much and not to sell for anything less. (However, most CPA’s have never sold a childcare center before so they don’t know the marketplace.)
- A childcare center’s owner may have heard that a similar childcare center down the street or across town sold for a specific amount, and the owner know that their center is much better than that one, therefore, the owner wants a much better price than that one. (However, the childcare owner may not know the revenue, profits, conditions of financial records, or other factors that can determine valuation.)
- A Seller wants what they paid for the center when they bought it. (However, just maybe the Owner overpaid for a center, or didn’t do proper due diligence, or maybe the sales or profits have dropped.)
- Maybe the seller started the childcare center from scratch and has invested so much into it (both money and sweat equity), and wants it back. Often this “sweat equity” causes an owner to reject good offers and not sell a childcare center until the owner HAS to sell. (Childcare centers owners who wait until they HAVE to sell often get a lower price than owners who don’t have to sell.)
- Every seller has a “Right Price”. This is the price that if a buyer offered this amount, the owner would not hesitate to sell. It is often a dream price because often if a buyer did buy a center for the “Right Price”, the debt service to the buyer would be so high that the buyer would be losing money.
A business owner could want to know what her childcare business is worth because she has received an offer to buy the business; because she wants to know what offer price to give to a potential buyer(s), because the business owner wants a change in her life; because of a partnership dispute/pending divorce/prenuptial agreement; or it could simply mean the owner is planning her retirement.
- Non-economic factors, such as personal reasons, can influence the results of a valuation for the seller and buyer.
- Sometimes, a seller might want to sell her center as speedily as possible because she is ill and doesn’t want to leave it to her spouse with problems. Selling quickly will be more important than price in this case. In other cases, the buyer may see some very significant ways to improve profits that the seller does not recognize, or realize are as likely to happen as the buyer see things.
- Childcare Brokers have talked to a potential seller who told me that the price of her center was “X Million Dollars”. When asked why, I was told that she felt she needed “X Million Dollars” to retire. As a result, I had to decline the engagement because the actual value was lower. When a valuation is used to negotiate a transaction, the valuation needs to be numerical, logical, and properly worked.
It is very likely that a childcare business sale will not be successful if the emotional factors dominate.
Mistakes Childcare Center Buyers Often Make In Valuations:
- If the Seller’s asking price is too high (this is often because the seller doesn’t know how to value a business, or because the listing broker got the listing by promising to the seller a higher price than the business is worth.) – A buyer doesn’t want to be in a position that only after the acquisition happens does the Buyer discover that she/he overpaid! Any offer should be at a discount from the asking price, or the buyer should not buy the business.
- If the Seller’s asking price is reasonable or low – Sometimes, because Buyers expect to negotiate, a Buyer may offer a substantial discount from the asking price, and therefore without knowing what a fair price is, lose out on buying a good business for a great price.
- The potential buyer may know of a childcare center owner who is thinking of selling her center, but it is not listed for sale, and the owner doesn’t want to give an “asking price”. Instead, the seller wants the buyer to make an offer. Buyers in this position could overpay, or offer too little and, in essence, insult the business owner, who therefore, refuses to sell the center to that one potential buyer.
- As a condition to obtaining a Small Business Administration (SBA) loan, a lender will also require a valuation. Most potential buyers would prefer to not be two months info the process of buying a childcare center when they discover that the SBA valuation is substantially below their offer price and that lender will 1) not make the loan, 2) require a much higher equity down payment from the buyer, or 3) increase the interest rate because there is not as much collateral as previously thought. This can be a waste of two months of both the buyer’s and seller’s time.
The object of the valuation information on the Childcare Broker website (Webpages: Calculating Cash Flow Of A Childcare Business – (Appraiser vs. Lender vs. Buyer), Determining a Reasonable Valuation Earnings Multiple For a Childcare Business, Does A Valuation Make Sense For A Typical Buyer Of A Childcare Center Business?, Childcare Business Valuation and Deal Structure, and Business Valuation For Underperforming Childcare Centers) is to help you understand the value of a Childcare Center Business through the experience of Childcare Brokers. If you are a potential childcare center buyer or seller, and would like help to value a childcare center(s), please contact Childcare Brokers.