Business valuation of day care centers
Key industry stats
Classified under SIC 8351, there are slightly under 149,000 day care centers operating in the US alone. The industry as a whole generates over $19.9B in annual revenues.
Despite the growing presence of large chains, the average day care center is small – producing some $100,000 in annual sales with about 7 employees. These businesses are labor intensive – to produce some $3,000,000 in annual revenues, a typical day care center employs 50 – 100 staffers.
Day care centers employing fewer than 25 staff are responsible for $9.7B in revenues – over 49% of the industry total. While the industry is quite fragmented, the entry costs tend to be high due to considerable investments in the facilities required.
Top 7 factors affecting the value of daycare businesses
Day care centers which command the highest valuations tend to exhibit the following traits:
- Size makes a difference. The most valuable day care centers have a licensed capacity of over 100.
- Attractive location – both the interior and grounds.
- Rent expense within 10% of business gross revenues.
- Long-term, skilled staff.
- High levels of historic and current enrollment.
- Percentage of business revenues covered by state subsidies.
- Relatively high proportion of educational programs offered.
Business valuation methods for day care centers
As with any small business, you can determine the value of a daycare center using a number of business valuation methods.
Day care centers are frequent business acquisition targets. You can use existing business sale comps to get a good idea of what a day care center is worth. The most commonly used valuation multiples, or ratios that relate the business’s value to its financial performance, are:
- Business sale price to gross revenues plus inventory.
- Business sale price to seller’s discretionary cash flow plus inventory.
- Business sale price to EBITDA. Inventory is added separately.
The valuation multiples based on the business gross revenues offer you the most accurate estimates of business value in this industry. We study the differences between the different multiples to determine the pricing trends for businesses over time.
What you can do with valuation multiples
You can use the valuation multiples derived from comparable day care business sales to value your own company. Apply valuation multiples to business financial performance factors for accurate, defensible business appraisal.
What our analysis shows is that for privately owned day care centers using the gross annual revenue as the basis, you get the business value estimates with the least spread between the low and high values. In contrast, the business value estimates based on the discretionary cash flow show spreads almost twice as large.
Since these valuation multiples are derived from actual business sales, this means that business buyers and sellers tend to rely on the business price to gross revenue valuation multiples when pricing day care center business sales.
Valuation multiples, business sale price and terms
As a rule, valuation multiples do not account for the way a business sale is financed. That is one reason there is a spread between the low and high values. Seller financed deals tend to price higher than all-cash business sales.
An average day center business purchase includes seller financing for about 30% of the contract purchase price. Typical seller notes have a term of 5 – 7 years with an average of 8% annual interest, fully amortized. You can expect a business sale price that is 20 – 25% higher with such financing compared to an all-cash transaction.
Valuing a day care center business based on its income
Small day care centers are typically owner-operator managed. A well-run business in this industry tends to have rather steady income levels. For such businesses, the Multiple of Discretionary Earnings business valuation method is a great choice.
You can calculate what your business is worth based on its earnings and a set of key financial and operational performance factors. In addition to calculating the current business value, you can use this well-known method to plan a number of changes that can increase your business worth.
Business goodwill valuation for established day care centers
Well-established day care centers develop considerable business goodwill. You can calculate the value of business goodwill using the Capitalized Excess Earnings method.
This is very useful if you plan to buy or sell a day care center and need to allocate the business purchase price among its assets in a tax-advantaged way.