How Business Value Defines the Child Care Business Owner’s Retirement

For some childcare business owners, their business is more than a source of income; it is often a mission and lifelong project, a source of personal identity, and, most critically, the primary engine fueling their retirement. However, research indicates a disconnect between the perceived value of these businesses and their owners’ actual financial readiness. With up to 80% of a business owner’s net worth tied directly to their childcare business, this is especially true if they also own the associated real estate, building, and land. Business operations are not static, and neither are business and real estate values. The value of these assets often determines how secure their retirement will be. And how long they might have to work – some may need to work into their 70s or 80s.

The reality of retirement preparation among all small business owners, including childcare business owners, is sobering. A survey of American business owners found that 75% of respondents have saved less than $100,000 for retirement. Even among those nearing retirement age, 68% still have less than $100,000 set aside. This lack of personal savings outside the business creates major dependence on the ultimate sale or transition of the business to provide cash savings for retirement.

This dependency often rests on an optimistic view that the business will continue operating for many years. However, anyone who has been in childcare for very long knows how quickly things can go from great to declining. Area elementary schools opening new PreK classrooms can mean losing several four-year-olds (and even three-year-olds). This can leave the business with overnight losses in tuition revenue and profits. Any childcare owner who survived a recession has seen firsthand how quickly things can change.

Many childcare business owners today are in their 60s or older and have yet to see their enrollment and business performance return to pre–COVID levels. They find themselves at retirement age and unprepared to make the dramatic adjustments needed to revive the business, forcing them to reconsider their retirement timeline. Their story illustrates that fluctuating profitability and market timing can suddenly diminish the funds available to support a retirement lifestyle.

To consider a business as a retirement asset, a childcare owner must first understand how value is determined. Relying on a “gut feeling” or a rough guess based on gross revenues or “rules of thumb” is dangerous; a professional business valuation is essential for informed planning. There are three primary methods used to analyze and value a business:

1. The Income Approach: This method estimates value based on the business’s ability to generate future income, then a multiple is applied to the Seller’s Discretionary Earnings (SDE – for owner-operated childcare businesses) or Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA – for childcare businesses with a Director in place that manages the business).
2. The Market Approach: This compares the childcare business to similar childcare businesses that have recently been sold and adjusts differences to arrive at a value.
3. The Asset-Based Approach: This focuses on the net value of tangible and intangible assets minus liabilities.

Several factors can increase or subtract from the estimated value. Consistent financial performance and growth potential are the most important drivers, as potential buyers scrutinize revenue, profitability, and cash flow trends. However, operational efficiency and whether a management team is in place or the business is reliant on the owner are equally important. A business that relies too heavily on the childcare owner’s personal involvement is often worth less to a buyer because the owner’s knowledge and relationships with employees and parents leave when the owner retires. In fact, 31% of business owners cite overdependence on their own leadership as a primary barrier to successful exit and succession planning.

The cost of a “retirement shortfall” can be very high. The financial stakes of a successful business sale are best illustrated by the “math” of retirement spending. If an owner retires at age 65 and requires $50,000 in after-tax annual income, a savings pool of $500,000 will likely be depleted in just 12 years (by age 76). To maintain the same income until age 90, the owner would need nearly $1.1 million in initial savings.

Since most owners draw less than $50,000 annually for personal expenses and save $25,000 or less per year toward retirement, the “gap” between their current savings and the required $1.1 million must come from the childcare business’s value. If the business cannot be sold or if the sale price is insufficient, owners often report they will have to delay retirement (22%) or accept a significantly lower standard of living.

Financial advisors recommend against having “all your eggs in one basket” and advise diversifying retirement assets outside the business. Several options are designed for business owners and provide both diversification and tax advantages.

• SEP-IRA (Simplified Employee Pension): A popular option for sole proprietors and businesses with few employees. It allows contributions of up to 25% of an employee’s wages (or roughly 20% of net profit for the self-employed), with much higher contribution limits than those of traditional IRAs. These work well for small and medium-sized childcare businesses with few employees.

• SIMPLE IRA: Ideal for businesses with 100 or fewer employees, this plan is inexpensive to operate and requires employers to provide either a 3% matching contribution or a 2% non-elective contribution.
• Solo 401(k): Designed for business owners with no full-time employees other than a spouse, this plan offers the highest contribution flexibility, including both “employer” profit-sharing and “employee” salary deferral components. For 2026, total annual contributions can reach $72,000, plus catch-up contributions for those over 50. This is a great option for the owner of a small family day center with no employees.
• Cash Balance Plans: These are “hybrid” defined benefit plans that allow for significantly higher contribution limits than 401(k)s, sometimes exceeding $200,000 annually for participants over age 60. Combining a cash balance plan with a Solo 401(k) can allow high-earning owners to shelter large amounts of income while lowering their tax liability.

Despite these options, nearly half (49%) of business owners have not diversified their retirement income and resources outside of their business’s value.

Having worked with childcare business owners for decades to develop and implement Exit and Succession Plans, we’ve often seen owners unprepared for retirement. At ChildCareOwner, as part of our Exit Planning Services, we encourage our childcare owner clients to work with a CPA or tax advisor and a personal financial planner to review their diversification options and implement the ones that best meet their needs. Because most business owners delay planning their Exit, we see some having to keep working in their childcare business for several years longer than they would like, to allow more time to prepare for and fund retirement.

It is never too soon to start planning your exit!