Selling a Child Care Business - 30 Years of Lessons

In 2025, I celebrated 30 years of helping people build, buy, grow, and sell childcare businesses. It is hard to believe that 30 years have passed. I can still recall starting my business brokerage and consulting company and selling the first child care business. I was speaking with a child care owner the other day, and he said, “I bet you have seen a lot and learned many things about improving, valuing, and selling child care businesses in the last 30 years.” Yes, I have learned many things, and I thought I would share some of the most important lessons I have learned over the years.In 2025, I celebrated 30 years of helping people build, buy, grow, and sell childcare businesses. It is hard to believe that 30 years have passed. can still recall starting my business brokerage and consulting company and selling the first child care business. I was speaking with a child care owner the other day, and he said, “I bet you have seen a lot and learned many things about improving, valuing, and selling child care businesses in the last 30 years.” Yes, I have learned many things, and I thought I would share 30 of the most important lessons I have learned over the years.

Before You Go to Market

Selling often takes longer than expected

Many childcare owners mistakenly compare selling their childcare business to selling a home. Having sold their last home in three or four months, they believe the sale of their childcare business will be relatively quick. When I started 30 years ago, the average time to sell a business was nine to twelve months. Due to various factors, including fewer qualified buyers, a lack of financing, and increased regulations in the child care industry, among others, the average time to sell a child care business is typically one to two years. Do some sell faster? Yes. However, on average, you should plan on a one- to two-year marketing timeframe.

Of course, you can “give” your child care business away pretty quickly. “Looking for a steal – bargain hunting child care business buyers searching for their next deal” can readily be found. Moreover, when they find a “burned-out” child care business owner, anxious to get out quickly, no matter the price, they know they will pay far less than the listed price.

Jokingly, I always tell childcare business owners to make sure they contact me about selling their business when they are just feeling a little uneasy around the edges. If they wait until they are completely “toast,” their burnout will lead to a lower sale price and frustration with the average time needed to market a childcare business and receive the highest price.

So, plan ahead – take your childcare business to market early enough to allow plenty of time for a qualified buyer willing to pay fair market value to be identified and a structured, business-preserving transfer to take place. And, should you get lucky and your childcare business sells quickly, well, that means you’ll get to start the next chapter of your life sooner – retirement, moving to the beach, or spending more time with family and friends.

Buyers do not pay for potential

Child care business owners often list all the changes a buyer could make to increase business profits. It is true that some child care buyers will buy your child care business for its potential, but they will not pay you for potential. The realization of potential in the childcare business requires hard work and often additional capital expenditures. A buyer is unlikely to pay you for this potential that they must then invest additional capital and exert considerable effort to achieve. If you think your child care business could increase potential profits by adding an after-school program or summer camp, you need to add the program if you expect to be paid for it. If you think your profits could be higher through better labor cost management. In that case, you need to implement measures to decrease your labor costs if you want a buyer to pay you a higher price because your labor costs are within normal operating ratios. Whatever the “potential item” might be, you need to have implemented it, and your financial records should reflect the savings or increased profits if you want the sales prices to reflect your child care business’s “true potential.”

Correct tuition creates profits

Profitability starts with setting profitable tuition rate I often find that a child care business is not profitable because the tuition rates are too low. It is not uncommon to find tuition rates hundreds of dollars less each month (across all age groups) than area market rates.

The owner has decided not to charge higher rates to help their parents afford childcare. Now, please don’t misunderstand what I’m about to say next and accuse me of being heartless. I understand the financial burden that child care costs can be for the average family. However, charging tuition rates that are too low results in two and sometimes three undesirable things;

Low or no profits, which puts the child care business and the owner in a constant financial struggle.
Low profits lead to limited business value.
And number three, low tuition rates often make it difficult to sell a child care business. No buyer wants to be the “bad guy” who buys a childcare business and substantially increases tuition rates, which causes lost enrollment and a poor reputation in the community.

As an owner, you should reevaluate the tuition rates you charge for each age group or classroom. (If you need help calculating your breakeven point and calculating tuition for profit, please give me a call. I am happy to help you.) And, as an owner, make sure you fully understand the impact of low tuition rates on your child care business’s financial health, program quality, and the compounding effect of low business value and the diminished ability to sell your child care business.

I wrote the first version of this lesson in the fall of 2021, about eighteen months into COVID. I said it was too soon to draw conclusions about the long-term impact on our industry, that experienced people I respected held very different opinions, and that — as we say in the South — we were not out of the woods yet.

I have left that in, because it was honest at the time, and because there is more value in showing you what I expected against what actually happened.

What I had right

The staffing problems were not temporary. Years later, centers are still running short, still opening rooms they cannot fully staff, still losing people they trained. Labor costs have gone one direction – up – ever since, and they have gone there faster than tuition. The behavior challenges we started seeing in young children did not fade – and they made a hard job harder for directors and teachers.

What I had wrong

I assumed enrollment would come back. Almost everyone did. Centers reopened, restrictions lifted, parents returned to work, and the reasonable expectation was that classrooms would refill.

For a great many programs, they never did.

And the reason has almost nothing to do with what we were all watching in 2021. Back then our attention was on operations — could we keep staff, could we stay open, could we afford the cleaning and the protective equipment? Those were the visible problems. But the thing that reshaped this industry was on the other side of the ledger.

Demand changed, and it changed permanently.

During the closures, families had to find another way. A grandparent stepped in. A neighbor took two more children. One parent cut back or stopped working. Those arrangements were supposed to be temporary, and a surprising number of them simply became how that family lives.

Then remote and hybrid work altered how many days of care a family actually needs, and how much they are willing to pay for days they do not use.

More public school systems moved into the space. First four-year-olds, and now in a growing number of districts, three-year-olds — taking the oldest and most profitable children out of private centers and leaving behind the infant and toddler rooms that cost the most to staff.

And underneath all of it, births have been running at historic lows. Fewer children are entering the pipeline every year, and that is not a policy you can reverse or a trend that turns quickly.

Today it is not unusual for me to look at centers operating well under half of licensed capacity — programs that were full in 2019 and are not close to full now.

What this means if you are thinking about selling

A buyer and a lender are not looking at your licensed capacity. They are looking at your enrollment, and more than that, at the direction it has been moving for the last three years. A center licensed for 150 running 80 children is valued on 80 children — and if that 80 was 110 two years ago, the trend is part of the conversation whether you raise it or not.

If I could go back and add one line to what I wrote in 2021, it would be this: a pandemic does not only change how you operate. It changes how many customers you have. And that change outlasts the emergency by a very long time.

Broker exclusively represents you

It is important to know “whom does the child care business broker represent” – you or the buyer?

The “laws of agency” – which party the broker represents vary for each state. Some states permit brokers to represent only one party, typically either the seller or the buyer. Other states allow dual agency, which allows the broker to represent both the seller and the buyer. To add to the confusion, other states allow the broker not to represent either the buyer or the seller – often referred to as transaction brokerage – they represent the deal, not the parties.

Selling a childcare business is a very complex process. To obtain the best price and transaction terms, it is essential that the business broker you hire specializes in selling childcare businesses and represents your interests exclusively.

What Your Business Is Worth

Sometimes more than owners think

Most of these lessons are cautionary. This one is not.

At least once a year, I sit down with an owner who has no idea what they have built.

A few years back, an older couple called me. They had operated their center for more than twenty years and were tired. They had decided to close the doors — turn off the lights, let the staff go, and let someone else lease the building. Their landlord, of all people, suggested they at least call somebody and find out whether the business itself could be sold first.

They had been receiving my newsletter for years. We had never spoken.

We went through the financials, and I gave them a value range that started at two million dollars. The husband almost hit the floor. His wife looked at me and said, “Donna, you do not have to tell us a big number to get this listing. You’ve got this listing. Just tell us what you really think you can get for it.” I told her that was what I really thought.

It sold for just over two million.

They were weeks away from closing a business worth more than they ever imagined.

This happens more than you would believe. Owners get so close to the daily work that they stop seeing the asset. They know their profit is decent. They do not know what a buyer will pay for the profit, a licensed and rated facility, a trained staff, and twenty years of community reputation.

The gap between what an owner thinks their business is worth and what it is actually worth runs in both directions. Sometimes it is bad news – not what they had dreamed or needed it to be worth. Sometimes it is the best news I get to deliver all year.

Before you close a child care business, find out what it is worth. It costs you very little to ask, and the answer occasionally changes everything.

Fair market value

When selling a childcare business, the goal is to obtain fair market value for both the business and the real estate (including the building and land) if the real estate is part of the transaction. The fair market value of a business or real estate is defined as the price a willing and knowledgeable buyer would pay to a seller under the following conditions:

Both parties – buyer and seller are looking out for their interests and have a reasonable level of knowledge about the value of the child care business and real estate. A seller wants the highest price, and a buyer wants the lowest price. For example, if a child care owner sells the business to a family member for a very low price, the price would not be considered fair market value.
Neither the buyer nor the seller is under any undue pressure to complete the transaction. The foreclosure sale of a childcare business is not considered “fair market value” because the seller is often under great duress and the sale is involuntary.
The child care business is offered on the open market (confidentiality, of course) for a reasonable period.

To meet these three simple conditions for “fair market value” in the sale of a child care business, the seller must have a reasonable level of knowledge about the value of their child care business and the value of the real estate if included in the transaction. Most childcare business owners have limited knowledge of the value of their childcare business or associated real estate. Therefore, having an experienced child care business broker or business appraiser to help determine the fair market value is essential.

Second, the child care business owner must be voluntarily selling the business – it is not a forced sale due to foreclosure, forced liquidation, or other involuntary transfer, such as a divorce, partnership dissolution, or similar event.

Moreover, to obtain the fair market value of a child care business, the business must be marketed openly (confidentially, of course) for a reasonable period. Too often, a child care business broker will only market the child care business to a small number of buyers, typically a handful of regional or national chain buyers. Little to no effort is made to locate an individual, private buyer. A childcare business broker should employ a multifaceted approach to marketing your childcare business, including internet marketing, print marketing, personal contact with buyers, and exposure to both local, regional, and national childcare operators looking to expand, as well as private individuals. Without extensive marketing (confidentiality, of course), not all possible buyers will be identified, resulting in fewer offers and often lower offers. Be sure (before you sign a listing agreement) that the broker you are hiring will expose your child care business to as many buyers as possible – both individual private buyers and corporate buyers, not just a handful of corporate chain buyers they have sold centers to in the past.

What Drives Value Up and Down

Importance of confidentiality

It cannot be overstated that the importance of keeping the potential sale of your child care business completely confidential. Even minor breaches of confidentiality often result in the loss of employees and enrolled children. Breaches of confidentiality can lead to a reduction in the purchase price or the business being taken off the market, requiring months or years to rebuild enrollment and business value.

Too often, when considering the sale of their child care business, owners seek advice from individuals who lack knowledge about selling a child care business and the sensitivity of parents and staff to a potential change in ownership. An attorney, accountant, or real estate agent tells them the best way to sell a business is to let everyone know it is for sale – tell your employees, parents, and call your competition and see if they would like to buy your child care business – very bad and ultimately very expensive advice!

I recently spoke with a child care owner who had done just that – let everyone know she was looking to sell. Having heard the same story hundreds of times, I could have recited it to her. She shared that she had shown the business to more than a dozen potential buyers and had not received a single legitimate offer. Several individuals, having no money, wanted her to lease them the childcare business and building with no money down – just come in and start running the business, making monthly lease payments for everything. She had lost a few key teachers to her competitors, and her enrollment and business value had declined. Each day, she had to spend time addressing her employees’ and parents’ concerns about what potential buyers might do with the business – whether they would be qualified, what changes they would make, and whether they would lose their jobs, among other concerns. She, of course, wished that she had reached out to someone who specialized in helping people buy and sell child care businesses confidentially. Fearing her business would continue to decline, she considered closing the childcare business and leasing the building to a man who wanted it for another type of business. Once a thriving, profitable childcare business, operating for twenty-plus years with a stellar reputation, was on the brink of closing its doors. Ultimately, the total financial loss is likely to be several hundred thousand dollars. Yes, loose lips sink ships and child care businesses – confidentiality in selling a childcare business cannot be overstated.

All marketing efforts, meetings, business showings, completing the steps of due diligence, notifying licensing of the sale, and the desire to change ownership – all the way up to the day of closing must be handled confidentially. Over the years, I have developed processes and procedures to minimize the risk of confidentiality breaches. It requires vigilance to follow proven best practices and to constantly remind everyone involved – seller, buyer, lenders, attorney, and accountant – of the need for extreme confidentiality. The continued successful child care business operations and business value depend on it.

Heavy regulation decreases value

I have worked on child care brokerage and consulting projects in many states across the country. And, with more, of course, in my home state of North Carolina. Over the last two decades, child care regulations in North Carolina have undergone substantial increases. Regulations, particularly burdensome ones, increase the cost of doing business and decrease profits, thereby decreasing the value and potential sales price.

As a child care operator, you must reevaluate your business operations with each new regulation. Moreover, when necessary, make changes in your business not only to meet mandatory regulations but also to, as much as possible, maintain profits. I often see child care businesses that have made changes to meet new regulations. Still, they have not re-evaluated their child care profitability, considering the new regulatory impact on business profits. You should always be asking yourself, “How can I meet regulations, license law, and provide quality child care – but also increase my business profitability?” There is often more than one way to meet regulatory requirements, with some options being more expensive than others. How can you spend less money and still meet all requirements? Every dollar of profit you preserve not only provides you with more personal Income but also makes your child care business more valuable and easier to sell should you choose to sell your child care business.

Increased regulation reduces desirability

Over the years, I have successfully sold childcare businesses to individuals already in the industry, such as directors and teachers. Today, when asked if they are interested in buying their own child care business, often the response is, “Are you crazy? It is challenging enough to be a director or teacher in childcare today. I would never want to deal with what I see the owner going through every day.” For most of the last decade, large centers and multi-location programs had a deep pool of chain and private equity buyers waiting. That pool has thinned considerably. What has not changed is the shortage of buyers for small and medium single-location programs — a director or teacher who once would have bought a center now watches what the owner deals with every day and says, “Are you crazy?” Fewer buyers means a longer time to sell. Still, fewer child care business buyers today than in years past seek to purchase a small or medium-sized single-location child care program. Fewer buyers increase the time it takes to sell a child care business.

Given that each state’s regulatory environment differs, states with stringent childcare licensing regulations are less appealing to national chain buyers. States with overly burdensome regulations decrease profits and increase overall operational complexity. Therefore, it is common for national chains to prefer expansion in some states over others due to the regulatory environment.

Organized financial records increase price

Most child care owners (like most small business owners) are not accountants. Keeping up with the financial records often “takes a back seat” to many other activities necessary to operate a child care business. Specialized childcare software can make tracking tuition and expenses easier. At a minimum, you should have a monthly Profit and Loss (P&L) Statement either prepared in-house or by an accountant. And, of course, the annual corporate tax return should reflect the information contained in the monthly P&L Statements.

The tax code offers numerous legal tax deductions that reduce taxes at both the corporate and individual levels. Some business owners write off my expenses that have nothing to do with the operation of the child care business. These expenses may reduce the state and federal taxes due; they will also decrease the value or selling price of the childcare business. Many buyers, their accountants, lawyers, and other advisors are not interested in discussing which expenses were business-related and which were personal expenses run through the childcare business. They often will not be willing to absorb unnecessary expenses to reflect higher cash flow and value in the business.

If you want to receive the highest price possible for your childcare business, stop running personal expenses through the business – clean up your financials and maintain an organized, clear paper trail of all revenue and expenses to support the financial statements, tax returns, and accurate cash flow and business value.

Facilities constructed for child care

As you might expect, buildings designed and built for child care have the highest value. In addition, newer buildings are often more desirable to child care buyers because they usually have fewer building code issues and require fewer updates.

Over the years, the student-to-teacher ratio has changed for each age group. Child care centers with rooms that are neither too small nor too large offer the greatest flexibility. And the ability to rearrange classrooms to meet changing ratios and enrollment needs.

Of course, when most people start in child care, building a new facility is not financially viable. Therefore, remodeling or repurposing a building for child care is necessary. Existing structures – supports, doors, windows, electric, plumbing, and layout must be analyzed with the thought of creating the most usable, highest licensed space possible – your future child care business profits and ability to sell your child care business someday depend on it.

Value is today not after closing

Over the years, I have read articles by other child care business brokers stating, “the value of your child care business is determined by its value after closing.” Each buyer will indeed assign a different value or price to your child care business based on factors important to them – “beauty is in the eye of the beholder.” However, the value and fair market price of your childcare business are based on how you operate it today and the expected level of continued profits.

The value of your child care business has nothing – absolutely nothing to do with how a buyer may operate the child care business after purchasing it from you. Homes, land, a car, and childcare businesses are all valued as of a specific date (today) based on current operations, profits, and conditions. Some buyers may not be willing to pay you what your child care business is worth because the way they plan to operate your child care business may not be as profitable.

I have always found it interesting how childcare brokers and the buyers they represent attempt to negotiate a lower value for a child care business based on how the buyer plans to operate the business after closing – their corporate overhead, additional management labor costs, and other expenses that will decrease profits. How a buyer operates the childcare business after they buy it is their responsibility, not yours. Why should you accept a lower price because the buyer cannot operate your business as profitably as you do? Of course, these same buyers are never willing to offer you more money if they see changes they can make that will increase profits.

It is important to know “who does the child care business broker represent” – you or the buyer? Many child care business brokers will tell you they represent you, list your child care business for sale, but then only expose your child care business to a limited number of buyers, usually the larger chain operations, and negotiate against you based on the low price child care chain operators want to pay. Ensure your child care business broker is working on your behalf, not on the buyers’.

CACFP

Over the years, I have heard many reasons and excuses for not participating in the Federal Food Program – I have just never heard a good one. Unless you are in a very high-income demographic area and can keep your center full with all private-pay parents, it is crazy not to participate in the Federal Food Program. If you follow the program, complete it, and file on time, the reimbursement will cover food costs, labor costs for food preparation, and some administrative program costs.

Look at it this way: you lose money if you are not on the Federal Food Program. For example, a center spending $5,000 a month on food and another $3,000 (or more) on kitchen staff without the Federal Food Program has $8,000 in costs with the Federal Food Program; you would probably have recovered most, if not all, of that $8,000.

Preventive maintenance

Skimping on interior and exterior preventive maintenance will ultimately cost you more money in the long run. Having a set schedule to address all the small and large preventive maintenance items in a childcare facility is essential. Setting up a simple “Preventive Maintenance To-Do List,” broken down into Quarterly and Monthly, will ensure that your childcare facility always looks good and help reduce large repair bills from deferred maintenance problems.

Employee education level is important

Most states have education requirements for child care teachers, assistant teachers, and often management directors. Moreover, staff education is often tied to licensure, ratings, and public tuition funding. Maintaining an acceptable level of employee education is important. Many corporate and individual buyers seek to acquire childcare programs with employees who meet all educational requirements. In many states, the buyer will operate under a temporary license for a period following the business transfer. It is during the temporary license period that the buyer must prepare for the program evaluation to obtain a permanent license. Buyers are reluctant to purchase childcare businesses without employees with the required educational levels. Buyers do not want to replace employees after closing, and, given the shortage of qualified teachers in many areas, buyers fear being unable to find qualified teachers quickly.

Child care programs with qualified teachers are more valuable and appeal to a wider range of potential buyers.

Excess labor costs decrease profits and value

The cost of labor – salaries, benefits, and associated employment taxes for teachers, staff, and management is often the largest expenditure in a child care business. Controlling labor costs is essential in child care, regardless of the size of your child care business. Although there are many factors to consider when analyzing labor costs in a child care business, the greatest labor cost savings are often achieved through better employee scheduling, particularly for employees in the classroom, such as lead teachers, assistant teachers, and floaters. Common things I see in child care businesses that result in higher labor costs:

Having too many teachers in a classroom – know your state-required teacher-to-student ratios for each age group and make sure you meet the ratio in each classroom. If ratios indicate one lead teacher and one assistant teacher, having two lead teachers or one lead teacher and two assistant teachers will be above ratios and result in excess labor costs.
Using too many part-time employees. Utilizing more full-time employees and fewer part-time employees often results in more effectively managed labor costs, particularly for teaching staff. In childcare, part-time employees are better utilized (if truly needed) in positions such as floater, cook, driver, or office administrative roles. Instead of having two or three part-time employees, can you combine roles or job descriptions and have one full-time employee complete the same job functions?
Too many administrative employees.

Small changes in labor-management can significantly reduce labor costs, increase childcare business profits, and enhance overall childcare business value.

High subsidy enrollment

To clarify, my statement is unrelated to the numerous reasons why all children should have access to quality childcare and early education. The statement is based on a common characteristic of any business and its impact on value, customer concentration

Customer concentration refers to the percentage of business revenue attributed to a single customer or a group of customers. For instance, a manufacturing business in which one customer accounts for, say, 25% of gross revenue is considered risky. Why might you be asking? Well, let’s say for some reason the customer is lost, well, there goes 25% of the business.

A high customer concentration – child care enrollment dependent on public funding increases business risk. Increased business risk results in a lower business value or sales price, as well as a reduced ability to sell a business.

Many things impact public funding for child care:

Federal and state budgets and budget cuts
In some states, the availability of funds is limited to specific age groups.
In some cases, public funding tuition rates are not comparable to private pay rates.
Many states have tied the continuation of public funding for child care to compliance with licensing requirements, program evaluations, and program infractions.

In recent years, many regional and national child care chain operators have revised their acquisition criteria to prioritize only those child care businesses with a high percentage of private pay enrollment. Some will still purchase child care businesses with around 30% public pay enrollment, often those centers that meet the 25% minimum to participate in the CACFP (Federal Food Program).

Therefore, you should reevaluate your childcare business, including your level of public and private pay enrollment, as well as your customer concentration. Can you, over time, decrease your business risk by limiting the concentration of your public pay customers? If you have a high percentage of public pay enrollment, it does not mean that selling your child care business will be impossible. It will take longer, and the ultimate sale price is often less.

Policies, procedures & systems

Child care owners often think they need to have more money to spend on their program, to buy this or that, to make it more valuable. Having adequate funds to develop and maintain programs is indeed essential. However, one important way to improve the value of your childcare business – without spending a dime – is to develop policies, procedures, and systems that are consistently followed.

Policies, procedures, and systems ensure operational consistency. Consistency fosters steady enrollment and employee retention, both of which contribute to higher revenues and profits.

Most centers have a Parent Handbook and an employee handbook that outline general information. These simple handbooks are a good start, but should not be the only written rules and guidelines. Every aspect of your child care business operation should be documented – who, what, when, where, and why things are to be completed in a prescribed manner. Moreover, you should have a set system to accomplish each task, such as opening procedures, closing procedures, handling parent conferences, and collection procedures, among others.

Child care businesses with good policies, procedures, and systems are often better operated, more profitable, and have better reputations in the community, as they are perceived as well-organized and efficient. They also often receive a higher valuation and sales price.

Facility rent

In addition to wages, building rent or mortgage typically ranks as the next-largest expense for operating a childcare business. All too often, childcare business owners lease or buy a building or space with a rental rate or mortgage payment that exceeds the standard benchmark operating guidelines. For instance, the monthly rent or mortgage should not exceed 18% of gross revenues—the closer to 15%, the better.

I could name several childcare buildings – nice facilities built for childcare – but the monthly rent or mortgage will likely always be above the standard benchmark operating guidelines. Over the years, I have received calls from not the first, but the second, third, and yes, the fifth or sixth child care operator in the building, struggling to make it because the rent or mortgage is too high. Moreover, I have had the same discussion with landlords and real estate developers numerous times about market rental rates for childcare versus office or retail space. Rarely will a childcare business be able to pay the same per-square-foot rental rate as for Class A office or retail space.

Before signing a lease agreement for the building, space (or buying a building) in which to operate your child care business, make sure that the monthly rent or mortgage will be less than 15% of conservatively projected gross revenues. Most commercial leases contain a corporate and personal guarantee. In other words, the landlord can pursue payment of the monies owed under the lease from your corporation and you personally, should you go out of business and default on the lease. When you cannot make the numbers work, you will most likely not be able to close the child care business and walk away without fulfilling the lease terms and required rent payments.

Child care businesses encumbered with high building rental rates are very difficult to sell. Do inexperienced childcare buyers with overly optimistic goals take over these childcare businesses and leases? Sure – but it is far more common for one of the buyer’s advisors – an accountant, attorney, partner, lender, or Uncle Charlie – to tell the buyer that the child care business cannot support the monthly rent, and they move on to a better opportunity where the numbers work.

Unreported income decreases value

Although not as common as it was 30 years ago when I started my business brokerage practice, some childcare owners today still tell me that their business tax return does not include all the tuition income they have collected. Well, unreported income is not something that I, as a business broker, have any interest in representing. In the eyes of the law, unreported income is considered tax fraud. When a broker represents a potential business buyer, there’s unreported income – that’s referred to as the perpetuation of fraud. I love my child care business owner clients – just not enough to go to jail for them. So, I only represent the financial information submitted on the business’s federal tax return.

Three important things to know about the effects of unreported income in a child care business:

Unreported income reduces business value because the reported gross revenue is lower than the business’s actual revenue. Unreported income causes all expense categories to appear higher when compared as a percentage of gross revenues.

Buyers are not impressed when a childcare business owner shares that they have not been reporting all their income. From the buyer’s perspective, he is often thinking. If the seller is willing to take a high risk and provide false information to “Uncle Sam,” the federal government. In that case, the seller might also provide me with “false” information to get me to buy the business. In my experience, business buyers and sellers must establish trust for the deal to reach closing. Telling a buyer about unreported income does not build trust.
Buyers, their advisors, and lenders rely on financial information to help determine the value of the business, make an informed offer, and secure financing. Professional advisors have substantial liability for the consulting services and recommendations they provide. Attorneys, accountants, and their professional advisors are quick to tell the business buyer to pass if the business numbers do not look right. Moreover, if the numbers do not look right or work, the buyer will not be able to obtain a loan to purchase the childcare business.

My advice is always to run the business, report all income and work, and keep all expenses within normal benchmark ranges. Once you have three years of accurate tax returns, you will be able to get a higher value for your business, and the buyer will have a much better chance of getting a loan.

Financing and Deal Structure

Earnouts are risky

Earnouts or Deal Structures Based on Post-Closing Contingencies or Business Performance After the Sale – Are Risky For Child Care Business Owners.

In recent years, I have received an increasing number of calls (more than in years past) from childcare business owners about selling their childcare business and owner financing.

However, owner financing is common when selling a childcare business or any small business. When transferring small, medium, and large childcare businesses, the seller typically finances a small portion of the total purchase price for an individual buyer.

More recently, questions about owner financing in the sale of childcare businesses have arisen for several reasons. First, more childcare buyers require owner financing to buy the childcare business. Now you might think these buyers are individual buyers, couples, or business partners – the typical mom-and-pop childcare buyers seeking financing from the childcare seller. Individual buyers often need a small amount of owner financing to obtain a loan. But, more so in recent years, several existing and new private equity-backed childcare chain buyers have standardly included owner financing or an Earnout Agreement as a required part of the transaction. Let’s take a closer look at each.

Individual childcare buyers are often not flush with cash and must obtain a bank loan to purchase a childcare business. The federal government backs the most common small-business loans (SBA) to finance purchases. SBA loans (Small Business Administration) often require a lower b yer down payment and longer amortization periods, resulting in lower monthly payments. And most SBA lenders allow the business seller to provide some owner financing, which counts towards the buyer’s total required down payment. In these cases, I usually advise the childcare business seller that providing the buyer with 5 – 10% owner financing would be a reasonable way to help the buyer secure a loan for the remaining 90 – 95% of the sale price. In these cases, the sellers’ risk is limited as they receive most of their money at closing.

Now, look at the private equity-backed childcare chain buyers and owner financing. Private equity groups obtain their money from private investors. The private investor provides the private equity group with capital to buy businesses, expecting a high rate of return on their investment. Although not a common practice to require the childcare business seller to provide owner financing, some private equity-backed childcare chain buyers will not purchase the childcare business unless the seller includes owner financing, and not a small amount, often 30 percent or more.

You might ask yourself why a private equity group needs the childcare business seller to provide so much owner financing. Great question. The most common reasons are to increase the overall return on the transaction. Also, the private equity group can buy more childcare businesses without having to come up with all cash for each one. And they may only have to pay the seller some of the owner-financed money under the agreement. Additionally, as long as the private equity group owes the childcare seller money, the seller is still tied to the business.

If seller financing is provided under a valid Promissory Note, the buyer must repay the owner-financed portion of the transaction, regardless of the business’s performance. In that case, it meets the definition of seller financing and a Promissory Note. Think of it like this: you go to a bank and borrow money to improve your childcare business and promise to repay the bank the original loan, plus interest. The document you sign is called a “Promissory Note” – you promise to repay the bank. No matter how good or bad your childcare business does, you must repay the money as you promised.

Well, if a childcare business seller provides owner financing to the private equity buyer, it may not really be under a “Promissory Note” – a promise to repay. Unfortunately, often it is not. I have reviewed numerous “Promissory Notes” (yep, the document title read “Promissory Note”), but they were not promises by the buyer to repay; they were Earnout Agreements. Whereas a Promissory Note is a promise to repay, an Earnout Agreement provides that the seller will receive payments only based on, most often, future business performance. If the business performance does not meet the terms of the agreement, they do not have to repay the seller. The childcare business performance requirements can include minimum enrollment, gross revenue, net operating income, minimum EBITDA, and many others.

Unlike the sale of middle-market – larger business transactions, where the owner of the business may continue to work for the private equity buyer for several years, childcare business owners do not often become employees of the buyer and continue to run the business. And even if they do stay on to help the buyer post–closing, they no longer have control of the business and decision-making. The buyer could make all sorts of employee and operational changes that negatively impact the business – and limit the business’s ability to meet the earnout performance requirements. And, yes, you guessed it, the childcare seller will not receive full payment. Unless, in some cases, the seller agrees to come back and work in the childcare business (at a low rate or for free) to help meet the business performance requirements of the Earnout Agreement. Having to go back and work in the childcare business they sold just to get paid their total sale price is not something I have known that owners want to do. Given that these earnouts may involve tens of thousands or hundreds of thousands of dollars, the seller may not have a choice if they want to get paid.

Again, a Promissory Note is a promise to pay, whereas an Earnout Agreement requires the buyer to pay only if certain conditions are met. At this point, you are probably saying, “what childcare owner would work years to build a business and then sell out to any “buyer – individual or private equi y group” and possibly not get their total sale price in the end? Well, more childcare owners than you might think. Some do so because they are desperate to get out and will agree to anything. But most do not understand the difference between a Promissory Note and an Earnout Agreement. The buyer refers to it as a Promissory Note and assures the childcare seller that all childcare business transactions include such agreements, and that there is no need to worry. And, far too often, the childcare business owner does not have the right team of advisors – M& A attorney, accountant, and childcare business broker representing them in the sale of their childcare business. Knowledgeable childcare M&A Advisors assist childcare business owners in understanding the complexity and ramifications of Earnout Agreements when selling a childcare business.

A common saying is, “Earnouts are a future lawsuit.” The seller often does not receive the total sale price for their business. Therefore, I rarely recommend that a childcare business owner accept an Earnout Agreement. And suggest you contact other professional advisors, such as a child business broker or an attorney who specializes in Mergers & Acquisitions, if anyone tries to get you to sign an Earnout Agreement.

RE and financing

For most of my career, large childcare businesses with very valuable (usually in excess of a total price of $7M) made the sale harder, not easier.

The reason was financing. An individual buyer purchasing both a business and a commercial building needed a loan large enough to cover both, and those loans were difficult to structure and difficult to get approved. Many buyers who could have handled the business alone simply could not get to the finish line when the building came with it. I watched a number of owners end up selling the business and holding the building and becoming a landlord when what they wanted was to be finished.

That has changed, and it changed in favor of owners who own their real estate.

Recent Small Business Administration changes have made it far more workable to finance a large childcare business and its real estate together, at higher loan limits and with a smaller down payment from the buyer than a conventional commercial loan would require. In practical terms, an individual buyer who a few years ago could not have touched a combined business-and-building purchase may now be able to.

What this means for you as an owner:

If you own your building, you are more sellable today than you were five years ago, not less.
Your pool of likely buyers now includes individuals, not just chains and investor groups — and individual buyers often pay more for a single location than chains do.
The building’s condition matters more than it used to, because it is now part of what a lender is underwriting. Deferred maintenance shows up as a lower appraisal, and a lower appraisal shows up in your proceeds.

If you own your real estate, get a realistic sense of both values — the business and the building — before you make any decisions about either. And if you have been assuming you would need to sell them separately, that assumption is worth revisiting.

Financing availability

The availability of financing, or lack thereof, has a significant impact on the ability to sell a childcare business and the sales price. Without financing, it is challenging to sell a well-operated and profitable childcare business. Several factors influence the availability of financing. However, the economy has a significant impact on business financing, both positive and negative. During good economic times, obtaining financing to purchase a business is easier. Conversely, during an economic downturn or recession, securing financing can be almost impossible. Without financing, fewer buyers seek to purchase a business. The fewer the number of business buyers, the lower the business’s sales price.

During the “Great Recession,” the availability of financing to purchase a business was almost nonexistent. Yes, SBA loans (government-backed) were still being made, but only to the most qualified buyer for businesses that the economic downturn had not negatively affected. Conventional lending (loans made by banks held in-house and serviced by the bank) was nowhere to be found, especially during the early years of the “Great Recession.” Banks often require a down payment of 30 to 50 percent from the buyer to obtain a conventional loan for purchasing a business.

The takeaway: The best time to sell a childcare business is during periods of economic growth. Child care businesses typically experience full enrollments and profits during periods of economic growth. Therefore, the value of the child care business will be higher. Moreover, during a good economy, financing is more readily available on favorable terms, and more folks are looking to buy a business.

Owner financing

About 99% of the childcare owners I have represented over the last 26 years would have preferred to receive all of their money at closing. Outside of selling to a large regional or national childcare chain, 90% of all business transfers to individual buyers will include selling financing. This is for three main reasons.

Seller financing results in a higher sales price. Everyone has heard: You can have your price or your terms, just not both. Business sales involving seller financing tend to sell for more.
It is often a “red flag” to individual business buyers and lenders when the child care business owner is unwilling to offer a reasonable amount of owner financing. The concern is that the seller is aware of potential issues in the child care business, such as market trends, state regulations, or other upcoming changes that may negatively impact the business, so the seller wants to receive all of their money at closing. Demanding all cash at closing will limit the number of buyers, their ability to obtain financing, and the purchase price.
Without some owner financing, individual buyers often cannot obtain a loan to purchase the business. So, how much owner financing? Under the new Small Business Administration (SBA) guidelines, guaranteed loans would normally require 10% or more of the total purchase price to be held in a seller-financed note. If the buyer were obtaining a conventional bank loan (not guaranteed by the SBA), a higher down payment would be required, usually in the 20 to 30% range. The seller often must be willing to provide more financing for a buyer to obtain a conventional loan.

The Buyers

What the pandemic actually changed

I have left that in, because it was honest at the time, and because there is more value in showing you what I expected against what actually happened.

What I had right

What I had wrong

I assumed enrollment would come back. Almost everyone did. Centers reopened, restrictions lifted, parents returned to work, and the reasonable expectation was that classrooms would refill.

For a great many programs, they never did.

Demand changed, and it changed permanently.

Then remote and hybrid work altered how many days of care a family actually needs, and how much they are willing to pay for days they do not use.

And underneath all of it, births have been running at historic lows. Fewer children are entering the pipeline every year, and that is not a policy you can reverse or a trend that turns quickly.

Today it is not unusual for me to look at centers operating well under half of licensed capacity — programs that were full in 2019 and are not close to full now.

What this means if you are thinking about selling

The buyers change

I am going to say something here that runs against most of what you will read from others in this industry.

The large regional and national buyers are not buying the way they were.

For most of the last decade, the story was straightforward: build a large, well-run, private-pay center, and eventually a chain or an investor-backed group would come along and pay a strong price for it. That was true. Many owners exited very well on exactly that path, and I represented a number of them.

That window has narrowed considerably. Growth among the large operators is coming overwhelmingly from opening new centers rather than acquiring existing ones. In addition, when they buy, the preference is for multiple locations, not one standalone center. Unfortunately, several of the best-known names in the industry have been closing locations rather than adding them. Some of the mid-sized groups that were assembling centers a few years ago are now dealing with problems of their own.

You will still hear that childcare is hot, that buyers are lined up, that now is a wonderful time to sell. Be careful with that. Ask the person telling you how many centers they have actually sold in each of the last three years, and to whom.

None of this means your business is unsellable. It means the likely buyer has changed, and if you have been building toward the wrong one, you have been building toward the wrong one for a while.

For most single-location and small multi-location owners, the realistic buyer today is an individual — someone already in early education, or an operator nearby who wants to expand. That buyer is not evaluating your business the way a chain would. They need a business that produces enough documented profit to support a loan. They care about your enrollment, your labor cost, your rent or mortgage, your rating, and how much of your revenue depends on public funding. They will pay for what you have actually built, not for what someone could build on top of it.

That is the buyer to prepare for. It takes two to three years to prepare a child care business properly for that buyer, which means the work starts well before you are ready to be done.

If you have been waiting for a phone call from a chain, that is not a plan.

Selling to an employee is highly unlikely.

Child care owners often hope to sell their child care business to a long-term, loyal employee, like a director or lead teacher. Transferring a childcare business to someone already familiar with the business, including employees, parents, and children, has advantages. However, in 30 years of selling child care businesses, I have only sold one center to an existing employee.

Employees often lack the financial resources to purchase a childcare business. Unless the childcare owner is willing to provide extensive seller financing and make other concessions, a transaction is often not possible. Now I hear you, “Yes, many child care employees dream of owning a child care business.” However, only two percent of people who start out trying to buy a childcare business (or any business) ultimately end up buying one – pretty slim odds. Childcare employees who venture out on their own usually try to purchase a small center or open a new one because of limited financial resources.

Another important consideration is that the employer-employee relationship is often strained when an employee is unsuccessful in purchasing the childcare business where they are employed. I’ve known several childcare owners who lost a great, long-term employee when a potential business sale fell through. Before approaching an employee to buy your childcare business, you should give it considerable thought – the stats are not in your favor.

Your Most Likely Buyer

I have been selling child care businesses since 1995 and speaking with hundreds of child care owners and potential buyers each year. In my discussions with child care owners, I often find that they have been planning for years to sell their child care business to a buyer who will most likely have little to no interest in it.

Owners of small and medium-sized child care businesses may be pinning their hopes on selling to a large regional or national child care chain for an equally large price. Unfortunately, things rarely work out that way. Large regional and national child care chains are only interested in buying large childcare centers. Many of these buyers note a minimum licensing capacity of 125 or even higher as their target acquisition. Moreover, in states with stricter licensing regulations, some chain buyers will consider only very large child care businesses. They cannot make the financial numbers work in small or even medium-sized centers.

Small and medium-sized child care businesses are most often purchased by someone already working in child care or early education – maybe as a teacher, director, assistant director, or elementary school teacher. Alternatively, the owner of another child care business either within the market area or at a distance that does not require too long of a commute. Moreover, the ability to market child care businesses confidentially online sometimes allows the sale of a child care business to someone living hours away or in another state, willing to relocate for the right opportunity.

Unlike the large regional and national child care chains, these individual buyers often have limited financial resources to purchase a child care business. Ninety-plus percent will need to obtain either a substantial amount of seller financing, a bank loan, or both to buy a child care business. Therefore, the childcare business must have good financial records showing sufficient profitability, or the buyer will have difficulty convincing a bank to lend the funds for the purchase.

Owners of small and medium-sized child care businesses must:

operate the business with high enrollments,
charge market rates,
Keep very tight controls on labor costs,
eliminate all unnecessary expenses,
Keep accurate, supportable financial records, and
create enough profit to allow the buyer to obtain financing

In summary, buyers of small- to medium-sized childcare businesses are typically individual buyers rather than regional or national childcare chains. Individual buyers have limited funds and can only obtain a loan to purchase a profitable child care business. As the owner of a small- to medium-sized childcare business, you must understand the most likely buyer or “buyer type” for your childcare business and create your business in a manner that will provide the profitability for a buyer to purchase your business someday.

Single locations - best buyers

Why? A large childcare operator is often only looking for a great location, high enrollment, and cash flow, rather than program-specific features. Childcare chain operations must have the same proven systems and programs implemented across all locations to maintain consistency and profitability.

Many individual private child care operators believe that a child care chain will be interested in their child care business due to its special programs, features, or curriculum, but this is usually not the case. The child care chain buyer must implement their standard program after the purchase. Therefore, special program features you have implemented in your child care business will often have little or no value to the child care chain buyer. However, your special program features may be viewed very favorably by individual buyers. Moreover, unlike the experienced child care chain buyer, the private individual buyer will most likely need your experience and expertise during the early days following the purchase to ensure a smooth transition. Individual buyers almost always pay more than child care chain buyers for single-unit locations.

Getting Yourself Ready

Exit Strategy

Child care business owners (and business owners of all types) agonize for about three years before listing and marketing their business. On a good day, they think – things are going great, I can hang in here a few more years. Moreover, on the not-so-good days, business owners often wish they had started the sales process sooner.

Given the number of years a childcare business owner thinks about selling, I have always been surprised at the lack of exit planning most engage in. During the years of contemplating selling, most child care business owners do little if any research or planning regarding the value of their business, the tax consequences of the sale, the value of their real estate (if owned), what is involved in selling a child care business, or planning what they will do after the sale.

It is never too early to start planning your exit from your child care business. In fact, before starting or buying a child care business, you should consider what options will be available for exiting the business in the future. Will you pass it on to a family member? Who will be the most likely buyer? What price would you hope to sell the child care business someday?

Exit Strategy Planning helps you to prepare not only your child care business for sale, but also prepares you for life after selling your child care business. A well-planned exit can have a profoundly positive impact on selecting the optimal time to take your childcare business to market, securing the highest price possible, and ensuring a smooth transaction. We have found that an excellent exit strategy for a child care business can be developed and implemented over a two or three-year time frame, allowing a child care business owner to capitalize on their years of ownership and hard work.

Always have a Plan A and a Plan B

Nearly every child care owner I meet has a Plan A. Very few have a Plan B.

The most common Plan A I hear is a child taking over the business. It is a wonderful plan when it works. Statistically, it usually does not. The daughter who grew up in the center goes to college, builds a career she loves, and has no interest in running a child care business — and she is often the last person willing to say so out loud, because she knows how much it would disappoint you.

Other Plan A’s I hear: the director will buy it. The center down the road will want it. A chain will come along. Each of these can happen. None of them is a plan.

Here is what I have watched for three decades. The owner with only one plan treats it as the outcome. When it falls through — and it usually falls through late, after years of quiet assumption — that owner feels defeated. They stall. They stop working on the business. Enrollment slips, the building starts to show its age, and by the time they call me, the business is worth meaningfully less than it was on the day Plan A died.

The owner with a Plan B behaves completely differently. When Plan A falls apart, there is disappointment, but there is no paralysis. They readjust in weeks rather than years, and they put their energy into Plan B while the business is still strong.

You do not need Plan B to be detailed. You need it to exist. If not your daughter, then who? If not the director, then what? If no chain buyer comes, what does a sale to an individual buyer look like, and what would the business need to look like for that buyer to get financing?

Write both plans down. Not in your head — on paper, where your spouse can read them. Then ask yourself honestly which one you are actually preparing the business for.

Selling a Child Care Business – 30 Years of Lessons

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