How Much Should I Pay for a Childcare Business?
Like any business, a childcare business is all about the amount of profit you can reasonably expect to make from the business. Businesses trade on a declared price to earnings factor which can also be described as a Return on Investment (ROI).
Childcare centre businesses currently sell generally in the range of 3 to 5 times annual profit(33% to 20% return on your purchase price) depending on the location, the strength of the business, lease terms and other factors. A childcare centre in a regional area should sell on a lower multiple eg multiple of 3 or ROI 33% than one in a capital city with a multiple of 5 or ROI 20%.
Example: A leasehold centre for $200,000 annual profit selling of a multiple of 3 would sell for $600,000
The profit per annum is expressed on a PEBITDA (proprietors’ earnings before tax, depreciation, and amortization. In layman’s terms, this is the money that comes out the bottom before you allow for any depreciation, tax or interest payments.
The first financial document a potential buyer should look at is the PROFIT AND LOSS statement for the previous financial year and if possible the year to date.
This is the document where your bookkeeper or accountant records all the income, all the expenses and the resultant profit for the period. Typically a childcare centre like any small business has its accounts structured to maximise tax-deductible expenses and some of these should be taken out for calculating the profit for sale purposes. We refer to these types of expenses as Add Backs. Add backs include items of a private nature such as a vehicle not used in the business, interest payments, depreciation, and any personal expenses run through the business. Also taken out are non-recurring expenses such as substantial repairs or replacement expense which is unlikely to occur for several years. If you need help in deciding on the Add Backs, your childcare broker or accountant will be able to assist.
Always remember that it is not a question so much of what the current owner makes out of the centre but what you can do under your management. Some examples of centres ripe for improvement are centres being run with overstaffing, poor promotion, inappropriate staff and buildings lacking maintenance giving a poor impression to prospective parents.