Develop an Exit Plan
As you begin to think about selling your school, developing an exit plan is a crucial initial step. In order to get the best price for your childcare business, you must ask yourself four questions:
- What is the current value of your childcare business or school?
- When is the right time to sell?
- What actions will increase the value of your childcare business or school?
- What is the proper sales process to sell your childcare business or school?
What is the current value of your childcare business or school?
There are many rule-of-thumb ways to value a childcare business or school, but they may not be reliable or the most accurate. If your school is sold at a value estimated by a rule-of-thumb method that is too low, you will be giving up money. If your school is marketed at a price based on a rule-of-thumb method that is too high, your school will NOT sell, unless it sells for just the value of the fixed assets. Childcare businesses and schools in financial trouble will often just sell for the value of the fixed assets with no goodwill. For a potential buyer to purchase your childcare business or school (as long as it is not in financial trouble), Adjusted Profits* of your school MUST be high enough to support three things:
- The debt service
- A reasonable salary and benefits for the new owner
- An internal rate of return on the equity invested by the buyer to purchase your school.
If Adjusted Profits of your school are not high enough to support these three things for the price you want, buyers are not going to buy your school. On the other hand, if the Adjusted Profits of your school cover these three things with additional profits left over, your asking price can be increased.
*Adjusted Yearly Profits are defined as income before taxes + owner’s salary and benefits + interest expense + depreciation + amortization – average yearly capital expense required.
When is the right time to sell?
Deciding on the right time to sell your childcare business or school is deeply personal. In making that decision, ask yourself the following questions:
- Is the amount of money you would receive from the sale of your school enough to accomplish personal, financial, and estate planning goals?
- If not, do you have the drive to manage the day-to-day details of the school to increase its profit for the next one to three years?
- Are you willing to continue with the intrinsic risks of school ownership while working towards the goal of increased value?
- Do you believe that your childcare business or school will be worth more in two to three years than it is now?While there is no hard and fast rule about the best time to sell, you should be considering your exit when there has been year-to-year growth in both profits and revenues and there is evidence that this growth will continue into at least the near future.
What actions will increase the value of your childcare business or school?
As you are already aware, there are two basic ways to increase your school’s profits:
- Enrolling more students and/or increasing the price of enrollment per student.
- Reducing expenses
a. When it comes to labor, is there proper management and awareness in place to send teachers home as soon as the students and children have left at the end of the day to keep the child/staff ratio to licensing requirements of the current headcount and not over? Are specific employees being paid too much for their job?
b. When it comes to overhead expenses, have you taken the time to purchase necessary equipment and items correctly? Do you delegate purchase decisions to employees? Have you properly managed expenses like credit card fees, food, insurance, manipulatives, toys, and other overhead expenses?
It will take time and drive to reduce your expenses in order to increase the value of your school but it will ultimately be worth it. The longer you can show increased profits on your financial statements and tax returns, the higher the business value will be to potential buyers, and the larger the approved loan amount available from lenders to finance the acquisition, which means more money in your pocket after the sale. If you choose to take action to increase the value of your childcare business or school and want to sell later, we can provide an annual evaluation of your school’s market value.
What is the proper sales process to sell your childcare business or school?
To get the highest price for your school, consider the following:
- Sell your school to an outsider. Potential buyers not currently involved with your childcare business normally have more cash and the ability to pay more.
- Document the value drivers of your school. This allows potential buyers to know its strengths and future
- Solicit offers from more than one potential buyer. Competition can lead to an increase in price.
Work with Gateway School Sales, a skilled and experienced brokerage firm, to achieve optimized results.