People make babies. There’s no way around it. It’s a cycle that’s been in motion since the dawn of humankind. And with both parents working in today’s modern workforce, those babies typically require a daycare. With such a steady stream of equally needy and adorable clientele, owning a daycare business can seem like a brilliant and simple investment.
If you want to buy an existing daycare business, you’ll need to dive into the following steps:
Consult with experts to navigate the tricky fields of daycare law and business appraisal
Consider the health of the business you are interested in buying
Evaluate your financing options
Adhere to licensing and insurance requirements before starting
As with any business, the first few years of establishing the business can be risky, unprofitable, and challenging. For some, skipping this headache and buying a business that is already up and running smoothly is the solution. Let’s dive deeper into the steps listed above.
Ask the Experts
Often, potential business owners want to skip the step of enlisting the help of experts in law and financial evaluation, typically because of the price tag. But consider this – an upfront cost now could save you thousands if not hundreds of thousands of dollars on avoiding potential litigation or finding out the real worth of your business is much lower than you paid. The horror stories of people buying businesses without finding out exactly what they were getting themselves into are real. If you are deeply against paying for outside help, at least consider the benefits of having lawyers and appraisers on your side.
Hire a Lawyer
People don’t mess around when you are responsible for their children. Local and state legislation defines “safe space for children” very differently depending on where you are located. Childcare law is often a convoluted and overlapping legal area, where federal, state, and local governments all have a hand in deciding the right way to care for children. Not only will you end up spending hours digging into each book of rules, the odds that you miss something important are not in your favor.
When buying a business, you’ll want the lawyer to help you guarantee that there is no pending litigation against the daycare business. They can assist in drafting contracts and warranties that could make sure you aren’t held liable for issues arising before your purchase of the business. They can also assist in affirming the business is meeting the requirements of the law, so that you don’t unknowingly assume the responsibility of a company that is violating any laws.
Consult with an Appraiser
Unlike items you’d find on the shelf at your favorite clothing store, buying a business doesn’t come with an easily identifiable price tag. There are a variety of complex quantitative and qualitative factors to consider when pricing out the value of a business. Business appraisers can help you get an accurate understanding of what the business is worth by evaluating:
- Financial risks and strengths
- The company’s track record; are they growing year over year?
- Risk of competition in the same area
- Value of the real estate and location
- Customer concentration and potential
What’s more, business sellers notoriously tend to overvalue the worth of the business they’ve built. Who wouldn’t? Soliciting the advice of someone who can filter through the opinions of the sellers and determine the facts of the situation can help you provide support for a lower valuation that is more reasonably priced. Or, it can at least confirm that you aren’t getting suckered into a bad deal.
Do a Business Health Checkup
Besides verifying the financial worth and good standing of the daycare business you are interested in buying, there are plenty of qualitative factors that can make just as big of a difference. If you want to make sure you are buying a company that is healthy and seen as a benefit in the community, there are a few things you should check on.
Real Estate or Location Specifics
Typically, a big part of what you are paying for in a business is simply the location itself. If you are acquiring some real estate by buying out a business, the first thing to make sure is that you are up to code. The general licensing requirements specify a minimum of 35 square feet of indoor space per child, or 75 square feet of outdoor space per child.
But matching those minimums is just the start. Is the building up to code? Would it be considered safe in the eyes of the parents when conducting interviews or dropping off their children? It is also important to consider if it is a good location for the market. Understanding the demographics surrounding the location and the likelihood that people will be willing to travel to the location in the foreseeable future for childcare are important considerations.
Evaluate the Brand
Another major piece of what you are purchasing when buying a business is the brand name. If you will be continuing the business under the same brand as the previous owners, you will want to ensure that the brand has a good reputation. Daycare is a business that absolutely requires the support of the community, so knowing whether the community actually trusts the brand or not is significant.
There are two easy ways to perform a “health checkup” on the quality of the brand:
- Checking reviews on social media, Yelp, and business evaluators such as the Better Business Bureau and Angie’s List
- Interviewing parents whose children are currently enrolled
Finding out what other people think about the business you are considering buying is crucial. An “under new management” sign can only go so far. Even if you change brand names, the associations of that location in people’s minds will stick for a long time. Get to know the community’s opinion in these ways.
Talk to the Staff
The only people closer to the business than the customers are the employees. Typically, if a business is for sale, the sellers should have no problem with you speaking to their employees. Similar to the interviews with parents, these conversations can give you the inside scoop on how day-to-day operations of the business are truly going.
Talking to current employees can also give you a heads up if any of them intend to leave when the previous owners exit. Recruiting new staff right at the onset of acquiring the business is a major headache to avoid if possible. Understanding if they intend to stay and whether they are satisfied with their current work arrangement can give you a valuable piece of insight.
Learn Enrollment History
Whether or not the daycare business is successful now, you should find out if they have had consistent success in years past. If this year they are booming but they have previously been under-enrolled, that could be a concern. Perhaps that is the reason they are looking to sell now – because the business finally looks like it’s operating well and they are ready to end their struggles when they can get a good price.
Checking out the enrollment can also tell you if they have been able to maintain consistent customers over time or if they have had the same clientele for a while. Daycare is a limited-time engagement, if their business is leaning towards one family or group, that may be a sign of higher risk. If one goes, they all go. Ensuring they have had a steady flow of customers from diversified sources can be a sign of a healthy company.
Consider the Economy
Larger than just the daycare business you are looking to buy, the greater economic health is another factor to be considered. Think about the cause and effect of the state of the economy around you. Is it a good time to be buying a daycare business? For instance, if the economy is currently booming, parents are more likely to put their children in daycare. This could be because of excess income coming in or a parent who was previously the caretaker deciding to rejoin the workforce to take advantage of good opportunities. On the flip side, people are more likely to take care of their own children in a poor economy. What’s more, they are more likely to also take care of other people’s kids, creating a one-two punch to the daycare industry.
If the only reason the business looks ready to purchase is because of a booming economy, consider that all good economies eventually correct the course, which could mean less-intriguing circumstances in the near future. You will want to evaluate the daycare business to determine if it would be able to succeed in more perilous times.
Evaluate Your Financing Options
Now that we’ve gone over how to effectively assess if a childcare company is priced right and can continue to thrive for the foreseeable future, you’ll have to come up with the cash to buy it.
There are two main options to consider for financing: using personal funds and taking advantage of seller financing.
Using personal funds doesn’t mean that you have to have tons of cash lying around in a savings account. There are a pretty wide variety of avenues to consider when looking into your personal funds:
- “Liquid” savings (cash, savings and checking accounts, anything easily convertible into cash)
- Retirement savings, 401K loans, etc.
- Personal loans
- Small business loans from the SBA
- Home Equity loans
While people typically don’t like to touch the assets they have worked hard to acquire, such as retirement balances and home equity, these are still tools made available to you that you should consider. Of course, there is an inevitable risk associated with any investment.
The second major item to consider is seller financing. Essentially, this is when the seller is willing to take payment for their business from the continuing profits generated by the business after you are in control. Instead of asking for full payment upfront, they receive a portion of the profits until they are fully paid off.
Seller financing won’t cover 100% of the cost of the business, so you’ll still have to put something down as a deposit. Typically, sellers are willing to cover 30 to 60% of their buyout with seller financing. Not only does this relieve much of the burden of the initial price tag of buying a daycare business, but it can say a lot about the health of the business. If the seller is willing to take a cut of future business profits, they are assuming there will be profits in the future. Willingness to rely on future profitability is a testament that they are selling you a business they believe in.
License and Registration
Just like being prepared with documents and certifications if you get pulled over, you must take care of the administrative tasks of licensing and insurance before acquiring a daycare business.
Licensing does not typically transfer with a daycare business when the ownership changes. Instead, the “new” business normally has to seek a new license to operate. As well, you can’t purchase personal licenses from the owners. You’ll need to make sure you are qualified and able to obtain licensing and state certifications as a childcare provider before considering making a purchase.
One thing you certainly don’t want to do if you’ve acquired a daycare business is to continue taking care of children without an insurance policy. Daycare insurance has some specific requirements in order to protect you from damages. It typically is more complex than your average business insurance. Insurance can cost anywhere from $250 to over $2,000 annually and needs to cover things like professional liability, abuse and molestation insurance, and general, property, and umbrella coverage.
Ready to Buy
Once you’ve walked through the process with experts, assessed the health of the business, evaluated your financing options, and can ensure you will be properly covered as far as licensing and insurance, you can ask yourself if you are ready to buy the daycare business. Navigating these complicated questions can increase your confidence and understanding of the business. The last thing you want to do is buy a daycare business without knowing if it’s a good investment. Take the time to work through these steps and you’ll be well on your way to making a wise purchase.
What if I don’t have the funds to pay for a business?
It is still possible to buy a business without all the money upfront. However, you’ll have to get creative in securing financing and loans to cover where you come up short. The more willing the seller is to accept seller financing, the better. You may want to consider partnering with an individual investor who can help cover these costs to get you into the business you are passionate about.
How do I know if the sellers are being honest?
Short of being able to read minds, you don’t. This is why the process of verifying the information they are feeding you is so important. Don’t skip the steps of consulting with experts and interviewing the other involved parties, such as current customers and employees. While the owners may be more biased or motivated to sell, the other stakeholders are more likely to just tell the truth.
Please note: This blog post is for educational purposes only and does not constitute legal advice. Please consult a legal expert to address your specific needs.
Whether you decide to buy or to simply start from scratch, our startup documents have got you covered. Check them out here.