If you are considering retirement or you want to move on to a different career, you may want to sell your daycare business to someone that will be proud to run just as you were when you first started the venture.
If you are going by the average annual revenue of $37,000, which is the median in the United States for the daycare industry, your business can be sold for anywhere from $12,950 to $24,050 based on the chosen percentage (or multiplier) of 35% to 65%.
What do all of these mathematical calculations mean exactly? Read on to find out!
The Easiest Method to Value Your Daycare Business
When you see it’s time for you to sell your daycare business to another owner, you will want to find out the value of your overall business.
The easiest method to value your daycare business is calculating the percentage of annual revenue. It will actually create more value as you sell your business as long as you are able to determine the correct percentage (or multiplier) for the overall calculation.
Valuing a daycare business usually has a multiplier of 35% to 65%, but you should consult an expert in this subject to find the correct multiplier that’s right for your specific business based on:
- Your annual revenue.
- Is it above the national average?
- Is it below the national average?
- Think of ways to increase your annual revenue before selling.
- Enrollment rates.
- How full you are to your daycare’s capacity.
- How much money you make from daycare rates.
- Location of your daycare.
- Is it a prime location for a daycare?
- The competition around your daycare.
- Is your business worth more due to the competition in your area?
- Are you the only daycare business within a certain mile radius?
- Amount of children currently enrolled.
- Money making potential.
- The value of your real estate.
- Are you renting or do you have a mortgage on the property?
- If renting, is the rent high or low?
- If you own the building, how much is the market value?
How Do I Do the Percentage of Annual Revenue Calculation?
To conduct the percentage of annual revenue calculation:
Annual Revenue x Percentage= Value of the Business
Going by the example of average annual revenue of a daycare being $37,000, let’s just say that the multiplier is 50% for ease of calculation.
$37,000 x 50% (0.5)= $18,500
Hence, using the 50% multiplier and $37,000 as the annual revenue would value your business at a base value of $18,500. Of course, particular factors can increase or decrease your daycare business value at selling time.
What Can Decrease the Value of My Daycare Business?
Try to be sure that you do not fall into any of these traps that could possibly decrease the value of your daycare business.
- Telling employees and parents that you are selling the business.
- Reassure your labor force is not costing you extra labor costs.
- Be sure your rent prices aren’t too high for your real estate.
- Unreported income will decrease the value of your business.
Learn about Daycare Expenses.
Tips to Increase Your Purchase Price
Here are a few tips for increasing your daycare’s value once you have found a buyer interested in purchasing your business.
- Enroll in the Federal Food Program
Get in touch with your state’s local Department of Agriculture to enroll in the Child and Adult Care Food Program (CACFP). You will actually increase your daycare’s value because you are increasing monthly cash flow that will pay for food costs and food preparation labor costs.
Usually, daycares in normally low-income areas take advantage of this program to fund free breakfast and lunch for their students. Unless you are in a higher income area where parents pay to privately enroll their children at your daycare, you may not be thinking this Food Program is beneficial as you could hire a food prep team and charge higher enrollment costs due to the higher income community.
- Keep Organized Financial Records
Make sure that all of your daycare’s financial records are accurate, up-to-date, and professionally written. Your profit and loss statements should reflect the numbers that are on your business tax returns.
Remember to maintain constant checks and balances not only from your business bank account’s records, but have your own copy generated using a professional bookkeeping application on your company’s desktop computer or laptop.
To make it easier for keeping organized financial records, you may want to hire a third-party accountant to help you. You can also take accounting classes (if that makes you more comfortable) to be able to do the accounting in-house for yourself as the owner.
- Ensure the Sale of Your Daycare is Confidential
If you start telling your employees and parents that you are going to sell your daycare, parents may cancel enrollment for their children and employees could move on to another daycare establishment to work. This could be due to the fear of change.
Some parents and employees may not like the idea of another owner taking over the business for fear that he or she will do things differently than you do that could upset their current experience at your establishment.
The only individuals that should know about you selling your daycare are your account, any lenders, your attorney, and your accountant. Stress to them the need for confidentiality and that you selling your daycare business should not be discussed with anyone affiliated with your business or even any of their colleagues, acquaintances, family, or friends.
What Are Other Ways to Increase My Daycare’s Value?
Check out this Solutions 4 Childcare article about the 25 keys to success in selling a daycare business in order to find out other ways that you can increase your daycare’s selling value.
The Higher Your Annual Revenue, the Higher Value of Your Daycare
Of course, the average national annual revenue of $37,000 was only used as an example in calculating the value of your daycare business. If you have revenue that is lower than the national average, you may want to take some time to increase it over another couple years to increase the value of your daycare business when it comes time to sell it.
If your annual revenue is more than $37,000, you will actually benefit and profit more and could possibly start the process of selling your daycare now?
- How long does it take to sell a daycare business?
It really depends on your particular situation. Selling a daycare business could take as little as 9-12 months or even longer. This depends on if you find an interested and qualifying buyer and the process for switching over ownership to his or her name.
- How can I do in-house accounting without having to hire an accountant?
Do your own in-house accounting without having to hire an accountant (besides taking accounting classes) by:
- Getting tutorials from bookkeeping application companies.
- Watch YouTube to learn the accounting basics of checks and balances.
- Have a family member or friend familiar with the subject tutor you in accounting.
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.
To learn more on how to start your own daycare checkout my startup course and documents here.