When it comes to selling your education or childcare business, several key steps can make all the difference. Whether you're considering retirement, seeking new opportunities, or planning a strategic exit, this guide provides valuable information on establishing an exit plan, enlisting professionals, and executing a targeted marketing campaign to successfully sell your business.
Education and childcare businesses play a vital role in the U.S. economy. These businesses not only provide essential services that support early development and the educational needs of children, but also enable parents to take part in the workforce. Education and childcare businesses encompass a wide spectrum, from organized care facilities to private schools and even specialized services like test preparation, camps, and professional development.
When it comes to selling your education or childcare business, the first step is understanding its value. Valuation methods vary, but most business owners and buyers use pricing multiples to assess their market value. This approach ensures objectivity and allows for a realistic and competitive asking price.
Market-based valuations in the education and childcare sector often rely on pricing multiples. These multiples compare businesses to similar ones that have recently sold, considering industry-specific factors like cash flow and revenue. For businesses with owner earnings under $1 million, the appropriate cash flow metric is Seller's Discretionary Earnings (SDE), which involves adding back discretionary expenses to the company's profits.
|
Education and Childcare Businesses Sold (2017-2024) |
Average Earnings Multiple |
Average Revenue Multiple |
|
Day Care and Child Care Centers |
3.14 |
0.85 |
|
Preschools |
3.16 |
0.97 |
|
Schools |
2.83 |
0.77 |
|
Other Education and Childcare Businesses |
2.01 |
0.60 |
Average Earnings Multiples for Education and Childcare Businesses
On average, education or childcare businesses have a cash flow multiple of 2.73, with a range of 2.01 to 3.14. Keep in mind that local market conditions, financial specifics, and unique business operations can influence your business's value. As a seller, it’s helpful to consider general market averages to establish a starting point.
Valuations Based on Sales or Revenue
While many education and childcare businesses, buyers, and brokers will use cash flow or earnings multiples when evaluating a business’ valuation there are situations where it's beneficial to consider revenue-based valuations. Revenue-based valuations provide additional insight into how a company compares to industry standards. To value a business based on revenue, you multiply its revenue by a suitable pricing multiple, typically using the average of the past three years' revenue as the basis for the calculation.
The average revenue multiple for education or childcare businesses is approximately 0.90, suggesting a business in this sector might sell for 90% of its annual revenue.
Documents Needed to Value Your Education or Childcare Business
When valuing your business, you'll need to gather various documents. It's advisable to have records going back three years. Providing potential buyers with comprehensive, organized documentation and solid bookkeeping demonstrates your business's past performance and future potential. Some of the documents to gather include:
While you possess in-depth knowledge of the education or childcare business you’ve built, you’ll want to consider hiring financial and business experts to help with the sale. Having a team of professionals with specific skill sets on board to help with valuation, marketing, and negotiation allows the business to run smoothly while it’s on the market. Accountants, attorneys, and business brokers can help ensure the sale transaction goes smoothly.
An accountant is essential for organizing your financial records and verifying their accuracy. They help demonstrate the value of your business based on its past performance. During due diligence, potential buyers will scrutinize your financials, making it important to have a CPA verify their accuracy. From tax advice to recasting financial statements and asset allocation, a CPA ensures compliance with tax laws and regulations.
An attorney experienced in business acquisitions is a valuable asset when selling your education or childcare business. They'll guide you through the legal aspects of the process and help draft important agreements like non-disclosure agreements, letters of intent, and offers to purchase. An attorney safeguards your interests throughout the entire selling process.
A knowledgeable business broker plays a vital role on your team. They act as intermediaries and advisors, offering market valuation, pricing analysis, and strategic guidance. Business brokers work on commission, typically around 10-15% of the final sale price, and offer a wide range of services, from valuation, to marketing, vetting buyers, and negotiating the deal.
Whether you're selling your education or childcare business to a trusted partner, passing it down to a family member, or listing it on the open market, a well-thought-out exit strategy is important. Ideally, you should start planning your exit at least three years before listing the business for sale. This extended timeline allows you to understand your business's value, optimize operations, organize your financials and enhance the business’s earning potential, boosting its value.
The timeline for selling a business can vary, typically lasting between six months to a year. In 2024, 190 education and childcare businesses were sold on BizBuySell, with a median time on the market of 181 days. Several factors influence the timeline, including the purchase price, industry and business type, buyer type, location, and whether you're working with a business broker, among others.
As you plan your exit, consider the factors that will make your education or childcare business appealing to potential buyers. It's important to focus on areas for improvement that can enhance the business's value. Some factors that can improve or reduce your business's price multiple include:
|
Improves Price Multiple |
Reduces Price Multiple |
|
Well-documented and organized operation: comprehensive financial records, detailed procedures, strong vendor policies, etc. |
Lack of organization: Inadequate bookkeeping, unreliable vendor relationships, informal agreements, etc. |
|
Prime location: near schools, residential areas, or high demand for services. |
Location with low demand or limited accessibility. |
|
Favorable lease terms, such as affordable rent and long-term agreements. |
Unfavorable lease terms, high rent, or leases requiring renegotiation. |
|
Optimized facilities and equipment, well-maintained with good records. |
Outdated or poorly maintained facilities and equipment. |
|
High student retention rate: A solid base of returning students. |
Low student retention rate. |
|
Experienced and committed teaching staff, likely to remain after the sale. |
Teaching staff without commitment to stay once the business is sold. |
|
Effective management systems in place, allowing the owner to focus on strategic decisions. |
Owner heavily involved in daily operations. |
|
High enrollment and revenue per student. |
Low enrollment or below-average revenue per student. |
|
Seller financing: Owners willing to finance a portion of the sale often receive higher offers. |
Cash-only transactions: Insisting on all-cash deals may limit buyer interest. |
When it comes to finding buyers for your education or childcare business, several options are available. Consider whether or not you want to sell your business to family members, employees, or place it on the open market. The goal is to get your business in front of enough interested parties to generate multiple offers.
Most business owners prefer to maintain confidentiality during this sale process. Keeping the sale confidential helps maintain value, and if you’re working with a business broker, they are adept at fielding inquiries from would-be buyers without revealing the company name. They will market your business for sale and create a “blind listing” on business-for-sale marketplaces. They will also have an NDA prepared for anyone interested in reviewing the details of your business. There are instances, however, when publicly announcing the sale to a few trusted advisors and competitors may be beneficial to see if they are interested in an acquisition.
When creating a listing on business-for-sale marketplaces, it’s important to create an impactful listing. It may be the first impression for potential buyers, so take the time to create a comprehensive and compelling listing. The top five components of a successful listing are:
The final steps of selling your education or childcare business involve negotiating terms and closing the deal. The due diligence phase can take a few weeks to a few months, depending on the complexity of the deal. The buyer will want to review your financials, business structure, operations, contracts and liabilities, customer data, employee information, legal issues, physical assets, and intellectual property. It’s not uncommon for issues to surface, so be prepared to negotiate. Modest adjustments to price or financing terms can alleviate many issues that arise.
Once all terms are agreed upon, the closing phase begins, during which necessary documentation is reviewed and signed. After the sale is complete, the transition of business operations to the new owner takes place, with assistance from your attorney and broker.
By understanding the value of your education or childcare business and the dynamics of the market, selling can be a straightforward process. Whether you list and market your business on your own, or hire a business broker, you’ll be on your way to a smooth transition and close the sale quickly.
Get our free Guide to Selling Your Small Business for an in-depth guide that will walk you, step-by-step, through the process of valuing and selling your education or childcare business.
