Preschool Business Valuation Benchmarks

Business owners, prospective buyers, and industry investors rely on a diverse set of financial benchmarks to assess the value of a business. We have compiled data from comparable sold businesses to provide insight into the business for sale market and important benchmarks for pricing and evaluating preschool businesses relative to industry standards.

See also: Day Care & Child Care Business Valuation Benchmarks

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Highlights of Preschools Sold on BizBuySell

Preschools and early learning centers listed and sold on BizBuySell are privately owned small businesses that provide care and education for children, primarily aged 3-5. While most preschool businesses sold are independently operated, franchise brands do appear among those sold, and are included in this data set. Generally, preschool and early learning centers operate out of dedicated commercial property, with fewer than 5% operating out of a home. Sizes vary greatly, but most of these businesses are licensed for 10-50 children.

Preschool Business Sale & Asking Prices

The majority of preschool businesses sell between $200k and $1MM, with a median sale price of $450k. The largest 10% sell over $2MM, while the smallest 10% sell under $150k. With a sale-to-ask ratio of 0.91, there is a greater disparity between asking and sale prices than the broader market, especially toward the upper end of values.

Preschool Business Valuation Multiples

Valuation, or pricing, multiples are financial tools that allow for comparisons between businesses that have different levels of sales and financial performance. They represent the sales price of a business relative to its revenue or earnings, and given enough individual business sales data, they represent what the market is willing to pay for a business given its revenue and earnings.

Valuation Ranges

Business values and associated multiples are influenced by a variety of macroeconomic factors such as interest rates, inflation, consumer spending, and overall economic growth. However, among businesses in a particular industry, size often matters most, with larger businesses fetching higher valuation multiples. Valuation multiples of preschool and early education center businesses range from 1.8 to 4 times annual owner's earnings, and 0.5 to 1.3 times annual revenue.

Revenue & Earnings Multiples

Earnings multiples represent the value of a business relative to its owner’s discretionary earnings or "cash flow". Arguably the most important valuation tool - as seller's discretionary earnings will often dictate how much a buyer is able to borrow to finance the business acquisition - business valuations tend to hinge on a reasonable earnings multiple.

Revenue multiples represent the value of a business relative to its overall sales or revenue. In conjunction with an earnings analysis, revenue multiples are often used as a secondary calculation to validate a valuation.

How to Interpret These Multiples

We calculate and provide valuation multiples from our database of "comparable" businesses sold on BizBuySell. Multiples based on comparable businesses - "comps" in business broker parlance - are useful for valuing businesses for sale. They represent the values at which similar businesses sold, and provide a way to calculate prices based on market values. Business brokers and valuation professionals will always turn to local comps when pricing businesses for sale or evaluating businesses for acquisition.

Quartiles, Median, and Average

No two businesses are identical, and as such, valuation multiples exist in a range. We have carved out four common values within this range: Bottom 25% is the lower quartile, and represents the value under which the lowest 25% of valuation multiples fell. Top 25% is the upper quartile, and represents the value above which the highest 25% of multiples fell. Median is the middle of the range, and average is the mean of the set. Mean is usually higher than the median, because a small number of high value businesses sold at multiples above the upper quartile will skew the average up.

Businesses with consistent financial performance, above average revenue and earnings, demonstrable growth potential, low owner involvement, unique competitive advantages, and a seller willing to finance will command a multiple at or above the upper quartile. Lower volume businesses with lower profit margins, full-time owner involvement, and many direct competitors will trade at or below the lower quartile. Most businesses will fall somewhere in the middle.

Based on this data, half of preschool businesses are valued and sold between 1.83 and 4.05 times their annual seller discretionary earnings, with 25% of well-run, larger companies trading above this range, and 25% of smaller, less desirable businesses trading below.

Financial Benchmarks

To determine how a business compares in terms of sales volume and financial performance relative to industry peers, it’s necessary to have some insight into industry standards. "Benchmarking" describes the practice of comparing a business’s financial performance to typical industry standards to determine where a business falls relative to other businesses in the same industry. These benchmarks can help guide business owners and buyers towards appropriate valuation multiples from the range above.

To that end, we have aggregated financial performance of preschool businesses sold on BizBuySell that can be useful for comparing a given business to the market.

Discretionary earnings (used interchangeably with the terms "cash flow" and seller's discretionary earnings or SDE) is often the crux of business valuations, so it is important to benchmark it relative to other similar businesses traded on the business for sale market. Revenue volume plays a large role in business valuation, as it measures the size of the potential income opportunity for new ownership. It's not uncommon for buyers to select an earnings multiple range based on overall revenue volume.

The table and chart below include revenue and earnings ranges of preschool businesses sold on BizBuySell over the past five years.

How Revenue and Earnings Level Affects Business Values

Obviously, higher levels of earnings lead to higher valuations, even given the same multiple. However, valuation multiples also tend to rise with business sales volume. Preschools that consistently generate higher sales (and maintain benchmark profit margins) tend to sell for earnings multiples on the higher end. So, an early education center generating over $1MM in annual revenue may sell for an earnings multiple of 4, while a smaller preschool business with sales of less than $500k may trade below 2 times its owner's discretionary earnings.

This tendency for higher sales volumes to fetch higher valuation multiples is largely driven by the economics of business acquisition financing. Businesses with greater revenue and earnings give buyers more cushion to cover debt service obligations and still have enough left over to pay the new owner a reasonable income.

Sector Comparisons

For a more complete understanding of the market and valuation standards, consider comparisons within the broader education and child care sector when benchmarking preschool businesses. The chart and table below include key metrics from sales of select education and child care businesses on BizBuySell.

Most education and child care related businesses tend to be valued similarly, as they share core business characteristics, with the primary driver of higher valuations being volume of sales. Preschools generate average sales on the high end, strong average profits, and so tend to command earnings multiples on the higher end as well.

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