Selling a Daycare Center

Enrollment against capacity

Every center has a licensed capacity, set by the licensing agency from the size of the building and the ages of the children. A buyer starts by comparing that capacity with enrollment, month by month, for the past several years. A center that is nearly full sells differently from one with half its rooms empty, and the gap between enrollment and capacity is where a buyer sees opportunity or risk. The buyer will want the exact figures from your records. Waitlists count, especially for infants and toddlers, since those rooms are the most expensive to staff and the hardest to fill.

Age mix gets close attention. Infant care requires more adults per child than a room of four year olds, so an infant room that is full is profitable only if the tuition is priced for it. Buyers will look at tuition by age group and compare it to nearby centers. They will also look at the seasonal pattern. Many centers lose children in late summer when kindergarten begins, and some school age programs fill up only in the summer months. Ask yourself whether your enrollment history shows a business that refills each fall, or one that is slowly shrinking.

Retention is a number buyers like to see. How long does a family stay, how many siblings enroll, and how many new families come by referral. Online reviews and the center's reputation among local pediatricians and elementary schools show up in the same discussion. Our post on recurring revenue and contracts explains why predictable income raises the price.

Staff, ratios and the director

Staff are the largest cost and the most fragile part of the business. A buyer will want a roster with every teacher and aide, their credentials, hire dates, pay and hours. The licensing agency sets the number of adults required for each age group, and a center that is short of qualified teachers cannot fill rooms no matter how many families are waiting. Turnover is the question that matters. A center where lead teachers stay for years gives parents a face they know, and a center that loses several teachers every year is expensive to run.

The director is the person a buyer worries about most. A strong director handles enrollment, parent relations, staff schedules and the licensing inspector. If the owner is that person, the buyer will ask who takes over, and the answer shapes the price. If you are the director and you plan to stay for a transition, say so early. Our post on how long you stay after selling describes what buyers usually expect.

Background checks, health screenings and training records are required for staff in most places, and a buyer will check that every file is complete. Gaps here lead to problems at the licensing review, and a clean staff file is a small thing that signals a well run center.

Tuition, subsidy and the books

How the center gets paid affects its value. Private tuition from families is the most predictable income. Many centers also take payments from government child care subsidy programs, employer arrangements or food program reimbursements, and a buyer will want the payer mix. Subsidy payments can arrive late and follow program rules about attendance and rates, so a center that depends on them needs a record of how reliably they were paid. A buyer will also ask about registration fees, late pickup fees and deposits, along with any tuition families have paid in advance, which is a liability the buyer assumes.

Buyers and lenders will ask for business tax returns, monthly profit and loss statements, a balance sheet, payroll records, an enrollment report by room and age group, tuition schedules, and the family handbook and enrollment agreements. Our guide to getting your financials ready for a buyer covers the basics. Cash receipts and informal arrangements, such as a discount for a teacher's own child, should be documented and shown in the books, since buyers will not pay for income that cannot be traced.

Because the owner often draws a modest salary and the center runs on thin margins, the way earnings are adjusted matters a great deal. Our post on seller's discretionary earnings shows how a buyer arrives at a figure for a center like yours.

The license and the inspection file

A child care license belongs to the operator and the location, and in most places it does not move automatically to a new owner. The buyer typically applies for their own license or a change of ownership approval, and the licensing agency reviews the buyer, the building and the program. This takes time and has to be planned. Rules vary by state and your attorney confirms what applies to your center. Many deals are written so that closing waits until the license is in the buyer's hands, and families keep attending during the wait.

The inspection file is the first thing a careful buyer reads. Reports, citations, corrective plans, incident logs and any substantiated complaints will all be reviewed. A center with a long clean record has an advantage. A center with repeated violations for ratios, supervision or facility conditions will have trouble finding a buyer or a lender. Accreditation, quality rating participation and any curriculum certifications are further points in a center's favor.

What has to transfer

The building matters more than in most businesses. A center is designed around classroom size, fenced outdoor play space, restrooms, a kitchen and pickup traffic, and few buildings can be converted at a reasonable cost. If you lease, the landlord's consent and enough remaining term are critical, and our post on the lease is part of the deal explains the process. If you own the building, a buyer may want to buy it, lease it, or do both, and our post on real estate attached to the business covers the options.

Vans, playground equipment, security systems, software for billing and parent communication, food program agreements and insurance policies are also reviewed. A buyer will want to know how and when parents will be told. Telling families too early risks an exodus, and telling them too late costs trust. Our post on when to tell employees applies equally to teachers.

What tends to sink a sale

Daycare sales stall for familiar reasons. Enrollment has been sliding and the owner blames the season. Teachers leave once the sale is known. The inspection history has an item the owner did not mention. The buyer cannot get a license on the timeline the lender expects. The landlord refuses to extend. Or the building needs repairs that come out of the price at the last minute.

How to get ready

Work on the things you can control. Keep enrollment records by month and age group in a form you could hand to a stranger. Raise tuition on a schedule if you have been underpriced. Fill the open teaching positions and make sure each file is complete. Review your inspection history with a critical eye and fix what you find. Develop an assistant director who can run the center when you are away. Start the landlord conversation early.

Business Advisors of America prepares the valuation and the sale materials, and screens buyers for funds and experience. If you are thinking about selling a daycare center, that page explains how we work.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.