Buying a childcare business can be a very smart business decision. The best prepared search is organized around tangible criteria and comparable operating metrics so that every prospective center is evaluated against the same requirements. The buyer's thorough due diligence is critical during this process to ensure the reasonableness of value and the adequacy of future business prospects.
Based on experience in dozens of childcare acquisition transactions, here's my suggested list of best practices and due diligence for any search to acquire a childcare business:
1. Be represented by a licensed broker
Buying any business is a complicated process and if you haven't been through it before, you're vulnerable to terms or conditions you may regret later. Don't contact a childcare center or listing broker directly--recruit your own broker and let them make the first call. Having representation will not cost you anything.
You are best served with exclusive representation rather than a sale where the same agent acts as 'selling & listing' agent, or serves in a "duel agency" capacity.
Buyers and Sellers have an inherent conflict of interest, and accordingly each should be represented by different brokers to ensure that their individual best interests are always the highest priority of their respective brokers.
2. Establish your acquisition criteria with a business plan
Start a business plan ahead of your search with a description of the business you want to buy, the market where you want to locate, the families you plan serve, services you plan to offer, and the business scale that fits your ambition and budget.
These are just a few of the steps needed so the earlier you get started, the better prepared you will be to buy and finance a business.
Click here to download my brief Business Plan Guide to writing the most effective business plan.
3. Research, research, research
You need to understand the local market where you plan to buy. Who lives there? What are their age ranges? Area income averages? Average home values? Which elementary schools serve the area? And most important, what's the number of children in the area?
Once you've learned about the market, turn your attention to the industry. Who provides childcare services in this area now (your future competitors)? Do these centers have waiting lists or class vacancies? Answering these questions can begin to confirm that conditions are right (or not) to buy into the area.
4. Evaluate each center with consistent criteria
Develop a checklist of information needed to evaluate individual childcare centers. Start your due diligence on the internet before visiting the center, checking the state regulating agency's site, and other public records such as local business licensing, Secretary of State's corporate records, and the county Tax Assessor.
Click here to download my Childcare Site Visit form for a starting list of information needed about prospective acquisitions (and future competitors when possible).
5. Learn how to value a childcare business before you search
While the ultimate "market value" may seem to be your price agreement with the seller, there are other parties who will have to concur with that valuation to facilitate a successful closing. Banks will not finance the purchase of a business with a perceived inflated value and they will rely on an appraiser's opinion to establish their position.
Sellers generally price centers at the top of the scale, but knowing how to accurately assess a reasonable value assures the Buyer that the final negotiated price will be within an acceptable range.
Click here to read more about valuing a childcare center business.
6. Review & analyze the seller's financial results
The financial statements & tax returns will be heavily relied on by your bank to decide whether and how much to lend for the acquisition. Understand how these numbers provide a true picture of the past performance of the business.
Click here to download my Financial Analysis spreadsheet to make a comparative review of the financial information provided by the seller.
7. Prepare financial projections to estimate future operations
Whether you're already in business or not, detailed financial projections are needed to ensure that you've carefully evaluated the changes in revenues and expenses that will occur by opening the business under new ownership and the accompanying debt.
Your bank will rely heavily on these projections and critically review their reasonableness when deciding whether to lend you funds for the acquisition. Get familiar with how these projections serve as a crucial tool that helps owners manage the planning/budgeting process and enhance your future operating success.
8. Start the loan application process early
You'll be knee-deep in the details of the business you target to buy after an exhaustive search. Early in your business search, identify your lender and begin the loan application process.
Best case, you'll be pre-qualified for a loan subject to a purchase contract. Worst case, you'll identify business or personal issues that can be resolved up front before you're counting down to a closing deadline.
Click here to get started on your loan.
9. Are you really ready?
It's a good place to mention that talented individuals who've not had previous hands-on experience in the childcare business will have the added burden of proving to a lender that they can successfully adapt to the rigors of the business quickly. The many challenges faced by those already in the trade are exaggerated for anyone who's never competed in this business.
Parenthood and years spent as a school teacher are not without merit, but don't necessarily prepare anyone to assume management of a business operation with only peripheral familiarity. The larger the loan request, the more scrutiny an applicant will face in this category.
If you've never been a childcare center operator before this venture, the best course of action is to prepare yourself thoroughly ahead of time. Enroll in classes and certification tracks offered by the state regulatory agency and trade associations to broaden your knowledge of what's actually required beyond what you already know about business.
Further, it's strongly suggested that you recruit a seasoned person with plenty of industry experience to become either a partner or key-employee to support your learning curve during the first two or three crucial years in business.
10. Establish your limitations
It's important to determine your personal limits ahead of your search for the center you plan to buy, such as location, size, price and overall condition. You'll likely own the business for an extended period, meaning any compromise made in the beginning will be a condition you'll have to live with for years. Be mindful of your most important criteria and if the business you're looking at doesn't meet them, pass.