The Turnaround Trap: Why Underperforming Child Care Businesses Struggle to Sell
Owning and operating a profitable child care business has always been challenging. The challenges have only increased since COVID for many reasons – staffing shortages, inflation, rising costs of everything, difficulty increasing tuition rates to cover the true cost of care, more parents unable to afford childcare, and ongoing changes in federal and state funding programs.
Numerous reports and surveys provide feedback from childcare owners and data, all reflecting similar information and noting common challenges, such as the recently released 2026 Early Childhood Education Benchmark Report. The report includes lots of data. For me, one of the most telling findings was “75% of childcare professionals report occupancy at 70% or lower, and 48% report levels at 50% or lower.”
Working in childcare Mergers and Acquisitions, I often analyze dozens of childcare businesses each year, and I see firsthand the impact of low enrollment on a childcare business’s financial performance. Childcare businesses with low or no mortgage payments or rent on the building are often the only ones that can stay in operation with occupancy (enrollment to licensed capacity) at 50% or less. And, those lucky, no-mortgage owners must also control labor costs and all other expenses, or they too will face serious financial struggles.
Increasingly, we are seeing more childcare businesses large and small, individually owned and multiunit operators, and chain operators reporting “soft” – low enrollment. Financial underperformance has led more childcare business owners to seek to sell. However, these owners often face challenges when selling a childcare business that is not performing well financially and needs to be turned around.
There is much talk about the hundreds of private equity buyers aggressively buying up childcare businesses, some paying high prices, and this, coupled with the constant talk about the lack of childcare, and care deserts has lead many childcare business owners to think that no matter what the financial performance of their childcare business – there will still be hundreds of buyers lining up to buy it. This is just NOT true!
As I speak with childcare buyers every day – individual buyers, regional and national chain operators – almost all of them make it very clear – “We Are Not Buying Turnarounds.” It does not matter how beautiful the building is, how strong the market is, or how great the reputation in the community… NO Turnarounds!
As you read this, you are probably saying, “What?” “I thought there were hundreds of buyers, ready to pay high prices for any childcare business.” The childcare owners I personally must deliver this news to when they reach out to me for help selling their financially underperforming childcare business – say the same thing. Unfortunately, that is an inaccurate assumption.
Selling any business, much less a childcare business, is a complex task. But attempting to sell an underperforming or distressed childcare business makes the task exponentially more difficult. Why? The simple explanation is what childcare industry experts frequently note: turning a childcare business around differs from managing a healthy one because of the intense time compression and the severe scarcity of both human and financial resources.
Childcare business owners, like most entrepreneurs, hope things will get better and often do not seek expert help to turn their childcare business around. All the while, their financial savings are being lost. When they finally decide they cannot turn their business around, they look to sell.
While private equity-backed childcare chain operators have the money to purchase underperforming childcare businesses and attempt a turnaround, they are extremely selective, focus on limiting risk, guard their limited resources – human and financial – and frequently decide to walk away from purchasing struggling childcare businesses.
When experienced buyers – individuals or private equity-backed operators – evaluate an underperforming childcare business, they do not just look at whether the business can be saved; they assess whether saving it is the best use of their resources – human and financial resources. They calculated through the lens of opportunity cost—the potential benefits forfeited by choosing one investment over another—using their resources to buy an underperforming childcare business, compared with the benefits to be gained from buying a well-performing childcare business.
We often talk about how much money – millions often – a private equity group has raised in a fund or allocated for the purchase of childcare businesses. However, funds are not unlimited. Buyers must carefully weigh the expected returns of a distressed childcare business turnaround against the gains they might miss from other, healthier childcare businesses for sale. While a successful childcare turnaround might promise large returns, the opportunity cost could mean giving up the stability of a moderate-growth, dependable childcare business.
Childcare business turnarounds require a tremendous amount of both financial resources and human resources. Turnarounds are not passive investments; they are grueling, complex, time-compressed events. Turning around a large or multi-unit childcare business requires complex restructuring, which can tie up the buyer’s top executive talent and its best childcare operations team. If a buyer’s best operational leaders are sent to stop a distressed childcare business from bleeding cash, that experienced leader cannot be utilized to scale a highly profitable childcare operation elsewhere in their portfolio. To justify this immense human-resource opportunity cost, experienced buyer firms rely on rigorous screening and qualitative judgment, frequently deciding that dedicating a specialized team to a struggling business does not justify the cost of missing out on another profitable deal.
Childcare is a unique business and requires experienced leaders to operate a well-performing business. The knowledge, experience, and expertise needed to turn around a childcare business are hard to find. It is common for a multiunit operator to have some childcare businesses that underperform, and some of these often struggle to turn around their underperforming locations. Buying additional financially underperforming childcare businesses to add to the ones they already own is not desirable.
Because private equity firms operate on specific fund lifecycles and target high internal rates of return (IRR), a distressed childcare business that might require an estimated four years to return to baseline profitability is a massive drag on the fund’s overall performance. Everyone involved in the acquisition is judged based on the rates of return on childcare businesses purchased. Experienced business buyers know – jobs – maybe theirs will be one of the ones cut when the required rate of returns on acquisitions is not realized.
Childcare business sellers of underperforming businesses often hope a private equity buyer will swoop in, write a check, and provide a “quick fix” to their woes. The reality is that turnarounds can require years of grueling operational restructuring. A standard turnaround period can last up to four years—comprising a year of losses, a breakeven year, a year of recovering profits, and a final year of consolidation to prove sustainability. From the perspective of a private equity firm, an underperforming childcare business is rarely viewed as a bargain; it is viewed as a massive liability. Risk they are rarely willing to take.
Owners of childcare businesses with low enrollment and underperforming financially have three options: One, figure out how to turn their business around themselves, often through trial and error, while continuing to suffer further financial losses. Two, reach out to experts with the necessary childcare knowledge and experience to develop and assist with implementing a turnaround plan. Or the third option is often to close the childcare business when they learn there are not hundreds of buyers with millions of dollars competing to buy underperforming childcare businesses.
If your childcare business is underperforming, do not delay seeking expert assistance to turn it around. Delays only result in greater losses, increased complexity, and a lower likelihood of a turnaround succeeding.
If you would like to discuss your childcare business, reach out to me. Conversations are confidential, and there is no obligation. 336-617-3181
Donna Dailey
