Maximizing Child Care Business Profits & Value
All childcare business owners should aim to increase profits and business value. Your childcare business is likely your largest investment and a substantial portion of your net worth. Therefore, you must actively manage your business profits to protect the value of your childcare business.
Unfortunately, most childcare owners struggle with increasing business profits and often need to learn the value of their childcare business or how to increase business value. Efforts to increase profits often only include focusing on increasing Gross Revenues. Increasing Gross Revenue alone may not be enough to increase profits. When trying to improve the profitability of a childcare business, it is essential to focus on the right things.
Focus on the Right Things:
- Increase Gross Revenues
- Increase Profits
- Increase the Multiple
Increase Gross Revenues
High gross revenues with low profits mean less income for you as a business owner and a lower business value. Full enrollment with low tuition rates will not result in good business profits. High gross revenues may make the “topline” look good; however, the “bottom line” profits create a financially healthy business, income for the owner, and a more valuable child care business.
Probability begins with analyzing and calculating the “true cost” to provide care – all labor, fixed, and variable costs – every cost. Without knowing exactly what it costs to provide care for each age group (and classroom), you cannot set tuition rates that will result in the desired level of profits.
For example, I often find that a childcare business is losing money in some classrooms –not just the infant room, breaking even in some classrooms and maybe making money in a couple of classrooms. For instance, a center with eight classrooms – losing money in two classrooms, breaking even in three classrooms, and making money in the other three classrooms. To generate an acceptable level of profits and business value, the tuition rates charged for all classrooms (age groups) must be high enough to cover all costs plus the desired profit level.
Increase Profits
As noted, profits start with charging the correct tuition rates. Then, it takes ongoing management to manage all costs daily – i.e., labor, facility, supply, etc. Managing costs is not something you can put on “autopilot.” Labor costs can quickly spiral out of control without proper daily scheduling and monitoring. Just because your labor costs were reasonable last quarter does not mean they will be good this quarter without your daily oversight.
Increase the Multiple
Childcare businesses are valued based on applying a multiple to cash flow. It gets confusing…but the multiple can be a multiple of EBIT (Earnings Before Interest and Taxes), EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Rent), SDE (Seller’s Discretionary Earnings) or some other number – like is said, “It gets confusing.” Basically, multiple is a measure of risk. The less risk, the higher the multiple; the higher the risk, the lower the multiple.
As a childcare business owner, your goal is to operate your business in ways that provide for a stable, financially healthy business today and a business that will continue to produce predictable results for a buyer. This is achieved by reducing risks by having a well-trained management team and employees, systems, and procedures, sound financial management, making the business less reliant on you, and other factors that ensure the ongoing success of the child care business. Buyers pay higher multiples for childcare businesses that have a significant likelihood of continued success and financial performance after the purchase.
Focusing on the right things helps childcare business owners increase profits today while decreasing risks, resulting in a higher business value.
Our Child Care Business Value Acceleration Program™ is a systemic process designed to improve profitability and value. A financially stronger and more valuable business will provide an asset you can sell, transition to the next generation, or an ongoing high personal income.
