How to Value a Daycare
According to IBIS World, there are over 561,000 daycares in the United States. These establishments primarily help with childcare and supervision, early childhood development, and social development. The daycare industry has struggled over the past several years due to COVID-19 and staff shortages. However, we can expect healthy growth in the coming years. Revenue will likely grow to over $74 billion dollars and profit margins are expected to rise. This is ideal if you are looking to buy, grow, or sell a daycare. However, the daycare industry remains highly competitive. To succeed, it is important to understand how to differentiate your daycare center. You can start by learning how to value a daycare.
The most effective way to learn how to value a daycare is to receive a business valuation. During a business valuation, a valuation analyst assesses the risks and benefits of a daycare. In addition, they will determine the value of a daycare you are buying or selling. This information can help you take the next steps to increase the value of a daycare.
Peak Business Valuation, business appraiser, works with many daycares throughout the country. We are happy to provide you with a business valuation for a daycare. Additionally, we can answer any questions you have on valuing a daycare. Start now by scheduling a free consultation with Peak Business Valuation below!
How to Value a Daycare
When deciding how to value a daycare, there are many valuation approaches to consider. At Peak Business Valuation, our business appraisers often use the market approach and/or the income approach. Both approaches are effective in determining the value of a daycare. However, each method uses a different basis of valuation. The business appraiser determines the most applicable valuation approach during a business valuation. This often includes using a combination of valuation approaches.
Valuing a Daycare Using the Market Approach
The market approach is popular when valuing a daycare. This approach is similar to the approach real estate appraisers use to value a house. Real estate appraisers determine the value of a house by comparing it to similar properties that recently sold in the area. When valuing a daycare, a business appraiser assesses the value of similar daycares that recently sold. If the daycare is a private business, the business appraiser uses private transaction databases.
Multiples for a Daycare
When using the market approach to value a daycare, business appraisers work with valuation multiples. Multiples are financial ratios that assess value based on various metrics such as cash flow, earnings, or sales. To find the valuation multiples for a daycare, valuation experts apply the proper NAICS or SIC code. Below we show how to value a daycare using multiples.
SDE (Seller’s Discretionary Earnings) Multiples for a Daycare
- The SDE multiple measures a daycare’s cash flow by multiplying its seller’s discretionary earnings by the multiple. This multiple is popular when determining how to value a daycare.
EBITDA Multiples for Daycares
- The EBITDA multiple represents a daycare’s earnings before interest, taxes, depreciation, and amortization. This indicates the return on investment (ROI) a daycare can expect.
REVENUE or SALES Multiples for a Daycare
- When using the REVENUE or SALES multiple, business appraisers apply a multiple to the daycare’s revenue to determine its total value.
To learn more about multiples, see Valuation Multiples for a Daycare.
Valuing a Daycare Using the Income Approach
The income approach is another common valuation method a business appraiser considers when deciding how to value a daycare. When using the income approach, a valuation expert determines the future cash flow potential of a daycare. The income approach also assesses the risks of buying or selling a daycare. We discuss a few of these risks below.
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- Staff Shortages: Many daycares struggle as a result of staff shortages. As such, it is vital for daycares to find and train skilled staff members.
- Competition: The daycare industry is extremely competitive. It is important to find ways to differentiate from competitors.
- Financial Performance: Many daycares struggle to remain profitable. Daycares need to build financial strength through careful planning and budgeting.
- Health & Safety Concerns: Daycares are responsible for the well-being of children. It is vital to ensure safety and health at your daycare.
Methods to Value a Daycare Using the Income Approach
There are many variations of the income approach. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Both of these approaches assess the future earning potential of a daycare. Below, we discuss how to value a daycare using these income approaches.
Capitalization of Cash Flow Method
- Valuation analysts often use the capitalization of cash flow method for valuing daycares with stable histories. When using the capitalization of cash flow method, the business appraiser determines an appropriate measure of economic income for a specific time period. The income is then divided by an appropriate capitalization rate. The capitalization rate represents the rate of return an investor can expect from the daycare. This method also examines the risks associated with the daycare. Some of these risks are listed above.
Discounted Cash Flow Method
- The discounted cash flow method is best for daycares with strong financial histories. In addition, business appraisers often use this method for daycares with reliable forecasts. The discounted cash flow method involves using 3-5 years of future earning projections. The expert divides these earnings by a discount rate rather than a capitalization rate to account for the time value of money. Keep in mind, the discounted cash flow method is less common since it relies on future cash flow estimates which can be inaccurate.
Summary
When valuing a daycare, business appraisers may use the market approach and/or the income approach. The approach the business appraiser uses depends on various factors. To know how to value a daycare, receive a business valuation. During a business valuation, a business appraiser assesses the strengths and weaknesses of your daycare. They will also determine the fair market value of a daycare you are buying or selling. With this information, you can take steps to maximize the value of a daycare.
If you are buying, growing, or selling a daycare, Peak Business Valuation, business appraiser, is happy to help! Peak works with daycares on a regular basis. We are happy to provide you with a business valuation for a daycare. We can also discuss any inquiries you may have about how to value a daycare. Start now by scheduling a free consultation with Peak Business Valuation below!
Be sure to also check out Value Drivers for a Daycare. Valuing a Daycare. Valuation Multiples for a Daycare.
