Valuation Multiples for a Daycare
The daycare industry includes businesses primarily providing daycare for infants and children. There are nearly 683,000 daycare centers operating in the United States. This industry generates over $55B in annual revenue. Thus, this industry is highly fragmented with the average daycare center being rather small, producing around $100,000 in annual revenue. With the increasing demand for daycare, now may be a great time to buy a daycare or sell a daycare. The first step in that process is understanding the value of a daycare.
Valuing a Daycare
A business valuation can help you feel confident you are buying a daycare at a fair purchase price. For those who are selling a daycare, understanding the value of a daycare can help you determine a listing price. In addition, knowing the value will help you negotiate with potential buyers. Get started today by scheduling a free consultation with Peak Business Valuation.
A valuation expert determines the value of a daycare using a variety of methods. One of the methods they use is valuation multiples. Below is a brief overview of what valuation multiples look like in the daycare industry. Keep in mind these numbers are only a guide. For more specific information about a daycare you are wanting to value, schedule your free consultation. Be sure to also check out Valuing a Daycare and Value Drivers for a Daycare.
Disclaimer: These multiples have been provided for educational purposes only. As such, the information provided does not constitute valuation advice and should not be acted as such. These multiples do not represent the valuation opinion of Peak Business Valuation or any of its valuation professionals. Instead, you should seek the guidance and advice of a qualified business valuation professional with respect to any matter contained in this article.
What is a Valuation Multiple?
One of the ways a valuation expert values a daycare center is by using valuation multiples. A multiple is like a ratio. It compares factors to each other. For instance, a common multiple in valuation is an SDE multiple. The SDE multiple compares the seller’s discretionary earnings with the implied value of the business. The valuation expert uses multiples of similar daycare centers sold on the open market and applies the multiple to your daycare to get a range of value.
For example, if a daycare has $175,000 in seller’s discretionary earnings, and receives a 2.54x SDE multiple, then the business would be worth $444,500.
On the contrary, if the daycare center receives a multiple of 2.89x then it would imply the value of the company is $505,750. ($175,000 times 2.89x)
As a business appraiser, Peak Business Valuation works with dozens of individuals who are looking to buy, sell, or expand a daycare. Because we have worked with multiple daycare centers, here is a range of valuation multiples that daycare centers transact at and are valued at. Keep in mind every daycare center is unique and as such the range of value can be significant. As such, we recommend speaking with a valuation expert about your specific daycare. Below we discuss SDE, EBITDA, and REV multiples for a daycare center.
Average SDE Multiple range: 2.39x – 3.35x
According to our data, daycare centers transact between a 2.39x – 3.35x average SDE multiple. To derive an implied value of a daycare, apply the multiple by the most recent 12-month period of revenue. The calculation is as follows:
SDE X Multiple = Value of the Business
For instance, if a daycare generates $480,000 in sellers’ discretionary earnings and transacts at a 3.12x multiple, then the business value is worth approximately $1,497,600.
$480,000 X 3.12x = $1,497,600
Seller’s discretionary earnings is a common cash flow multiple used in valuing small business transactions specifically daycare centers. It starts by calculating the company’s operating profit and adding back potential expenses that may not be incurred by a new owner. These expenses may include the owner’s compensation, the owner’s personal expenses, and other expenses such as non-recurring or non-related business items.
Average EBITDA Multiple range: 2.99x – 4.37x
The average EBITDA multiples for a daycare range between 2.99x – 4.37x. Apply this multiple to EBITDA to derive an implied value of the business. The calculation is as follows:
EBITDA X Multiple = Value of the Business
For example, a daycare has an EBITDA of $145,000 and transacts at an EBITDA multiple of 3.33x. Using the above metrics, the daycare is worth approximately $482,850.
$145,000 X 3.33x = $482,850
An EBITDA multiple measures a company’s return on investment (ROI). This multiple is preferred as it is normalized for differences in capital structure, taxation, and fixed assets. Normalized ratios allow for comparisons to similar businesses. Normalized ratios also more accurately represent the future earnings a buyer can expect from the business.
Average REV Multiple range: 0.48x – 0.78x
According to our data, daycare centers sell for an average of 0.48x – 0.78x revenue multiple. You can calculate the implied value of the business by multiplying the amount of revenue or sales a daycare makes by the valuation multiple.
Revenue X Multiple = Value of the Business
For instance, if a daycare makes $625,000 in revenue and transacts at a 0.67x multiple, then the business is worth approximately $418,750.
$625,000 X 0.67x = $418,750
In most cases, the REV multiple does not consider the operations of the daycare center. As such, a valuation expert may less frequently rely on this multiple. Therefore, it is important to look at cash flow multiples. Cash flow multiples – SDE and EBITDA – consider expenses that impact cash flow. For instance, COGS, salaries, rent, and expenses, among others.
When looking at valuation multiples for a daycare, keep in mind there are many factors that may impact this business. These factors will affect the multiple a valuation expert uses to value that business. As such, Peak Business Valuation, business appraiser, would love to talk with you more about the factors that may impact the value of a daycare center.
Peak Business Valuation, business appraiser, loves working with small business owners to maximize the value of a childcare business. We focus on helping individuals be successful in growing, buying, or selling a daycare. Questions are always welcome! Get started by scheduling your free consultation below! Be sure to also read Valuing a Daycare, and Value Drivers for a Daycare.
Schedule Your Free Consultation Today!