Author Topic: Buying Existing Daycare Center  (Read 1414 times)

SteadyDoinIt

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Buying Existing Daycare Center
« on: April 04, 2018, 11:31:50 AM »
I've always heard/been told that daycare centers are printing money and are a wonderful investment, so I've done a little legwork in my area and have found two for sale.

A little background on them:

They are for sale individually or together by the same owner(s) who are motivated to sell because of a divorce. Their cash flow is roughly $110k with total revenues ~$300k and a down payment of a little more than half of revenues for each. They are both at about 90% enrollment, have 8 staff (6 ft, 2 pt) each, have directors that are willing to stick around, and have food programs. These owners are apparently absentee and still pick up a great paycheck. For all intents and purposes, these look like successful businesses from a layperson's point of view.

Before I get my head too involved in the possibilities, who has some background knowledge on these businesses? What are the potential headaches? Would more or less involvement increase cash flow at all? The biggest question: is there something that I'm missing here?

I'd love for any feedback and will check back to respond individually to whoever takes some time to shed light.

Thanks guys!

Shieldmaiden

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Re: Buying Existing Daycare Center
« Reply #1 on: April 16, 2018, 10:02:26 PM »
I'm afraid I can't be much help, but perhaps someone in the mini-mustachians sub thread can help shed light on this? There has to be at least a few mustachians who work in a daycare that watch that subforum.

LessIsLess

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Re: Buying Existing Daycare Center
« Reply #2 on: April 17, 2018, 07:24:24 AM »
Obviously make sure the numbers add up. 

Day care is quite sensitive to the economy, so when employment is good like right now, more parents have jobs.  But when the economy turns, parents stay home to watch their kids.  Not only that, they watch other people's kids, too.

If you want to buy, see if the owner would offer more owner financing so you won't be out a large chunk of cash.  At the same time, if you do have a chunk of cash, you may be able to negotiate a decent deal since it's a somewhat "distress sale."

FuzzyRunner

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Re: Buying Existing Daycare Center
« Reply #3 on: April 17, 2018, 11:58:43 AM »
I would check with your local daycare laws and see if you are going to want to maintain what is needed to stay up and running.  I have looked into starting daycare in my area and the local laws are ridiculous.  Luckily you probably have everything set up the way you need but every year you'll probably need to re-up your certifications, etc. every year.  You'll also want to make sure you're willing to keep up with the paperwork and reporting needed to maintain your certifications (eating schedules, medication documentation, etc.)

Check the businesses current policies and see if you are ok with keeping them or only changing them a little.  How are payments made, at what time, deposits needed, etc.  Big changes in how the business is run can lose customers. 

Have you checked reviews (google, yelp, etc.) on the current business?  Any staff members that aren't getting good reviews?

HipGnosis

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Re: Buying Existing Daycare Center
« Reply #4 on: April 18, 2018, 09:59:26 AM »
I read somewhere to be leery of sellers numbers.  Of most anything.

Liberty Stache

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Re: Buying Existing Daycare Center
« Reply #5 on: April 19, 2018, 08:06:38 AM »
Obviously make sure the numbers add up. 

+1

Do the simple math of:
-I see X # of kids X pricing is $Y/kid/yr + other sources of revenue (book fairs, etc) = total revenue
-See how much the insurance is, I've been told that its a significant portion of the expenses. Then call around to different insurance companies to see how much YOU getting the same insurance would cost.
-See how many employees there are and figure out how much are they being paid, does that expense line item make sense.

In general, you want to be able to verify as many of the revenue sources & costs as possible before you buy the business to make sure they make sense.

Also, scope out the local competition. If you were a parent, what are your choices in a 10 mile radius (quality, cost, location, etc)? What are the local trends (where are new houses built, where are the existing and new jobs located, etc.)

If one of the directors left, could you manage it temporarily while you back fill the position. Do you have the skills to evaluate/hire new employees  when the eventual turnover occurs?

My fear would be how do you run this small, local business if one or more of your key employees left while having a full time job elsewhere? My guess is there's a reason this owner has TWO of these facilities. If one director leaves, pay the other a temporary bonus and have them run both while the owner back-fills the director spot.
"Sloth, like rust, consumes faster than labor wears, while the used key is always bright" ~Benjamin Franklin, The Way to Wealth

specialkayme

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Re: Buying Existing Daycare Center
« Reply #6 on: April 19, 2018, 09:02:33 AM »
In my immediately previous career I was a bankruptcy attorney. I either put companies into a Chapter 7 (closed the business) or into a Chapter 11 (court restructuring). I've seen, both from the ones I've done and the ones I've watched, probably hundreds if not thousands of companies declare bankruptcy, or more importantly not be able to afford bankruptcy and their owners declare bankruptcy. Based on that experience, there are two industries that I will never be a part of (as an owner or investor, in any way shape or form): restaurants and daycare centers.

The three (from what I've seen) industries that take the biggest hit from an economic downturn that aren't able to survive it are the restaurant industry, the daycare industry, and the construction industry. But when times are good, the construction industry can make enough profit to justify the risk. Plus they are able to cut back (to almost nothing) on their expenses to weather economic downturns. The same can't be said of either the restaurant industry or the daycare industry. They are required to maintain high overhead despite the low income. Which requires large cash reserves (or lines of credit) for "just in case" situations.

Moving specifically to the daycare industry, on paper they always look like the print money. And I write a weekly check to my daycare, so I'm well aware of how both sides of the equation operate. But all that glitters isn't gold. Most daycares have a substantial amount of administrative work and expenses, specifically as it relates to the licensing requirements and the insurance requirements. Those two have a tendency of sucking up most of the free cash (assuming it wasn't gone already for franchise fees). Employees are hourly, and you often have to manage them intensely. If one calls out sick, you need to be able to have a back up on the spot to maintain ratios for insurance and licensing needs. That back up will, in one way or another, cost you. Employees aren't easily found either. They typically aren't paid much, but have to withstand rigorous background checks. Finding replacements are hard, and there is typically high turnover. In my experience, most daycares service the middle to lower class (as the upper class can afford, and often find it cheaper to afford a private nanny, than to pay for daycare for 2 or 3 kids). Nothing against middle and lower class working people, but sometimes employment ends for them somewhat randomly, or a big financial emergency hits that they can't afford. Contracts for long term services are difficult, if not impossible, to enforce. Chasing parents for bounced checks can often become a job in and of itself. That's not to speak of the food subsidy requirements, the food preparation and associated expenses (or the nutritionist you need to hire), the registered nurse you need to have on call in the event of an issue, and the myriad of other heath and safety requirements. That doesn't even get into the basic rent, utilities, supplies (art, books, cleaning, furniture), ect. expenses.

That's also looking past the potential for "inflated numbers" that the old owner may have. If it's really printing money, why is the old owner "motivated to sell because of a divorce." There are many reasons that may make it valid, but it causes some suspicion. If you do want to move forward, have as much of it owner financed as you can, and have the transfer littered with representations and warranties that you can go after them in the event the business isn't as he said it is.

In the end, I wouldn't touch the industry. But your association of risk may be different.

SteadyDoinIt

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Re: Buying Existing Daycare Center
« Reply #7 on: April 20, 2018, 10:34:29 AM »
@specialkayme for the win.

Thank you for the powerful insight.

I was hoping for somebody with near direct experience to speak up, and you definitely came strong. It seems the risk, both literal and implied, well outweighs the financial benefits (if there are any at all).

Who knows, maybe these centers are doing well right now, but they're also likely running on all cylinders. Economy is fairly great in my region, the directors of the centers have been in place for some time, and enrollment is near its max. Should any of those factors change in any way, the headache > than the cash flow.

Seems like a low overhead, quick to market service business may be more prudent. Who has a word on that?

specialkayme

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Re: Buying Existing Daycare Center
« Reply #8 on: April 20, 2018, 12:13:50 PM »
Happy to help.


Seems like a low overhead, quick to market service business may be more prudent. Who has a word on that?

Can you provide an example of what you mean?

I'm a red panda

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Re: Buying Existing Daycare Center
« Reply #9 on: April 20, 2018, 05:21:23 PM »
Having never bought a business, my question is:
If an absentee owner is getting a paycheck, why would they sell?

Something seems missing here.

calimom

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Re: Buying Existing Daycare Center
« Reply #10 on: April 20, 2018, 06:45:07 PM »
Having never bought a business, my question is:
If an absentee owner is getting a paycheck, why would they sell?

Something seems missing here.

It sounds as though the sellers are getting a divorce and need to sell their assets to split the proceeds. As for owning a daycare center, it would seem an ideal buyer would need to have a passion for small children and their development. Quality daycare should be seen for the community asset it is.  Otherwise, it seems like not the best fit. OP, if you're looking for a business purchase with a decent bottom line have you considered things like office cleaning, carpet services, vending machine routes, that type of thing? Things like that might have a good ROI.

jedithunder

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Re: Buying Existing Daycare Center
« Reply #11 on: April 23, 2018, 10:28:47 AM »
to join in on some of what has been said above. (From a person who works in running a child care center)

The state licensing can be incredibly difficult, we were a $100 over budget just to meet the requirements of moving into a new facility. ( which was already set up with classroom-style spaces)

The staffing is extremely challenging. ( It is a F*cking nightmare, and I think I am good at it)

The care of little human beings is exhausting and expensive.

SteadyDoinIt

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Re: Buying Existing Daycare Center
« Reply #12 on: April 24, 2018, 11:11:49 AM »
Happy to help.


Seems like a low overhead, quick to market service business may be more prudent. Who has a word on that?

Can you provide an example of what you mean?

Something like a residential house cleaning service is the first example that comes to mind.

Can be run with minimal start up - need a website/seo and to find a great part-time employee. Employee can be one that I already know but doesn't have enough steady business. "Hey (person that I already know cleans houses), I can help you go from part-time to full-time and will pay you $X/hr. What do you say?"
Little overhead - some or most of the customers may provide their own cleaning supplies, but even if they don't, they aren't expensive in the least. Employee will drive themselves - I can entertain a mileage reimbursement for them should they feel underappreciated. Ongoing marketing - my least developed skill but one that can be found in partnership. Only other overhead that I can imagine is liability insurance to cover any mishaps.

Other obvious needs: a massive market base in a consolidated area, solid marketing, and customer retention plans.

The finance and customer conversion/retention can be run by myself on the nights/weekends until or if it becomes too busy.