How To Value A Childcare Business

Valuing a childcare business is a crucial step whether you’re preparing to sell, attract investors, or simply understand the financial health and future potential of your operation. Childcare businesses in Australia are in consistently high demand due to government funding initiatives, dual-income households, and a growing population, making them highly attractive to investors and buyers alike. An accurate, fair valuation not only sets realistic expectations for both sellers and buyers but also highlights opportunities for growth and improvement within the business.

Key factors influencing childcare business value

When valuing your childcare business, several key factors might play into the final result. We have detailed these below:

Occupancy rates

One of the primary indicators of a childcare business’s performance is its occupancy. A consistently high occupancy rate demonstrates strong demand and operational efficiency, which will boost your valuation.

Government subsidies and funding compliance

Childcare centres in Australia often benefit from government rebates, like the Child Care Subsidy (CCS). Compliance with regulatory and subsidy requirements directly impacts your business’s viability and value. Subsidies will also make your business look more attractive to buyers and investors, so it’s vital you stick to the requirements to get the best price.

Location and premises

If your childcare business is in close proximity to schools, residential areas, and public transport, the appeal to buyers and investors will be boosted instantly. Purpose-built premises will also often attract higher valuations thanks to their operational suitability.

Licensing capacity

The number of approved places the centre is licensed for directly affects the revenue potential and business value. The more places you’re licensed for, the better your valuation will be, as it’s an indication of how well your business is growing. Buyers will be more interested in a healthy childcare business with bigger licensing capacity.

Staff qualifications and stability

Well-qualified, long-tenured staff are invaluable in a childcare setting, and your buyers will recognise this as a huge win. By reducing turnover-related costs and contributing to consistent care quality, you can boost your business’s valuation instantly.

Reputation

Positive word-of-mouth, online reviews, and community presence can enhance demand and occupancy rates, which both improve your value and appearance to buyers.

Profit and loss statements, and other financial records

Strong, verifiable financial records, including revenue growth, profit margins, and clear expense tracking, are fundamental to determining market value. Without clear financial records, it’ll be much more difficult to get an accurate valuation – so bookkeeping should never be underestimated.

Valuation methods specific to childcare businesses

There are many valuation methods for childcare businesses to use, so it’s up to you which one you use. However, investors and buyers might be more interested in seeing certain metrics than others, which could influence your decision. Here are four options specific to childcare centres:

Multiple of earnings (EBITDA) method

The EBITDA method involves applying a multiplier to the business’s Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA). Childcare centres typically operate with consistent, recurring revenue streams through long-term enrolments and government subsidies, so their EBITDA offers a reliable measure of profitability for buyers and investors. Australian childcare businesses generally range between 3x to 5x multiples, although this will depend on your location, centre capacity, profitability, and reputation.

Revenue multiple approach

The revenue multiple approach applies a multiple to the business’s gross annual revenue, which can be used to estimate its market value. This method is often used when profit margins are volatile or financial structures vary widely, but revenue remains steady. This is most common in businesses with high overheads, like staffing and maintenance. Multiple for childcare businesses typically range between 0.8x and 1.5x annual revenue, although there are several influencing factors for this.

Discounted Cash Flow (DCF) method

The Discounted Cash Flow (DCF) method estimates a business’s present value by forecasting its future cash flows and discounting them back using a risk-adjusted rate. This method is ideal for larger childcare centres or groups of centres with predictable, long-term cash flow and government funding. However, it’s highly sensitive to assumptions around growth rates, occupancy, and future government policy changes, so it’s not the best option for all childcare businesses.

Net profit approach

Using net profit to value your business uses a multiple, usually between 2x and 4x, depending on your centre’s capacity, lease terms, location, management stability, and more, and adds it to your net profit for childcare businesses. This is a straightforward and reflective way of valuing a business, especially for smaller businesses with steady profits and occupancy rates. However, its simplicity makes it less useful or impressive for potential buyers and investors.

Common mistakes when valuing childcare businesses

When valuing your business, it can be difficult to navigate all of the possible pitfalls and mistakes other owners make. To help, we’ve listed a few of the most common mistakes made when valuing childcare businesses:

Overestimating future occupancy growth

One of the most common mistakes business owners make is basing their valuation on optimistic projections of their future growth without the supporting evidence to back it up. While your goal might be to increase occupancy over time, you might not always achieve this, as demographic trends, local competition, economic shifts, and changes to government subsidies, to name a few, can affect your business. Assuming unrealistically high future occupancy rates not only inflates a business’s perceived value but can also put off prospective buyers or investors.

Ignoring regulatory compliance risks

Childcare businesses in Australia operate under stringent regulations, which cover everything from staff qualifications to ratios, safety protocols to subsidy compliance. A common oversight when it comes to valuing these businesses is underestimating the financial operational impact of maintaining compliance. Not to mention the risks associated with non-compliance. Buyers and investors place significant importance on good regulatory standing, and any risk surrounding this can negatively impact your business’s valuation.

Undervaluing lease agreements

The terms of a childcare business’s lease are incredibly important in a valuation, but are often overlooked by owners. Centres with long-term, secure leases often hold greater value thanks to the stability and security they provide. On the other hand, short lease terms, high rent-to-revenue ratios, or leases subject to frequent reviews can lower a business’s appeal and reduce its market value. Both valuers and buyers will closely look at your lease’s terms, so it’s essential that you account for this when preparing a business for sale or valuation.

Inadequate financial documentation

Accurate and transparent financial records are the backbone of any reliable business valuation. Unfortunately, some childcare centre owners maintain incomplete, inconsistent, or poorly organised records, which can seriously undermine a valuation. Valuers typically require at least three years of financial data, including profit and loss statements, balance sheets, occupancy reports, payroll records, and subsidy payments. Without this information, prospective buyers might look at the business as higher risk, likely resulting in a lower offer or less market interest.

Neglecting community and brand reputation

In a community-focused industry like childcare, reputation is a significant factor in business value. Centres with strong community ties, positive parent feedback, and excellent online reviews often generate higher valuations thanks to their strong occupancy rates and ability to attract new enrolments. Overlooking the importance of brand perception and word-of-mouth marketing is a critical error to make when valuing your business. You should always be monitoring and managing your public image, so that you can factor your reputation into your valuation strategy.

Enhancing your childcare business’s valuation

If you’re looking to increase your childcare business’s market value, here are a few practical steps you can take:

• Improve your financial reporting: Maintain accurate, up-to-date financial records and separate business and personal expenses so buyers can see exactly what the business requires.
• Increase occupancy rates: Implement marketing campaigns, introduce flexible enrolment options, and build referral programs to maintain strong enrolment numbers so buyers can see they’ll get a good ROI.
• Strengthen staff retention and training: Invest in professional development and retention programs to foster a stable, qualified workforce that you can pass on to the next buyer.
• Secure long-term lease agreements: Negotiating favourable, long-term premises leases provides stability and can increase the confidence of your potential buyers and investors.
• Enhance online presence and reputation: Encourage positive reviews, build an engaging website, and maintain active social media channels to boost community standing and enquiries, all of which will boost your valuation and buyer interest.

FAQs

How long does it take to sell a childcare business in Australia?

The time taken to sell a childcare business in Australia typically ranges between 6 and 12 months, but this timeframe is based on several factors. These include your business’s location, size, profitability, occupancy rates, lease conditions, market demand, and more. For example, if your business is in a high-performing area with a long waitlist, it’ll likely sell faster than one in a more obscure area. How quickly your business sells depends solely on its health.

What multiple do childcare businesses typically sell for?

The general rule of thumb for a childcare business in Australia is that it sells for a multiple of 3x to 5x EBITDA. In some cases, high-performing businesses with strong occupancy rates and pristine reputations might sell for even higher 5x. The multiple you achieve depends on your business, so it’s difficult for us to predict without the details. However, an accurate valuation should give you a good idea of how much you can sell your business for in the future.

Should I use a broker to value my childcare business?

We highly recommend getting in touch with a licensed broker or professional valuer experienced in the childcare sector – especially if you’re unsure or inexperienced in the world of valuations. While you might be tempted to estimate your business’s valuation by yourself to save some money, childcare businesses have complex variables that can trip you up and leave you with an inaccurate valuation. This might lead to lower interest in buyers or broken trust with investors. Brokers can also give you invaluable advice on how to sell your business, along with their network of contacts to make the process that much easier.

Get in touch with a business valuation expert near you

Valuing a business is incredibly important to ensure that you’re appealing to the right buyers and investors. The value of your childcare business can vary depending on several factors, including your financial performance, online presence, enrolment and occupancy, and more. With multiple ways to value a business, it can be a daunting process for business owners who have plenty of other things on their plates! Get in touch with us today to see how we can help you value your business professionally and accurately.

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