To many people entering the childcare industry, determining the “right” price for a daycare or school can feel like a total mystery. If you’ve started your research, you might have heard a dozen different metrics: $7,000 per seat, $10,000 per seat, $30,000 per seat, net profit percentages, or complex multipliers.
It can sound like a lot of “mumbo jumbo,” but as a buyer, you need a grounded, logical formula to ensure you aren’t overpaying. In the professional business world, valuation isn’t a guessing game, it’s math.
The Magic Formula: SDE x Multiplier
The standard method used to value a daycare is based on Seller’s Discretionary Earnings (SDE) or Net Profit multiplied by a specific Multiplier.
- Net Profit: The money left over after all bills are paid, but before taxes.
- The Multiplier: This represents how many years it will take for you, the buyer, to “break even” and earn back your original investment.
In the daycare and school industry, the market multiplier is between 3 and 4. When the school is smaller in size, then it might be closer to 4. If it’s bigger, closer to 3.5. We rarely have a 3 times multiplier in recent years. For the purposes of a healthy acquisition, we can look at a 4x multiplier. This means if a business makes $100,000 in annual profit, you pay $400,000. For the first four years, the business essentially pays for itself. In year five, you finally start putting real profit into your own pocket.
Warning: If a seller asks for an 8x or 10x multiplier, you are essentially agreeing to work for free for a decade before seeing a return. If the building lease is only five years long, a high multiplier makes zero sense, you could lose the location before you even break even!
Case 1: The Private School (Non-Funded)
For private schools or daycares that do not receive government funding, we look at the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
- The Math: Let’s say a private school has a net profit of $300,000 per year.
- The Valuation: Using a 4x multiplier, the fair price would be $1.2 million.
- The Buyer’s View: You pay the investment off in four years and begin true wealth generation in year five. This is a standard, reasonable entry point for a solid business.
Case 2: The CWELCC Program (Government Funded)
Under the CWELCC program, profit is often capped (currently around 7.75% of total expenses). Because profit is fixed, using a multiplier on only the profit makes the business look artificially cheap. To find the real value, we combine the owner’s salary (management fee) and the fixed profit.
- The Scenario: * Owner’s Management Fee: $120,000
- Fixed Profit: $80,000
- Total “Take-Home” (SDE): $200,000
- The Valuation: $200,000 x 4 = $800,000.
This provides a much more accurate market price that reflects the actual cash flow you will step into as the new owner.
The “Tax Trap” Reminder
It is important to remember that these formulas use pre-tax numbers. In reality, you will pay personal income tax on your salary and corporate tax on profits. While we use a 4x multiplier as a benchmark, the “real-world” break-even point is usually closer to five or six years once taxes are paid. This is exactly why you cannot afford to “jack up” the multiplier – the longer the break-even period, the higher your risk.
Conclusion
As a buyer, your goal is to find a business with a reasonable multiplier – typically between 3 and 4. This ensures you aren’t just buying a job, but an investment that will actually pay you back in a reasonable timeframe. There are other factors that you should also consider before buying a daycare, read more here.
For other comprehensive daycare topics, visit our education site at https://operatorjourney.ca
