When evaluating the sale value of a business, a common approach is to use a multiplier applied to the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Essentially, EBITDA functions as the net profit of the business before taxes and other deductions, making it a straightforward metric for assessing value. For childcare businesses, the typical multiplier ranges from 3 to 4, and occasionally 5, depending on specific circumstances.
Understanding Multipliers in Childcare Business Valuation
The multiplier represents the number of years it would take for a buyer to recover their investment from the net profits. For example, a 3-year multiplier means the buyer breaks even in 3 years, while a 4-year multiplier extends that to 4 years. However, additional factors can significantly influence this calculation:
- Leased Premises: If the business operates in a leased location with only 3 years left on the lease, using a 3-year multiplier becomes problematic. Buyers would barely break even by the time the lease expires, creating uncertainty about renewal terms. This risk could deter potential buyers unless they see other opportunities, such as moving the license to another location.
- CWELCC Program Impact: For CWELCC (Canada-Wide Early Learning and Child Care) licensed centres, the difficulty in obtaining a CWELCC license adds intrinsic value. Some buyers may see potential value despite lower profitability due to CWELCC restrictions, though this will depend on their strategic goals.
Example Valuation: Non-CWELCC Centre
This is a hypothetical example of a non-CWELCC Centre. For a non-CWELCC childcare centre with 80 students, the annual profit might be around $325,000. Applying the standard multiplier of 3 to 4, the business could be valued at approximately $975,000 to $1.3 million. This straightforward calculation remains consistent for non-CWELCC centres.
The Challenge of CWELCC Valuations
CWELCC centres face different constraints due to the 2025 guidelines limiting profits to 7.75% of expenses. For instance, a centre with annual expenses of $1.3 million could generate a maximum net profit of around $100,000. Using a 3-year multiplier, the business would be valued at $300,000. This figure often undervalues the business when considering factors like renovation costs or goodwill.
Balancing Profit and Goodwill
If the net profit is about $100,000 and a $1 million valuation, it would mean that it could take 10 years for a buyer to break even—a scenario that many buyers would find unattractive. However, adjustments can improve the valuation, such as:
- Adding Back Salaries: If management salaries can be added back as net profits, the valuation may increase.
- Goodwill: The exclusivity and difficulty of obtaining a CWELCC license can add intangible value. Buyers might prioritize guaranteed enrollment and government-supported income over immediate profitability.
- Lease Term Stability: A centre with a 10 to 20-year lease provides long-term operational security, making longer break-even periods more acceptable to buyers.
Factors Influencing CWELCC Centre Valuation
At its core, the valuation of CWELCC centres is a balancing act between:
- The buyer’s perception of the CWELCC program’s importance
- The timeframe within which the buyer can realistically break even
For example, a purchaser may accept a 5-year break-even period if there’s guaranteed income and operational stability for another 10 years or more. Others might extend that timeframe if additional value can be demonstrated through goodwill or strategic benefits.
Final Thoughts
Childcare business valuations, particularly for CWELCC centres, are not one-size-fits-all. While traditional methods like the EBITDA multiplier provide a starting point, other elements such as lease terms, goodwill, and unique licensing opportunities significantly impact the final valuation. Ultimately, the value is determined by how much a buyer is willing to pay based on their strategic goals and risk tolerance.
