I received the following question from my national blog:
COMMENTS: I have owned my childcare facility for 15 years and I am carefully considering buying an existing childcare for sale. I found your article about how much a business should sell for. This business for sale grosses 550k @ 70% capacity and the sellers records showed 75k profit. The are asking 300k. I feel 200-225k might be more appropriate. Any advice? Thank you, I emailed because your article has been the most imformative incising people I have talked to and research conducted!
Thank you for the note. I would agree with you.
First, you need someone to make sure about that earnings number. But if it is seller’s discretionary earnings of 75K, that means one owner made $75K per year owning and running that business. That isn’t all that much. Really they are selling a job (as opposed to something that is creating cash flow that you can save for a return on investment). A nice job with some perks, but also some hard work. A multiple of 4 is too much. Often companies with earnings under $100K go for 2 to 2.5 earnings.
I admit I don’t know much about the market and multiples for small childcare facilities. However, there are many that are sold each year and that data is accessible. My associate Fred Hall does business valuations for banks and business owners. He recently launched an inexpensive appraisal business that will give you comparable transactions around the country, and will really narrow down that multiple for you for that level of earnings. You can reach him at: www.affordablebusinessappraisals.com. I’ve copied Fred on this message in case you want to ask him questions.
If you are serious about buying this business it would be well worth the few hundred dollars to find out what these businesses really sell for.