Acquisitions Anonymous - #1 for business buying, selling and operating - A $1.4M Preschool Business in LA: Preschool Profit or Pitfall? - Acquisitions Anonymous 299

Episode Date: May 21, 2024

In this episode of Acquisitions Anonymous, Heather, and Mills get into a preschool and daycare business up for sale in LA with an asking price of $1.4 million. They discuss everything from its stellar reputation to the real challenges of daycare management, like licensing, labor markets, and what it really takes to run a daycare keeping little humans happy and healthy. Hope you enjoy it Check out the listing here: https://www.bizbuysell.com/Business-Opportunity/a-mission-driven-daycare-and-preschool-real-estate-included/2179478/Thanks to this week's sponsor, Plane:Expand your team globally with Plane’s payroll and HR platform. Easily hire, onboard, and pay employees and contractors worldwide. Manage US and international payroll, benefits, and compliance efficiently. Plane automates payments and ensures tax compliance across over 240 countries. Learn more at plane.com/aapodcast.Learn how to buy a business.If you are interested in buying a business but unsure how to start, you should check Michael's Buy a Business Course:You will learn:• Build a thesis for the type of business that's right for you‍• Learn how to stand out in a sea of buyers• Create a working, scalable Deal Engine getting you leads• Maximize your chances of finding great dealsSubscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

The other thing that I don't love about this situation is this is kind of a, this is a business that has a very hard ceiling in terms of capacity. Yeah, really good point because you're right. That is exactly how people think of this service. Hey, everybody. Welcome back to another episode of Acquisitions Anonymous. Mills here, me and Heather talk about a deal she brought today out of California. That is a daycare center. It's a little bit smaller. These come in all kind of different shapes and sizes. And we talk about what would be beneficial versus what would kind of be not as a. attractive in this market. This business includes real estate. We talk a little bit about the complexity. I would put this as one of the harder businesses that we've ever looked at in terms of operating in compliance. I think for lack of a better term, no foul intended towards kids. But it's just a very difficult business. And when you look at these numbers, it seems like this is a business that is probably listed by the seller. You'll pick up some clues in the listing that allude to that.

But you can tell they love it. It's part of their kind of ethos and their personality. and that makes its way into the listing description, but it also, I think, I'd some issues with thinking about running this business if it wasn't your baby and if it wasn't, you know, something that you created from the ground up. I hope you enjoyed the episode. Stick around for a quick word from our sponsorship. Hey, everybody, it's Millnell with Acquisitions Anonymous. We have an exciting new sponsor that I want to talk to you about today.

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Hey, Heather. How are you? I'm good. Sorry for anyone that hears a cat yelling in the background, but as I was explaining to Mills, I have a cat that's getting a little bit older, and she has, we think, lost most of her hearing, and she just yells sometimes for a reason. So that's what she's doing. That's sorry. It could be weird. Sorry. You can have, you know, you can have people yelling in the background or something like that. So that's just a cat. And she's fine. She's just talking. So we've got an interesting deal here today. Yeah, I like this. Tell me more about it. What? What made it? All right. Well, this is a preschool and daycare in Los Angeles County. I will go ahead and read it, but I think this is an interesting industry for a lot of people. A lot of folks are kind of curious about buying these businesses. So this is on Biz Buy Sell. Asking prices of $1.5,000. Cash flow is $25,000. Gross revenue is $322,165. And there's real estate in year for $435,000, which is pretty small for Los Angeles. as far as a dollar amount. Yeah. Yeah.

So business description, step into a well-loved community established over 16 years. Those who truly care about children and recognize what it takes to earn the trust of their community will not hesitate to give this small business a closer look, recognizing a lack of clean, organized, nurturing child care options for their own children and the children of their community, the current owners embarked on a mission to create one themselves. Over the past 16 years, this daycare of preschool has earned. local and national praise, including five-star ratings across Google Yelp and Care.com. It has also earned three employees, but it has also earned three employees who've been

part of the community for several years, respectively. I didn't understand that sentence, sorry. Along the way, the business has grown each year of operation with the most recent gross revenue coming at $322,000 with cash flow at $256,000 and projecting potential for $500,000 revenue in 2023, which is already over. The current owners who are moving on to new ventures are committed to your success. In addition to all of the physical and digital entities, you'll need to hit the ground running, the owners are willing to add to their existing license for up to six months, making themselves available for consultation as needed.

The sale includes real estate, a 2880 square foot house that sits on a 7,361 square foot lot. 100% of the daycare's use, as well as two high traffic digital domains that promote the brand and generate enrollment inquiries. It's in Los Angeles. And that is what they are telling us about it. What do you think, Mills? This is interesting. Part of me wonders if it's listed by the owner, you know, something about the tone of it

makes me think maybe we don't have a picture of a broker. It says business is listed by Dylan Gans and there's no photo. It doesn't look like they're a. you know, dedicated broker with a profile on biz by sell. Interesting. Okay. So I think that there is a, I think there's a bowl case for preschools. It is a incredibly high trust, you know, exchange of services.

People drop their kids off to you and, you know, you have to keep them intact and healthy and, you know, not screaming their eyes out when the parents come back to pick them up. That is a really, really difficult transaction. to be the kind of custodian of. And I think you get paid for it. We don't send her kids to daycare, preschool, or anything like that. But the people who know, you know, even here in Columbia, which is not a super competitive market weightless for preschools when they are pregnant, not even have the kid yet and

start paying just to be kind of in line and hot spot. So I think that there's a strong bull case for it. What doesn't really add up to me is if they have three, let's just say they only have three employees because they've mentioned three and nothing else to tell us otherwise. Those three employees are only making like $70,000 a year total if that's their only cost, the difference between revenue and the cash flow. So something in numbers doesn't really add up here. I'm wondering if, you know, I don't know, maybe it's, you know, an owner kind of managed business and they participate in the day to day. day and they're wanting to take steps back. But I don't know that you could use just the kind of sticker price revenue cash flow numbers to predict anything going forward. You really want to get

into the weeds here. Yeah, I'm going to guess that they're not paying rent to themselves, that they own this. You know, it's a residential house. And you know, we've probably all seen these kinds of preschools where it's, it used to be a residence. And now it's, it's converted to a preschool, my guess is that they have not included any rent expense in this. And that's a common problem that we see in some listings where the EBITDA will shrink dramatically once you pay market rent or you include market rent in your pro forma cash flow. So that's probably part of it. But the industry in general is in high demand. It can be a great type of business to buy into. And you've got kind of, you know, to compare these private preschools to franchised,

preschools. You know, so you've got all these different franchises, Goddard. I'm going to forget half of them now. The only month's coming to one is Goddard, but there's so many of them that there's high end, kind of medium end, and a little bit lower end. I look at preschools where some of them are receiving government subsidies. And then so you want to look at the percentage of kids that are on a government program versus not. Some buyers like the stability of a market where they're getting mostly paid by the government. Obviously, they get paid on time. They know what to expect. But there's, you know, there's the downside of that as well, that the government could change the amount that they're paying or they could change the rules. And there's a little bit more of a

process to kind of get approved for that kind of funding. So I think the first thing you want to do with any preschool is kind of find out that mix. Are we private pay or are we on some kind of government program with the kids. And then if it's not a franchise system like this one, you know, what do they have? What are they offering? What makes this preschool stand out? Do they have a curriculum? What's the type of, you know, neighborhood that they're in? The house being only $435,000 in Los Angeles, unfortunately, it does tell me this is probably a lower income area because that's really, really cheap for a house in Los Angeles County. So this is probably a low-income area, which is fine. It just, you know, that's the clientele that you're serving and they're going to behave a little bit

differently. They might be a little more turnover, you know, people moving in and out. And so you want to kind of understand that, you know, who your client base is. I also think that the sellers, like you said, probably this is their own listing. They're probably not including their own salary in this cash flow figure. They're probably, they are this preschool director. In many other preschool businesses, especially the franchise concepts, often the owner is not the preschool director. They are not in the classroom. They are overseeing administrative and marketing and all of the other functions of the business. And this one feels like it's a owner operator who's really washing the kits every day, which is a, you know, a special breed of buyer that's going to sign up

to do that because that's a lot of work. So I do think that those are some of the challenges with this really small kind of private preschool. This one kind of reminds me of this dilemma that you see sometimes in smaller businesses. A lot of restaurants fit into this specific category. And it's the kind of real estate operating business dilemma and which one actually has the highest and best use and the highest value. there was a restaurant that actually is like within eye shot of my office window that ended up selling a

couple years ago. And I met with the owners because we had some mutual friends. And they were like, hey, what is our, you know, what is our business worth? And they owned the building as well. And it's kind of this iconic location and, you know, really great residential. And I just said, you know, really, you can't separate the two. It's either a real estate play or. nothing, you know, or maybe a real estate restaurant play, but the person who buys it can't relocate it,

right? This daycare, it probably works because, and I think a lot of daycares are this way, it's on the way between, you know, where the family lives and where the parents work. And, you know, you can't just say, hey, we're going to find another house, like, to your point, you may not be able to find another location for even close to the same price. but this is one of those situations where you say, okay, these folks might just be able to sell the real estate and that might be the best kind of avenue here. But they definitely want to and are trying to explore, can we get paid a multiple free cash flow instead of just the real estate value because the yield is going to be higher on that? Yeah, absolutely. And it's totally another point is location dependent businesses in general.

know, a lot of times we just have to sort out, like, how location dependent is this business? Sometimes even a manufacturing business is location dependent because it's too expensive to move. Yeah. You know, and fixtures are all kind of in there and you're not going to do that. So it's really always kind of an exercise to say, well, how location dependent is this business? This is highly location dependent. This is like retail. It's that location dependent.

And when they are, you should want to own the real estate. If you want the business, you should own the real estate. It wouldn't be worth it to be a tenant here ever. But yeah, this one's a little too small, but I like the industry and the growth potential for it. And the fact that, you know, there are so many different shades of, you know, of preschool available. There's really highly education oriented.

There's sort of the Montessori type. There's all kinds of different ways you can go with this. but I think this would be a tough one to buy as an independent. I am working with a client on a preschool deal right now where the sellers had at one time owned 18 different independent schools or not part of a franchise system. But when you get that big, they've got such a great system in each school that it's almost like a franchise operation.

They had a curriculum and they had procedures and they had professionalized staff. And so that's, you know, that's what you're getting. You know, you're getting kind of a piece of all of that. And that's really valuable in these kinds of situations. Unless you're a teacher or someone who's already run a preschool, maybe you've been a preschool director. This would be a tough business to step into, I think, when it's this small, because you're not going to get all of that professionalization most likely with something that's this tiny. I think it's tricky to at this size, Heather, for, you know,

for you to really have much, like, in the trenches as an owner-operator. and you can't call in sick for this type of business, you know, and you may not really have enough depth of the employee base. Like one or two people calls out. I don't know, I don't know how many kids. They don't talk about like their census, you know, how many students they have at any given time. But you got to think, I mean, even if there's 20 kids here, you can't just do that as one adult. Like you said, there's so many different shapes and sizes. Maybe this is half day.

Maybe it's full day. Maybe it's just after school care. Who knows? But still, you've got a, the compliance around these is, is nothing to, you know, bulk at. I mean, there's a lot of regulatory oversight that goes into this type of business. And to your point, you would not want to be figuring this out on the fly. They talk about, you can borrow our license for six months. Well, okay, let's just assume that you can get your license again in six months and get your own.

That is, that's a big, that's a big hurdle to overcome. And, you know, the purchase price and the structure would definitely have to reflect the risk associated with that. Because it's not in your hands and it's not in the seller's hands. It's going to be, you know, in the hands of some, you know, staff person who works for the state of California and one of their state agencies. So that's probably not a quick process either. No. I've seen, you know, any kind of license transfer is, it's before you even really go very far at all, let's just say you find a business you think you like.

You really have to go deep down that rabbit hole of what the license transfer process looks like, what the process of getting your own license really looks like and be realistic with the timeframes. I worked on a business once that was in California also, and it was tourism, you know, like buses. And there was a Department of Transportation license that needed to be transferred. And it turned out to be much more difficult than by. buyer or seller, the seller kind of thought he knew what that was going to look like. And it was way more difficult and took way longer than they thought. So yeah, any license transfer, you really want to go

check with third parties, check with other people who have bought businesses like this and what they ran into because that could kill the deal, basically, or you could end up wasting a lot of time on something that you can really never close. But speaking of the licensing, it also kind of brings that whole issue that you, anytime you're dealing with children, there's liability. And that's kind of why there's licensing, right, so that there's some kind of oversight to make sure that people are running these properly and that their background checks on everybody. I think that's always a concern in these kinds of businesses. Anytime you're dealing with children, it is something where you've got to look at the record of these folks. Have they ever haven't

had any complaints? And sometimes they're not valid complaints, but it doesn't matter. If someone has complained about anything, you really have to take that very, very seriously. And if you're going to be the one running the preschool, you know, boy, you know, you're the one that's going to be, you know, potentially dealing with that liabilities personally. So I think that's a lot to think about in these kinds of businesses. Yeah, absolutely. The other thing that I don't love about this situation is this is kind of a, this is a business that has a very hard ceiling in terms of capacity. let's say right now, you know, they have room for 30 kids and they only, you know, have 20 on average. When you get to the point where, you know, let's say it goes well, you, you migrate the licensure and, you know, you get it in your name and things are going well and your marketing and like it sounds like they have two digital build words, which I think the digital billboards are probably worth a substantial, you know, price in terms of the purchase price allocation.

But let's say it all goes well and you start growing the business. What are you going to do when you outgrow the space? You can't just double the size of the house. It's not like you're in a commercial strip mall and you just lease the space next door also when it becomes vacant. So this is one of those kind of hard ceiling in terms of capacity businesses where you go, okay, best case scenario, I'm going to hit a really hard stop. And then I'm going to have to go incur another lease and another kind of, you know, whole batch of fixed costs associated with a new location. And it's just seems like a little bit of a tough pill to swallow in that you have significant downside and you have a fixed amount of upside given the circumstances. Right.

And like a lot of businesses, there have been staff shortages in this industry. Any size preschool deal that I've looked at, that's a lot of business. one of the biggest concerns of the lenders is who's the existing staff, how much turnover have you had, are you paying current market wages? Because a buyer coming in here, if you lost your staff, you might have a lot of difficulty replacing them. Even the two or three people that you've got here, you're really heavily dependent on them. And it is a tight labor market for people like this. So that's another concern. I like the industry. I think this is a tough business, though, this particular one.

I think the dynamic here, too, Heather, is this is one of those services that has a maybe low perceived value. Like, you look at it from the outside and you just think, well, I mean, yeah, it should work. I should be able to drop off my kids and I should be able to come pick them up. And like, it's, it's like going to a big event and like watching the cater. If the cater is really good, you don't think anything about it. The food just shows up and you're like, yeah, it was, you know, it was fine. It was mediocre. But like, I wasn't there for the food.

I was there for the speaker or whatever. But if anything isn't right, right, if three out of the four items on your plate are warm and one is not the right temperature, you're like, oh my gosh. I mean, it was terrible. I can't believe. But it is ridiculously hard to serve the right temperature food to hundreds of people at the same time. This reminds me of that. You know, you have to keep so many variables in such a tight band for this to go well and for kids not to, you know, jump the fence and run away from you, you know, after preschool. Like, there's so many things that can go wrong.

And if you do any of them wrong, you look like a criminal. And if you do all of them, right, people are like, okay, yeah, that like, you did what I paid you to do. Not like, wow, you really impressed me. And like, you know, it's just that kind of tricky dynamic where the perceived value of the service is kind of at par or it's terrible. Yeah, really good point because you're right. That is exactly how people think of this service. and yeah, nobody raves about how fun their kid's day was, as long as their kid is safe and, you know, seems fine. That's what they're looking for.

Yeah, I think that's a really, really good point. But if anything goes wrong, that's for everyone in education, whether it's preschool or, you know, the upper grades. My best friend is a teacher. And one of the hardest things about teaching in grade school, which is what she teaches, is the parents, you know, and the complaints and the, you know, little stuff that they kind of blow up. So yeah, you're right. It's so easy to get people not happy and very hard for anybody to be really thrilled. So really good point. To kind of turn this maybe slightly more positive because we're speaking just candidly about how we feel about this and it's not great. I think that in this segment, the service that I like the best is kind of the asset light and we come to you model. It could be like, you know, soccer tutoring or, you know, some kind of curriculum based. tutoring or something where if you own a massive chain of daycares, you don't necessarily have, you know, a sports tutor. It doesn't make sense, right, to have your own soccer, you know, guy. But there are franchises out there and there's business concepts out there that they go,

all right, look, we have a staff of some former, you know, elite soccer players or something like that. And we'll come around and every Tuesday afternoon for 45 minutes, we'll come to you on your premise, which you pay for. and you insure and you have staff to manage these kids. And we'll come do this tutoring, this batch kind of format where, you know, it's not one-off tutoring or one-off coaching. It's, hey, we'll enroll 20 kids and we'll do soccer lessons for, you know, eight-year-olds. And they can extract pretty, you know, pretty hefty prices and kind of a substantial margin for that because of the favorable kind of efficiency and economics. But I like that kind of we come to you efficient model versus.

is, hey, I have a house. You have to come to me. And if you don't, then, you know, I'm running up fumes. Yeah. Yeah. You know what just came to mind when you said that was a music school. I know an individual that rolled up music schools. They were all these, like, tiny little, you know, little groups.

And it's a great business because, yeah, it's the same kind of thing. You need a specialist to teach your kids how to play certain instruments. If you want to do that, you feel like that's a good part, a good thing for your kids to be into. we got to go to the music school and they're going to do that for you. And they're good margins and it's actually very sticky. But to be the school that has to bring all those contractors in, yeah, that's a harder business to be in, I think. And you can do that for like any service, right?

It could be math. It could be reading comprehension. It could be a language tutor. It could be art lessons. Art. Yeah. It could be any of those things where, you know, you're able to, you know, play the kind of favorable characteristics in your favor

versus just kind of being left with somewhat fixed and limited capacity. But I think the biggest issue for me and why this one's thumbs down is it's hard enough dealing with your own kids. You know, can you imagine being in charge of dozens of them in this kind of format? It just, it feels very, very tricky, very uphill battle. Definitely put it in the too hard pile for me, kind of regardless of the price, you know, regardless of the terms, I just think it, this would be a very, very tough deal to get done. I think of even tougher deal to operate.

Yeah, agree. Thumbs down on this one. But good point about all those ancillary kind of art school soccer coaching. There's some really interesting businesses that might kind of connect to one of these. But for this one, thumbs down. Yes, I had a hard enough time with my kids too. Yeah, yeah. Well, that was a good one.

other thanks for bringing one that was fun and in your neck of the woods because you're able to, you know, $435,000 buys a really nice house in some areas, but you're able to provide the LA context. Yeah. Yep. Yeah. Well, thanks everybody for joining us. And if you like the episode, please subscribe, send it to a friend. And let us know if we miss this, if you know anything, we'll see you next week.