Acquisitions Anonymous - #1 for business buying, selling and operating - Daycare Center for Sale Analysis | $200K EBITDA Business

Starting point is 00:00:00 Hello, everyone, and welcome back to this episode of Acquisitions Anonymous. This is the Internet's number one podcast on buying, selling, and operating small businesses. I'm one of your hosts, Bill Dallessandro, and I'm here today with Michael Gurdley and Mills Snell, and I got to say, I really want you to listen to this episode. On the surface of it, this episode is about a daycare in Oklahoma that does about $200,000 of SDE. However, we went for about 30 minutes talking about so many nights. nuances of real estate included with deals, zoning, demographics around a local business. There are so much that we were able to tease out of this listing. And it really just kind of highlights

Starting point is 00:00:41 for me why I love this podcast. You know, a business is never just a business. There's so much else going on under the surface. So stick around for this one. I think you'll really enjoy it. It's kind of a classic Acquisitions Anonymous episode. So without further ado, I'll let you get into it. Enjoy this episode of Acquisitions Anonymous. Hello, another episode of Acquisitions Anonymous. We don't have 100% beers anymore. I can thumbs downing on just the plus inventory line. Hi, Heather here.

Starting point is 00:01:11 When I'm not breaking down deals with these guys, I'm helping people get the right SBA loans for their business acquisitions. Because when you're buying a business, the best financing isn't one size fits all. There's the best rate, fastest to close, the specific loan structure that you need, or a little of all of those things. That's why my company, Vizzo Business Capital,

Starting point is 00:01:28 works with over 30 different lenders to find you the best funding in less time and with less friction so you can focus on the deal. Sign up for a free live Q&A session on SBA loans at visocap.net. Then click Zoom sign up in the top right corner. That's V-I-S-O-C-A-P.net and click Zoom sign up. All right, we are now 20 minutes into our supposed recording block and we've just been shooting the shit for 20 minutes. And Michael goes, hey, we got to record an episode.

Starting point is 00:01:56 So now we're recording. But we actually enjoy each other in company. The problem was every time I would normally click start on recording, you guys started to talk about something we couldn't talk about because what if he was under NDA for it? And I was like, all right. So we could talk about publicly.

Starting point is 00:02:12 It's like, wait, we're not recording, right? Okay, good. We're not recording. Yeah. Okay. But this deal we are not under NDA for and is a publicly marketed deal so we can talk about. So we might need, like,

Starting point is 00:02:23 we might need official disclosures at some point, you know. this is not an offer to invest in securities. This is not investment advice. Past performance is no guarantee of future results, etc. All right, Michael, what do you got for us? This was actually found by our producer, Dalton. So it's kind of a good side because Dalton is like kind of our prototypical, you know, community member team, you know, listener here.

Starting point is 00:02:45 Like he's relatively early in his career and, you know, looks at stuff and he's like, cool. Like, that seems interesting. But I'm trying to figure out. why he thought this one was such a thing. So we'll get there. We'll find out hopefully. Don't list.

Starting point is 00:03:00 It's a profitable daycare center near Oklahoma City in Oklahoma City, Oklahoma, and I guess if you're going to be in Oklahoma City, you either want to be in Tulsa or Oklahoma City. And like, cool. Like, at least it's in Oklahoma City. Asking prices, $1.875 million. They appear to have a picture of it. And Bill, like, it looks like they... That's got to be an neighborhood.

Starting point is 00:03:22 Astro turf, right? Yeah. Yeah. Yeah. There's a barren wasteland and then bright green grass. Like much of Texas, Oklahoma is surprisingly brown, except for the east part, which kind of looks like Arkansas. But basically, if you're not on video, this is aerials of the daycare center, which kind of appears to be a big house type structure out in a big field. But you're right.

Starting point is 00:03:52 It looks like it's in other people's backyards. It's like it's in a neighborhood. Yeah, it backs up to like a neighborhood. Yeah. And then they've actually, for some reason, somebody went through a lot of trouble to take these aerial shots of the daycare center itself and like fuzz out or blur out all the neighbor's houses. I don't know why.

Starting point is 00:04:15 I don't know what. I mean, for a daycare center built on a flat brown plane, it actually looks pretty nice. Like it's a, looks like, you know, You said it's like an overgrown house, but it's like a big, it's a commercial facility, clearly. And it's parking in the front. It has like a backyard in the back with a little light. Very nice playground equipment.

Starting point is 00:04:33 Yeah, very nice playground equipment. I mean, I think for a daycare in a desert, this is pretty nice. What's not to lie? Keep going, Michael. All right. So asking price is $1.875 million. EBIT does $200,000 and they do $600,000 in revenue. So they offer rate at nearly 30% even even.

Starting point is 00:04:54 margins or 33% evital margins and has been around since 2013. Check out this well-established child daycare center with a great reputation near Oklahoma City. It's in an upscale area that has 165 feet of frontage road and sits on almost an acre. And it recently had 160,000, 160K renovation, I guess, is a $160,000 renovation on the playground and fencing. The center has multiple playgrounds complete with age-appropriate play structure, soft surfaces, and shade canopies that provide children with safe and engaging outdoor experiences. The center currently has seven full-time employees and two part-time employees. It also has three school buses and offers after-school and summer programs.

Starting point is 00:05:34 It's been a profitable turnkey center for the last 13 years. The center is licensed for 82 students and currently has 66 enrolled. The seller loves the center and the children but is ready to retire. Its current STE cash flows about 200k a year and has room to grow. Other things you'll enjoy about the center is the brand new roof that they did this year and a new range in refrigerator from 2025. Did you have a comment about the roof mills? I just noticed that the shingles look very crisp,

Starting point is 00:06:00 architectural shingles. We don't do those, but they look good. That's a roofing guy right there. Gurds and I are looking at the playground, and Mills is like, those are some nice shingles, I can tell. I like those shingles. Those are crisp.

Starting point is 00:06:12 Those are crisp shingles. Very technical. No annual loss. But that, all right, so Mills, how much they spent on that roof? from, you know, looking at it. We don't know how big the building is, but I would say they probably spent like $20,000, $15,000 to $20,000 on the roof. Okay.

Starting point is 00:06:30 You were right. The playground is the eye catcher, 160K on the playground. Yeah, wow. I love that they call out there's a new refrigerator, like bonus points. Those are $400. Yeah. They have a state of the art point and sale system and the secure keypad of the front door for controlled access for employees and parents. The sale includes everything already mentioned.

Starting point is 00:06:50 the real estate, three school buses, and all the furniture fixtures and equipment, and it's SBA lender approved. So there is real estate included. It would have to at that price. Yeah, I mean, for you would also, I think you'd kind of have to in this business model, or you're better have a long firm lease.

Starting point is 00:07:08 They're basically asking three times revenue or, you know, nine times even- Nine times EBITDA, yeah. Yeah, so realistically, there's, you're buying the real estate and then secondarily, there's the business on top of it. So, right. We'll come back to all that. Three facility, or they have nine employees, seven full time, two part time.

Starting point is 00:07:29 They have these three buses and then all the stuff I talked about from the real estate. Their competition is that they're in a prime location and they believe they have room to grow on this site. They are willing to help with support and training and the owner wants to retire. And I think that's it for the deal here. The fun thing I think maybe don't like to. about it was the real estate's included, but, and it may be somewhat relevant. The broker is a commercial realtor. It says he is from KW commercial Oklahoma, which I assume is commercial realty. You know what the tell was on that listing that there's 165 feet of road frontage?

Starting point is 00:08:09 That's, that's real estate. That's not business talk. That's not business acquisition talk. That's right. I don't hate this, but I feel like the ideal buyer is the person who lives like five doors down who is maybe like a stay-at-home mom or dad who is looking for, you know, another revenue stream, another income stream for their family. Yeah. And you got a lot of kids too. I'm out. Because it's Oklahoma or because you hate children?

Starting point is 00:08:41 First of all, I kind of like Oklahoma, just being a flyover America kind of person. It's kind of like Texas, but Texas light. I also think of it as like really far north Texas. That's kind of, it's like Dallas, but you just keep going. But no, I'm just not a person who would find joy in dealing with little kids and their parents and buggers and tears all day long. Like there's people that love that stuff. It's the opposite of whatever I am. Well, I think it's funny, Michael, because it says this has been a turnkey daycare center for 20 years or whatever.

Starting point is 00:09:14 And I, you know, what small business in the world is turnkey? Kee Mills, would you describe your business as a turnkey commercial roofing operation? I mean, that is the greatest euphemism ever. Would you say was turnkey when you were like at the hospital with one of your employees or someone brought a gun to the job site or like all this stuff that's happened? I mean, you can paint. Yeah, it's very, you know, non-definitive term. Like, it could mean anything you want it to mean.

Starting point is 00:09:42 In this case, I think since it's a real estate agent listing it, he means they have the keys to turn to open up the front door. That's what that means. The power is still on. The water is still on its turnkey. So I think an important detail here is the seller. It said the seller loves running the business and loves being in there. Like the owner of this business is clearly somebody who's running the school.

Starting point is 00:10:08 And they're headmaster, CEO, head salesperson, everything. Is that what's going on here? It sort of smells like that a little bit because of the statement, the owner, loves the kids. And I mean, it's been around long enough that like everybody in the community is like, oh, yeah, like Miss Wendy. Like, we love sending our kids down there, which is possible to, you know, migrate to a new owner and personality. But also, like, if you get on this neighborhood's shit list and 60 people, which is probably like, you know, I don't know, it's 30 families probably on average, like, you could lose clients so fast. And then where are you going to go to get them?

Starting point is 00:10:51 You can't go to the neighborhood two miles away. Your only client base, like, the Tam is just the houses that are in like a one mile radius. But that's true of any daycare, right? I mean, that's your Tam. It's got to be convenient. Yes, but I think in this case, like, it's in the middle of a suburban sprawl, you know, and like it almost looks like it could be a gay community, although I don't think it is. At least, like, the daycares I'm thinking of, or, on like main thoroughfares. This just looks like it's smack dab in the middle of a residential development.

Starting point is 00:11:23 I think that's an interesting pro for the deal. And the guy hinted about it in the listing. It's a private location because when you're looking at these kind of suburban developments, it's not like there's a lot of different tracks available and all that kind of stuff. And they start to get built out. And then

Starting point is 00:11:40 a daycare like this could or just like be the only daycare within five miles in any direction. if they're the only one there. Because all the other stuff has better, higher and better uses, whether it's mini storage or the local barber or the local gas station,

Starting point is 00:11:56 like, things get allocated. And if you're the only one there, like pretty much these parents have no choice. They either drive five miles the other direction, or they work with you at the Mills Daycare of Fun location here in Oklahoma City. It's haunting. The other thing is like, what are you gonna do?

Starting point is 00:12:11 You're gonna buy five houses and bulldoze them to build another daycare to compete with this? Like, you're completely, locked in. You probably can't because of the way zoning works and fly over America. Like they you probably cannot or and it might even just be a deed restriction and those subdivisions you can't take bulldozed out a house and put a daycare center in like it's impossible. Well and they also mention it's licensed for 82 students. I next to our shop we had this like kind of flex industrial building that I had to go before the zoning board to

Starting point is 00:12:47 protest because somebody wanted to put a daycare in this industrial area that my business is located in. And it was not under the table of permitted uses. And so I went to squash the variance and say, like, look, I don't want 200 kids getting dropped off while my roofers are like filing out of the parking lot in, you know, pickup trucks or trailers. And in the process of their zoning appeal, that the new incoming tenant was, you know, they were kind of asking, like, what's your capacity? What do you think you're going to do? And they, they quoted the state statute that said, you know, you're required to have like four and a half square feet per child. So based on the size of the building, like, we can have 280 kids. And you have to go actually,

Starting point is 00:13:32 like, apply for that. It is, it is licensed based on the size of your space to the amount of kids that can be there. There's some, like, regulatory hoops that you actually have to jump through. And the, the facility has to be inspected. You can't just, like, decide to start. start a daycare for 50 kids in your in your backyard. Have you ever looked into how zoning works in Japan? Never. Peritably? No.

Starting point is 00:13:56 No. So it's fascinating. So it's the inverse, like almost everything in Japan, the reason people like to go there is almost everything is the inverse of the United States, right? So in the United States, like, we celebrate, like, who are the biggest heroes in our country? Like, it's Elon Musk, Jeff Bezos, the, like, the Marlboro Man, the Cowboy. like we love that individualism. And you see that in the way we do stuff.

Starting point is 00:14:20 Everything's about like this sole leader. The Japanese, like, it's more about like community and harmony. That's the priority. Like be part of the broader thing. They're very collectivist and we are very individualistic. Thank you for. Yes. You should start a podcast bill.

Starting point is 00:14:36 I think you do really good. But so zoning, so our zoning in the U.S., basically it says, okay, this is single family residential. And that's what it's very, restrictive. That's exactly the way it's supposed to be, right? Or it's multifamily, whatever, or it's light industrial. And that's what happens there, right? Okay, this is zone and it's heavy industrial. What the, what the Japanese do is they invert it and say, okay, we're going to zone it and say, this is the worst use case as you work your way up to toxic waste dump. This is the worst use

Starting point is 00:15:06 case that you can put here, right? And so what that enables you to do is, if you think about it, you mark something as light industrial, well, legally, without any zoning changes. You could do light industrial. You can do multifamily housing. You can do single family housing. You can do whatever. You can put a park there or a golf course.

Starting point is 00:15:24 So it's basically like it inverts everything. And what it does is it makes the like the fluidity of your real estate market there so much more open. Right. To where you could just like, okay, I want to build a house here. I'll build a house here. Right. Or I want to build a daycare center. I'll build a daycare center because that's the way it is.

Starting point is 00:15:40 Whereas your reaction to the, okay, you're going to take away this light industrial thing and make it to a daycare. well, like, I'm going to fight that because of the way we look at it. And they just do it to totally opposite way. And they actually have affordable housing for most people in Japan. So you can see why this works. Because you just build stuff. So you can build stuff. They have like a master list of like the offensiveness of every single use and that you're

Starting point is 00:16:05 ordered by offensiveness. This is like negative 98 points, you know. Yeah. There's like a list. It goes from, you know, best to worst. And then they'll restrict certain other stuff. Like, I mean, they're so. organized like most Americans go to Japan and we're really loud. But in Japan, like you're,

Starting point is 00:16:24 there's so much about the collective that you're supposed to, it's considered rude to have a public phone call in front of somebody else or to subject somebody else to your speech. So like they're actually, it's super quiet, like almost everywhere you go. But then they'll like have a whole district where it's like, this is going to be the noisy district. And you'll like cross the street and it's like, blah, wow, wow. Like just like 150 decibels. everywhere you go. So they will actually take certain uses and say, okay, this is going to be here and you go to this place and that's where it happens. Japan is a fascinating culture. It's just in so many ways the opposite of ours.

Starting point is 00:17:00 Which I think is why Americans love to go there because it feels so different. It is crazy. Yeah. And the other tough thing is like, and I could nerd out about this because that's where we went for string break. But like their language is very heavily context dependent, whereas ours is very descriptive. So it makes it one of the most difficult things for Americans or Westerners to get into the culture because we don't understand the context of stuff.

Starting point is 00:17:27 So like nuance will totally miss it. Whereas in Americans, we're like, no, we're just going to tell you what we think. And it's just crazy. Our sentence will include all the context you need to understand it, but there it won't. Oh, 100%. Yeah, 100%.

Starting point is 00:17:39 So this business is, stable as heck probably, right? It's probably beloved in the neighborhood, you know, to Mills, Miss Nancy has probably been there for however long and everybody really loves her. I do think you could buy it, you know, as long as you show up and are the new Miss Nancy and everybody likes you too. And, you know, and you are part of the community. This would be tough, I think, to buy remotely. Oh, yeah. I mean, I don't know that you could. I also because I think Miss Nancy works in the business, like from how we're reading it. She might even She might even drive one of the buses, you know.

Starting point is 00:18:17 Yeah. So do you guys think this will sell? Or do you think this just ends up getting shut down when Ms. Nancy retires? I bet it sells, but it sells for a lot closer to like just the value of the real estate and not necessarily the value of the cash flow. I mean, an opportunistic buyer would,

Starting point is 00:18:38 you know, create some value from that. I mean, you got to ask yourself, is this the highest and best use of that land? Right. I mean, they've got it priced at, I mean, I guess it's like a 10 cap, right? It's like 10x cash flow. And I don't know if you couldn't do better putting condos up on it. Yeah. You know? There, I mean, I think there is something to say about service-based businesses that are care providers, whether it's child care or senior care or, you know, anything kind of in between like assisted living spaces. hospice, like those businesses are not going away. They don't mention anything here about the, like, the payer. And I don't think that, obviously, there's not an insurance component to this. It's just like private child care. But I don't get the impression that there's like a subsidized element to this either. There are a lot of daycare centers that heavily rely on, at least in our area, government subsidy, because there's this big push. of like work doesn't work without childcare and trying to subsidize the high cost of child care.

Starting point is 00:19:49 But I mean, one of my employees, a female in the office is about to have a kid. She's been interviewing daycare centers. She hasn't even had the baby yet. She's been interviewing daycare centers for like four months. And the wait list, a lot of these places when there's a limited, like when the supply demand is out of balance and there's limited capacity in these centers, you have to get on the wait list before you have the baby and start paying, like rent, in essence. You have to start paying your fees before the baby is even born just to hold your spot. They mention excess

Starting point is 00:20:23 capacity here because I think they do have a small tam, but sometimes these things can be incredibly lucrative. It's big emphasis on sometimes, at least in my, every state is different. These are state regulated. Yeah, which is important now. So, you know, this is in Oklahoma. You need to diligence the specific ways this works. Oklahoma if you're going to buy this business. Hopefully you should already live in Oklahoma if you're buying this business or be moving there. But like in North Carolina, for example, there is a cap on the ratio of basically care providers to students at daycares. And it's like four to one. Oh, gosh. Yeah, it's like super low. And so when you think, and so there's there's this law on the books,

Starting point is 00:21:06 right? And people go, we need to cap it. And like if we relax this cap, all these kids will die and it'll be horrible. And then like the headline on the next page of the newspaper is how child care costs in North Carolina skyrocketing. Yeah. Or skyrocket. And it's like, well, you know, clearly you need to pay one fourth. Each child needs to pay one fourth of a caregiver's salary plus benefits, plus overhead, plus rent, plus whatever, right? So like there's a structural kind of caught, the cost of child care is implied. Like the whole margin structure of your business is implied. Yeah. The ratio is the way. dependent thing.

Starting point is 00:21:44 Right. And so, and then of course there's like you can only have so many children per square foot. Like as we said, it's listing. It's only licensed for 82 students. So a lot of these structural, a lot of the shortage of child care spots that you're alluded to mills is structural. And then there's also, of course, zoning because, you know, roofing business owners say, we don't want a new daycare in my neighborhood, right?

Starting point is 00:22:05 So you can't build new ones. And so there's just only so many spots. And the existing ones can't hire more staff. And so, like, it's just funny that, like, the way people complain about this is those this unsolvable problem, but it's like driven by regulation, like, directly. You know, they have legislated the shortage into effect and hold it there. One of the biggest risks in entrepreneurship through acquisition is buying a business with fragile systems.

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Starting point is 00:23:18 Churches. Because they have empty buildings six days a week. And they say, oh, we can use all our classrooms. And, yeah, we can hire the staff. But we have the overhead fixed regardless in terms of the physical plant and the premise. And a lot of times they own their real estate free and clear forever. Exactly. And there's no rent.

Starting point is 00:23:37 And they have tax abatement also because it's religious. No property tax. Yes. So that is why churches play such a big role in child care in this country. I need to start a religion, TBD, working on it. Tax break. So I think one thing we- Get your clawed going on that.

Starting point is 00:23:53 Yeah. It'll happen tomorrow. Hold on. I've got to tell Open Cloud to start a religion for me. I'll be right back. I'll be a cold leader soon. So I want to talk about something that is a nuance of this deal that I think is really important. So this is a local business.

Starting point is 00:24:07 You're working in a suburb. It looks like this is a suburb that was built 20, 25 years ago. What happens with suburbs is young families move in, they bring in their kids, and then people get married to their interest rate, they get settled, and the neighborhood starts to age, and it's fewer and fewer kids. And I've seen the same thing happen on my street. Like, I'm in a neighborhood that was developed in the 70s. My house was built in the 70s.

Starting point is 00:24:34 And when we moved in, my kids were the only kids in the entire neighborhood. Because everybody else had bought their house 50 years ago when they were 25, and now they were still living in it. Now, the cycle has started again that kids have started to age out or the people start to age out or die and stuff like that. And so we're seeing more and more kids. But I think that's a big question mark with a deal like this. You know, are you going to have massive headwinds because you're, in an aging suburb and there just aren't that many kids anymore. And one little red flag here is their, you know, their license for 82 students, but they only have 66. They probably only have

Starting point is 00:25:10 66 because that's all the kids they could sign up. And that may be because there's just not kids in the neighborhood like there used to be in this, in this area. Yeah, you would almost want to like look at the where you are in that demographic swing. Because eventually, like, the older folks, you know, are moving out and downsizing and the neighborhood gets back, filled. But where are you in that cycle is really, really important? And would be relatively available data? That's a great point, Michael, because this is a local business intrinsically. And your Tam is the kids that live within a 10-minute drive.

Starting point is 00:25:43 And I did ask, Claude, Oklahoma City is not immune to the decline in childbirth. They actually, like many places in Flyover, America, have totally beaten the idea of teen pregnancy, which if you guys look at a big part of why our birth rate is down in the country, it's because we beat teen pregnancy. We quietly beat smoking teen pregnancy, like all these things, but nobody celebrates these wins for America. But anyway, but yeah, Oklahoma City's, it doesn't have as many kids as it used to. Interesting.

Starting point is 00:26:16 I guess we beat team pregnancy. You're right, but those were a lot of births. Yeah. Anyway, started to be a doubter. Okay, so what do we think about this deal? I don't hate it. I think for the right person, if this is your dream job, like, it's great. there's real estate backing it.

Starting point is 00:26:30 There's a lot to like. I mean, if you lived anywhere close by, you just got to think, is this deal on Zillow? You know, like, does this guy have this thing listed on LoopNet? Because if you're the right,

Starting point is 00:26:43 let's just say there's, you know, I don't know, a thousand people that live in this vicinity. Somebody's got to look at this and be like, you know what? I'm enterprising enough that there's something to this. It's in my backyard.

Starting point is 00:26:53 I look at a lot of stuff very generously when it's close by. Like, oh, I mean, you know, but absolutely. I think there's got to be somebody nearby who could like scoop this thing up and it will not run on autopilot. There is no turnkey operation, especially when you're caring for, you know, 60 plus kids, but it's doable. Yeah. Here, I think this deal is really tough and here's why.

Starting point is 00:27:20 The ideal buyer for this is, you know, Miss Nancy 2.0, right? Miss Nancy 25 years younger. someone who has experience as a child care provider kind of wants to go out on their own, wants to own their own center, et cetera. Generally, the income and wealth profile of those people are not such that they're about to buy $1.8 million of real estate and an operating business, right? Now, you may be able to get a mortgage, and we haven't talked about how you finance this deal yet. Maybe we should. But you have a buyer pool here, and the fact that it's, that the fact that it's being sold with real estate makes the purchase, price that much higher and that much harder to structure. I think if this were, you know, somehow without the real estate and already had a long-term lease and, you know, someone could step into buying this with some seller financing over a couple of years and gradually step

Starting point is 00:28:14 into being the new Miss Nancy, I think that would be a more transferable business. It's usually to think about who your buyer profile is. I think it's kind of a, it's a narrow Venn diagram, the person who is a good owner for this business, wants to work in this business. has capital to buy this business and they'll structure the deal. And by the way, I should say, this is where a good broker would really create a lot of value and the challenges they have a commercial

Starting point is 00:28:39 realtor as a broker. Totally agree, man. So how would you, how could you finance this? In theory, there's real estate, a real estate, lenders, real estate lenders, Main Street lenders love owner-occupied real estate.

Starting point is 00:28:55 You know, I'd be really curious. Where does it appraise? But I think you could finance a, ton of it by, you know, through the rental flows and then talking to bank into lending money on that aspect of it. And then maybe the seller, seller finances almost all the business premium on top of that. And you're not in a bad place. Stephen, the broker here is going to hate this and he's probably going to send us a cease and desist. But I think you only buy the business and you have an option to buy the real estate and you rent it back from the owner. you show them, hey, look, you're going to get a fixed income stream based on the rent.

Starting point is 00:29:29 I want a right of first refusal and an option to buy it, under set terms and set, you know, durations. And you just get in and start running the business because you're talking about the value of the cash flow here is maybe two times versus nine times, you know, including the real estate. And you ease your way into this. So, I mean, and there's functionally then risk sharing with the seller. where they go, okay, I'm not, I'm not getting as much money as I hoped, but I still have an asset and I have an income stream. Yeah. So, Michael, you scroll to the top here so we can see again the asking price and the and the cash flows. So this is a $200,000 cash flow business. Let's assume the business is worth at most half a million bucks, two and a half times, right?

Starting point is 00:30:16 So you've got the real estate value here, and they want $1.9 million. So you've got $1.4 million of real estate and $500,000. of business value at the top end. So Mills, I like what you're suggesting. You structure some sort of pay over time seller financing on the business part of it, structure in a lease payment that is guaranteed over a 10-year lease or whatever, and you have to have an option to buy the real estate because if someone else buys the real estate and raise your rent, you're cooked. And also, this is the only time, I mean, everybody knows owners of real estate hate giving options to buy, right? It's generally a net negative for the owner of the real estate. So the only reason the owner of any real estate would ever do that is in conjunction to get something else they

Starting point is 00:31:03 want, which is selling their business. So this is basically your only opportunity to get that right option to buy. Because if you, even if you do a seller, seller finance deal here and you put it on 10-year lease, you are, as soon as you sign that without the option to buy this, you're never getting the option to buy it and you've got to take time off the end of your least. Right? You lost all your leverage. So you have to negotiate that option to buy now as part of the business transaction. But maybe that's how it works. Maybe that's how you get a, you know, a former teacher in here. You know, they work their way into sweat equity. They end up owning the business. They've got a 10-year lease with an option to buy it. You know, they own the business

Starting point is 00:31:46 free and clear after two or three years. Then they bank cash flow for another five years. And then they can get a mortgage and buy the property. And then, you know, after seven or eight years, you own, you're in the same position as Ms. Nancy was. It's hard to tell, you know, we don't really have the info. But if they have 600,000 in revenue and 200,000 in EBITDA or SDE, they probably aren't paying rent right now. You know, it's owned by probably the same entity and she doesn't pay rent. So if all of a sudden, let's just say you're paying $10,000 a month in rent, because if the value of the real estate is around, you know, one to one point, million or something like that, there's got to be kind of an applicable cap rate. But,

Starting point is 00:32:26 you're saying at this point, though, once you layer on the rent, that is going to force the purchase price lower. Like, the deal has to pencil. So it will bring reality into the equation for the seller of you may want this much money. The appraisal will probably not work for you to get that much money. Here's a path towards getting the most that you can. You can always count on mills to bring out the pencil. So, just make sure it pencils or a pin or a pen if you want. But yeah, that's the problem because, yeah, you got $100,000 of rent, of pro forma rent in here, which you probably do. And now your SD goes from 200 to 100. And now you, that's a tough conversation. Yeah. I think what it shows is there's not a lot of enterprise value in this business relative to the

Starting point is 00:33:11 scale of the real estate. Yeah. This is one of those, in my mind, I think of the deals we looked at in Savannah, and I forgot exactly what the businesses were, but the businesses, when we looked into it, were worth nothing and the real estate was worth millions of dollars. This is one of those things where it's just a covered land play were the real values and the real estate here, which is why I initially went to, hey, I really want to own this real estate because I understand how it worked. Who wants to own a stupid daycare business? But I'd love to own a business that is a transferable and, you know, to your point, when this thing, when you underwrite this thing, I bet, 100% of the value is going to be in land, and it's just a covered land play.

Starting point is 00:33:51 You're exactly right. And that's probably why the highest and best use of this land is not a daycare. I wouldn't think. The math kind of bears that out, right? Because you're not creating any value by having a daycare on it. So there's got to be a better way to use this land. And at risk of, I know we're a little bit longer than we usually go, but at risk of like being on a soapbox here, like I think and I am as red blood of capitalist as they come. But I do think like this is one of the challenges. of like pure capitalism is like this daycare needs to exist. Like the daycare existing in this location is good for the community, right? And is a net benefit to the community beyond, you know, the six townhomes that could otherwise go on this plot of land. But the six town homes are the economic highest and best use of it.

Starting point is 00:34:40 So functionally, Miss Nancy is subs, every year that she continues to operate a daycare on here, she is subsidizing the community, right? She's taking a dead weight loss and subsidizing the community. And zoning restrictions are the thing that probably protect her. And you said D restrictions are what protected? Or zoning restrictions. Like it probably is difficult to get the density you need on this lot in this neighborhood with the HOA or whatever regulatory hurdles strict or not that exist.

Starting point is 00:35:13 it would be those things are protecting the business otherwise a townhome developer would have come and built you know 16 condo units here or whatever assuming it's a desirable noplication right and i do that's the challenge that's what government tries to balance as the check on capitalism is the places where there are negative externalities that with the loss of the daycare right that are not born by the specific property owner in this case yeah more extreme example would just be a park right if this was a park then the municipality would have to pay for it. No private enterprise would pay for the park. That's right. But as of right now, like, Miss Rachel is like, is a philanthropist, right? Essentially, right? She is, every year that she owns this, she is subsidizing the community by offering a really nice thing that the community needs. And that's why it is tough by this business because you are, and to continue to operate a daycare on this land,

Starting point is 00:36:08 because you are now taking the baton from Ms. Nancy as the philanthropist it subsidized the neighborhood. I don't know how you solve that, but like, that's functionally what's going on here. That's why this deal is hard to make work. Dolan really provided a gym on this one. We were, we were not so sure at the beginning, but by the end, we talked about it for 35 minutes. Pretty good work. Yeah. Thank you. This, and by the way, this is why I love this podcast, because, like, on the surface, this is just a daycare in Oklahoma. But look at all of the different places we were able to go and teach and learn about what's going on here. Deal structuring and zoning and so much else. Real estate with businesses, financing, structuring, all those things. We're all embedded in this

Starting point is 00:36:52 daycare in Oklahoma. Yeah. That's good stuff. All right, everybody. Thanks for being here. We'll catch you next week when, well, we're back talking about another daycare at Oklahoma City. Texas next time. Yeah, we need a civilized daycare.

Acquisitions Anonymous - #1 for business buying, selling and operating - Daycare Center for Sale Analysis | $200K EBITDA Business

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