Although intended to stabilize the childcare industry and individual childcare businesses, in my opinion, the funding only served to “prop up” the industry. The childcare industry will be more unstable when the grant funds are depleted. Unless there are additional grant funds, or as I like to say, “another pot of gold at the end of the rainbow,” many childcare businesses will face serious financial problems due to operational spending changes.
Most states’ Stabilization Grants fund approved spending guidelines allowed child care owners to spend a certain portion of grant funds on employees – hourly wages, bonuses, benefits, etc. In addition, a certain percentage of the grant funds could be used for child care building mortgage or rent, repairs, maintenance, and other “facilities and program” related expenditures.
It is common to see a very high percentage – often 70% or more of grant funds must be spent on employee-related items. Thus, many child care business owners have increased hourly rates for most if not all teaching staff, management, and all other employees. Some increased hourly wages a reasonable amount – an increase that the business will be capable of maintaining when the grant funding ends. And additional grant funds were paid to employees by bonuses based on performance and goal achievement guidelines. The hourly wage increase will be ongoing but not the bonuses.
Unfortunately, many childcare owners increased the hourly wages to employees above a level that their childcare business will be able to continue to pay when grant funding ends. Some felt they had no choice but to match the hourly rates offered by their competitors. When the money runs out, most employees will not be willing to accept an hour pay cut. Child care business owners will find a larger portion of gross revenue needed to cover labor costs. Given that labor is always the largest expense in a childcare business – an even higher percentage of gross revenues needed to cover labor costs will increase the financial break-even point, decrease net operating profits, and generally make the childcare business more financially unstable.
To compound the problem, many childcare owners have decided not to increase tuition rates or only implement a small tuition rate increase. I can already hear the financial tsunami ahead for these childcare businesses. The small tuition rate increases will not be enough to cover the increase in labor costs and the impact of high inflation on many other expenses required to operate a childcare business – gas for vehicles, utilities, food, etc.
Owners who did not utilize the Stabilization Grant Funds effectively will likely find their child care business less profitable and unstable when the grant funds end. They may also find it difficult to implement the very large tuition rates necessary to cover the increased labor costs and inflation costs.
How will all of this impact the value of a childcare business? In general, decreased net operating income (profitability) decreases the value of a business. Buyers will be less interested in childcare businesses with limited profits and even more unwilling to purchase (or pay very much) for a childcare business that is losing money. No matter the type of buyer – an individual buyer, chain child care operator, or private equity group – they all buy childcare businesses to make a profit.
I hate to think about it, but having worked as a child care M&A Advisor and financial analyst for 27 years, I know that when the grant funds run out – the childcare industry and individual childcare businesses will experience financial problems. Many will decide to try and sell their childcare business – lots of childcare businesses up for sale will cause a supply and demand imbalance and further depress the value of childcare businesses.
So, what should you do? Don’t panic – plan! Most states estimate that their Stabilization Grant funds will end sometime in 2023 – some as soon as the first quarter. There is no set program to extend or provide additional grant funding for the childcare industry. You must analyze your financial situation today and how it will look when the grant funds end. Only with a detailed financial analysis of labor costs and all expenses will you be able to make the necessary financial decisions and act today to ensure your child care business does not see financial problems once the stabilization grant funding ends.
If you would like some assistance with your financial analysis and planning, please give me a call. I offer specialized child care management consulting for individual center owners and multiple-unit operators. My direct line: 336-617-3181
