Introduction

Planning your exit from your childcare business is a critical phase in your lifecycle as an entrepreneur. A well-thought-out exit strategy ensures the business’s continuity and maximizes the value derived from years of hard work. Exit planning involves preparing for the eventual ownership transition, which requires careful consideration and strategic planning.

Understanding Exit Planning

Exit planning is a process, not an event! It is the process of preparing a business owner for the eventual sale, transfer, or closure of their business. It involves evaluating the current state of the business, identifying potential successors (internal candidates) or buyers (external—most likely buyers), and implementing strategies to enhance the business’s value. The goal is to ensure a smooth transition that meets the owner’s financial and personal goals.

Frequently, when I discuss exit and succession with childcare business owners, they often seem surprised to learn that exit planning is not just for big businesses; it is an essential part of ensuring the successful continuation of their business once they are no longer the owner. I rarely find that most childcare owners have given much serious consideration to when and how they will exit their childcare business. To that end, they have not participated in any formal exit planning training – specifically designed for childcare business owners, nor have even an informal, much less a written formal exit or succession plan.

Now, I do not mean to pick on childcare business owners – but given that childcare businesses are my area of expertise, My articles, advice, and consulting services focus only on childcare business owners, their needs, their goals, and how I can use my knowledge and experience to assist each one of them in meeting their business and personal goals. Even in areas where they may not realize they should learn more about, develop goals, and implement action plans to reach goals in certain areas. Exit and succession planning are two of those key areas.

Surveys indicate that as much as 75% of business owners hope to exit their business within the next ten years. These surveys include business owners across many industries and companies of different sizes. Unsurprisingly, the larger the business, the more likely an owner will have received formal exit planning education and engaged in formal exit planning. I have always found this puzzling, as proportionally speaking, no matter the business size, it almost always represents a large portion of the business owner’s net worth. Therefore, the importance of exit planning education and formal exit planning is the same for every business owner, no matter what the size of the business.

Reasons for Exit Planning

Childcare business owners might consider exit planning for various reasons:
• Retirement: Many childcare business owners plan to retire and need a strategy to ensure their business continues to thrive without their active involvement.
• Health Issues: Unexpected health issues can necessitate an abrupt exit from the business, making preemptive exit planning essential.
• New Opportunities: Some owners may wish to pursue new ventures or opportunities, requiring a strategy to transition from their current childcare business.
• Market Conditions: Favorable market conditions might present an opportunity to sell your childcare business for maximum value.

Although the reasons for exit planning are numerous, 50% of all business owners will exit their business involuntarily—or what is often referred to as the five D’s. Why? Lack of exit planning.

Steps in Exit Planning

The process of exit planning involves several key steps:

1. Evaluate the Business

Surveys have shown that childcare business owners, no matter how small or large, often have a substantial portion of their personal financial net worth tied to their childcare business and associated real estate (buildings and land) if owned. Owners often indicate that their childcare business value comprises between 75% and 90% of their personal net worth, particularly if they own their childcare building and land.

Given the large portion of a childcare business owner’s personal financial net worth, the first step in exit planning is to conduct a thorough evaluation of the business. This includes examining financial statements, assessing market position, and identifying strengths and weaknesses. In addition, an accurate business valuation is essential to determine its true market worth. Also, should you own the real estate – childcare buildings and land, learning its actual market value is also essential.

2. Define Goals and Objectives

Childcare business owners must define their personal and financial goals. This includes determining the desired timeline for exit, the amount of money needed from the sale or transfer, and any legacy or philanthropic goals.

3. Explore Exit Options

There are several exit options available to childcare business owners:

• Sale to a Third Party: Selling the business to an external buyer can maximize financial returns.
• Family Succession: Passing the business to a family member ensures continuity but requires careful planning to address potential family dynamics.
• Management Buyout: Selling the childcare business to current management or employees is often a preferred exit plan but rarely happens for many reasons.
• Employee Stock Ownership Plan (ESOP): This involves selling the business to employees through a trust and can offer tax advantages. This can be an option for large, multiunit childcare businesses. However, the expense and complexity of creating and maintaining an Employee Stock Ownership Plan (ESOP) make it a prohibitive exit option for most childcare businesses.
• Merger or Acquisition: Merging with or being acquired by another company can enhance the business’s market position.

4. Develop a Transition Plan

Once an exit option is selected (it is better to have Option A, B, & C), a detailed transition plan should be developed. This includes outlining the steps to prepare the business for transfer, addressing legal and tax considerations, and communicating the plan to all stakeholders.

5. Enhance Business Value

To maximize the value of the business, owners should focus on key areas such as improving financial performance, strengthening enrollment, and enhancing operational efficiency. This might involve investing in technology, reducing costs, or consistently operating at a high enrollment to licensed capacity level to ensure optimal profits.

6. Address Legal, Financial and Tax Issues

Exit planning involves addressing various legal, financial, and tax issues. This includes reviewing contracts, updating legal documents, and ensuring compliance with relevant regulations – not just state childcare licensing and regulations. Professional advisors such as lawyers, accountants, and financial planners can provide valuable guidance in this area. Forming an advisor team, each with specific knowledge and experience regarding exit planning is essential to exit planning success.

7. Plan for Life After Exit

Business owners should also plan for their life after exiting the business. This might include considering how they will spend their time, pursuing new interests, or planning retirement. Financial planning is critical to ensure a comfortable lifestyle post-exit. I often find that childcare business owners may have engaged in some exit planning and preparation of their business for their exit – but have done very little to prepare themselves personally for their exit and life after exit. This is often evident in surveys of business owners a few months after exiting their business – they express a high level of dissatisfaction or regrets. Many express concerns about not having engaged in enough exit planning and, therefore, know or wonder if they left money on the table because they had not optimized business performance and value before taking their business to market. In addition, they were unhappy, often feeling lost or unfulfilled personally because they had not prepared themselves for not being a business owner – no longer having the mission of delivering high-quality childcare and early education as a central point of their personal identity, self-concept, and daily life.

Common Challenges in Exit Planning

Exit planning can be complex and fraught with challenges:

• Emotional Attachment: Childcare business owners often feel a deep emotional connection to their businesses, which can be difficult to let go of.
• Market Conditions: Unfavorable market conditions can impact the timing and financial outcomes of the exit.
• Family Dynamics: Succession planning within a family can lead to conflicts and requires careful navigation.
• Valuation Disputes: Disagreements over the valuation of the business can complicate the exit process.
• Legal Complexities: Addressing legal and regulatory issues requires expert advice and can be time-consuming.

Case Studies

Examining case studies of successful and unsuccessful exit plans can provide valuable insights:

Successful Exit:

A large, family-owned childcare business successfully transitioned to a third-party buyer. The owners invested in improving operational efficiency and profitability through the Childcare Business Value Acceleration™ services offered by ChildCareOwner, which enhanced the business’s value over about a year before offering it for sale. They worked with other professional advisors on their team to address legal and tax issues, resulting in a minimization of taxes, creating additional funds for their retirement, a smooth transaction, and a successful exit.

Unsuccessful Exit:

A medium-sized childcare business faced challenges due to poor market conditions and internal conflicts between the owner partners. The owners had not developed a clear transition plan or addressed potential valuation disputes, leading to a prolonged and contentious exit process that led to deal failure resulting from surprises discovered during due diligence, requiring remarketing of the business to other buyers and ultimately diminishing the childcare business’s value.

Conclusion

Exit planning is a critical aspect of childcare business ownership that requires careful consideration and strategic planning. By understanding the steps involved, exploring exit options, and addressing common challenges, childcare business owners can ensure a smooth transition that aligns with their personal and financial goals. Early and proactive exit planning not only maximizes the value of the business but also provides peace of mind and a clear path forward for life after the business.