Do you have an Exit Plan for your childcare business? Is it a well-thought-out, written plan that outlines the process you will follow as your plan your eventual exit from your childcare business? Or is it more that you have some ongoing dialogue with yourself about how you need to get started on an Exit Plan?
No matter what project we are trying to complete or a goal we hope to achieve, engaging in strategic planning increases the likelihood of success. Exit Planning is no different. Not having a childcare business exit plan can be costly. And unfortunately, the problems associated with needing an Exit Plan are only realized when it is too late to implement and realize all the benefits of an Exit Plan.
Costs of Not Having a Childcare Business Exit Plan
Heirs Not Interested in the Business – No Plan “B”
Many independent childcare businesses are family owned and often have family members working in the business. Sometimes the family members helped start the childcare business and may have some ownership. Or the owner’s son or daughter works in the business and may have expressed a desire to own the business someday.
According to The Family Firm Institute, as few as 30% of small businesses are passed on to the second generation, 12% to the third generation, and a very small 3% of businesses are operated by the fourth generation. Of course, the business ceasing operations contribute to the low percentage of second-generation business ownership. But, more often, the reason lies with the next generation not being interested in owning a childcare business. They have career interests and goals that do not include carrying on the family childcare business.
I often find that childcare business owners have thought and planned for years to pass their childcare business on to another family member or heir. However, as the owners’ exit from the business nears and family members give it more serious consideration, they decide to go in another direction. The childcare owner is often left without a Plan “B.” They may have to alter their desired exit timeline to put the necessary Exit Plan in place or exit anyway and reap fewer financial benefits.
Decreased Business Value
Exit Planning is a process, not an event. A large part of the process includes a strategic plan to increase the profitability and value of the childcare business over time before exiting. Increasing value takes implementing operational and financial management strategies that cannot be effectively achieved at the last minute in a short time. More childcare businesses are sold for far less than possible because the owner did not have a growth, profitability, and value acceleration plan. The business was sold for less than the optimal value that could have been achieved through planning.
Retirement and Family Financial Security
Often 75% or more of a childcare business owner’s net worth is tied up in their business and associated real estate (building and land). Let that sink in – 75%. How much of your net worth is tied up in your childcare business? Business owners often plan for the proceeds from the sale of their childcare business to fund a substantial portion of their retirement.
Failing to create a strategic Exit Plan that includes increasing the value of their childcare business often means selling for less. And, where the real property is also owned, if the business profitability does not support the full market value of the real estate, it too may be sold for less than the price that could have been achieved through strategic exit planning.
High Risk of Future Business Failure
Childcare businesses that are not operated optimally pose challenges even for experienced childcare buyers and operators. Business turnarounds take time, knowledge, and often substantial cash infusions. Buying a childcare business and transitioning to the new owner is a big enough challenge in itself – add the need for quick changes to increase business performance and profits, and it is easy to see how the risk of failure increases. If owner financing was part of the deal, the previous owner might never receive full repayment.
Creating a strategic Exit Plan can help to eliminate these challenges and provide the ability for childcare owners to exit on their timeline and with a price and terms that allow them to capitalize on their many years of hard work and sacrifice to build a successful, financially sound, valuable childcare business.
