Market Timing in the Early Education Industry 

In every industry and economic cycle, there are always people who believe that they can predict the future usually because they have some business model that’s been right once. This authority will point to their example of being right without discussing how many times they have been wrong and explain that you’re safe if you trust them. From investment banking to preschools, it has been my experience that very few people have this gift and most business models built to predict the future are fatally flawed somewhere, usually in the assumptions made about the very foundation of the model. You know what isn’t flawed…..the present. In the present, the following is occurring in the early education vertical:

  1. Buyers are paying the highest prices for childcare companies, preschools, Montessori schools and private elementary schools. This is largely because the demand for centers and schools far exceeds the current supply of centers and schools available for sale. This reduction in available centers and schools is caused by the difficulty in hiring and retaining teachers. When centers don’t have enough teachers, they can’t enroll the students and financial performance suffers. Most people don’t want to sell their centers or schools when they are not performing well. At BFS®, we’re helping our clients to increase staffing and enrollment.
  2. Sellers are retiring with bigger paydays than they ever thought possible.
  3. Many centers have received exceptional amounts of grant money, but those funds are being reduced and centers are now pushing themselves to produce higher profits without grant money.
  4. Sellers are retiring with bigger paydays than they thought possible.
  5. While some banks have become cautious in the wake of a few PPP lending mistakes, banks like our industry and continue to make funds available to us.

Here’s why it’s occurring.

  1. Early Education is a desirable industry not just because of its monetary rewards, but because it gives us the ability to do work that makes a real difference.
  2. Material cash flow is difficult for buyers to find. One of the things that makes our industry great is the fact that it’s highly fragmented. The huge majority of centers and schools are owned by small business owners. Because most early education companies are relatively small and because financing is abundantly available, there are many qualified buyers.
  3. Investors from private individuals to equity funds invest in early education companies, and they want to see a growing return on their investment. The fastest way to grow early education companies (whether they own five schools or 500) is by the acquisition of other centers and schools. And generally speaking, investors are not patient when waiting for a return on their investment.
  4. Many owners of early education companies have been holding back and choosing not to sell. The most popular reasons for not selling are…

    a. Fear that they won’t have enough money to retire comfortably.

    b. Concerns over a potential economic downturn.

    c. Fear that someone will find out about the sale before their company is sold.

    d. Don’t know what else to do after the sale.

In today’s environment, the seller with profits has the new golden ticket.

As always, we hope it helps.

Best to you….Brad Barnett, President BFS®

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