Welcome!
I’ve looked at thousands of businesses for sale, and learned to read between the lines. Every issue, we'll take a deeper look at a listing, learn something, and I'll rate the deal at the end!
This week’s listing: A preschool and daycare in Los Angeles County, with a 16-year track record and rave reviews online.
The numbers: It is selling for $1.4M, has cash flow of $256K, and includes over $400K in real estate.
Green flags
First off, a business like this is all about reputation. People want only the best for their kids. So it’s great that they’ve already got a history of good reviews.
The knock-on effect from that is that you’ll probably never hurt for customers. In most places, daycares and preschools have crazy waitlists. So you’re probably at full capacity pretty much all the time.
Then there’s the fact they’re growing revenue every year. That’s a good sign, but I want to know how they do that.
Finally: a business like this is location-dependent, and you never want to be a tenant. So it’s good you get the real estate, otherwise that would be a deal breaker.
Red flags
But let’s look a little closer at that land. $435K for property in Los Angeles is really cheap — so this is probably a lower-income area. You’d want to check out the neighborhood.
Next, this is a lot of work. It looks like an owner-operator who’s in there watching the kids every day. That takes a special kind of buyer who’s ready to do that.
There’s also something weird about the numbers. They list cash flow at $256K, with gross revenue at $322K. That’s less than $70K in expenses. How does that pay for three employees, let alone anything else?
Finally, they say they’ll “add you to their licensing” for 6 months. That’s probably the tip of the iceberg in terms of regulatory oversight. So you’d want experience in the industry — this is not something you want to figure out on the fly.
What I’d ask
It’s great that revenue keeps growing — but how? The building can only hold so many kids, so does that mean the prices are going up? If that’s the case, I’d want to know if there’s a price ceiling in the market that will make growth harder.
Then, to be cut-throat about it, you’d want to ask yourself: is this business the best use of the real estate?
This dilemma comes up a lot when a smaller business has real estate. But if it’s not the best use, you have to be the bad guy and turf a bunch of little kids. Not fun.
A few other things I’d want to explore:
- How much turnover is there in the staff?
- What’s the mix of private pay vs government subsidized students? That will give you a sense of how stable the revenue is.
- What are the paths for growth?
And, of course, what’s going on with those financials? Things look weird, and weird’s not good!
My rating
Like so many businesses, there’s an opportunity here if you know the space. But I’m giving this a cautious thumbs down.
The heavy reliance on owner-operator, the cloudy financials, and the mess of red tape makes this a tough pill to swallow.
I’m giving this two children out of five.
What do you think? Check out the listing yourself and let me know.
Or listen to Heather and Mills do the full breakdown on Acquisitions Anonymous!
And remember — if you still want these breakdowns, click this button!
[BUTTON: Yes, keep sending me Deal Breakdowns!]
Have a great week!
Michael
