Key Takeaways
- Lenders size the loan against historical, documented earnings. Your growth plan is context, not collateral.
- Every add-back must be traceable to a tax return or a ledger, or it will come out of the number.
- Run your own coverage calculation before the lender does, then stress it with an enrollment loss rather than a flat percentage.
- The license is a funding condition in practice. Regulatory timing and loan timing are one calendar.
- Program parameters come from SBA, credit decisions come from the lender. Ask the lender what it will do with your file.
Two programs, two jobs
SBA's 7(a) program is its primary business loan program and is delivered through participating lenders, who make the credit decision within SBA's requirements (Source: U.S. Small Business Administration, retrieved 2026). For a typical child care acquisition, where much of the price is goodwill and the facility is leased, 7(a) is the usual vehicle.
The 504 program is built for long-term fixed assets such as owner-occupied real estate and heavy equipment, and it is structured through a Certified Development Company alongside a third-party lender (Source: U.S. Small Business Administration, retrieved 2026). When the building comes with the business, the two programs can be combined or compared, and the right answer depends on the split between property value and business value. Bring both to the first lender conversation instead of deciding on your own.
Detailed program requirements for lenders, including how change-of-ownership transactions are handled, live in SBA's standard operating procedure for its business loan programs (Source: U.S. Small Business Administration, retrieved 2026). That document changes periodically. Ask your lender what the current version requires for equity, seller notes, valuations, and life insurance rather than relying on any secondhand summary, including this one.
Recast the earnings the way a lender will
Start from the tax returns, not from a broker's adjusted earnings page. Take reported profit, add back the owner's compensation and benefits, interest, depreciation, and amortization, and then add back only those discretionary items you can point to in the ledger. Subtract what you will actually spend: a director salary if you will not be in the building daily, market-rate rent if the seller owns the property and has been charging below market, and any deferred maintenance that is really an annual cost.
Work an illustrative center. Recast seller's discretionary earnings come to $420,000. You intend to hire a director at $95,000 including payroll taxes and benefits, which leaves $325,000 of cash available for debt service. Purchase price is $1,400,000 for the business, with the facility leased. A loan of $1,260,000 amortized over ten years at an assumed 10.5 percent produces a payment near $17,000 a month, or about $204,000 a year. Coverage is $325,000 divided by $204,000, roughly 1.6 times.
That is a comfortable file. Now break it. Lose eight children at $1,150 a month and revenue falls about $110,000 a year. Remove one teacher at roughly $46,000 fully loaded and the earnings drop is about $64,000. Cash available becomes $261,000 and coverage falls to about 1.28 times. Still workable, but that is your real margin, and it is the number worth arguing about. Ask what happens if the director leaves in the same quarter.
| What the lender asks for | The child care version of it | Why it matters here |
|---|---|---|
| Three years of business tax returns | Plus year-to-date interim statements | Establishes the earnings the loan is sized against |
| Revenue detail | Enrollment roster by room, tuition schedule, payer mix | Shows whether revenue is contracted or seasonal |
| Payroll records | Staffing grid against required ratios | Tests whether current labor cost is even legal |
| Lease | Assignment consent and term against amortization | Occupancy has to outlast the loan |
| Collateral schedule | Usually thin, since the value is goodwill | Drives guaranty and injection discussion |
| Management resume | Your experience or your director's | Child care operating credibility carries weight |
| Regulatory status | License, inspection record, pending findings | A closing condition in substance |
Equity, guaranty, and the things nobody mentions early
Plan for a personal guaranty from every meaningful owner and for a lien on available business assets. Expect a life insurance requirement when the business depends heavily on one person. Expect the lender to ask about your liquidity after closing, not just your injection, because a buyer with no reserve is a credit risk in a business that makes payroll every two weeks.
Budget beyond the down payment. Closing costs, counsel, an independent business valuation if the financed goodwill crosses the threshold your lender applies, licensing and application fees, insurance deposits, and working capital for the first payroll cycles all land in the same month. A seller note can sometimes bridge part of the gap, generally only on standby terms the lender accepts; the seller's perspective on that trade is in seller financing in child care sales.
Licensing is a financing issue
A lender cannot fund a business that has no authority to operate the morning after closing. In practice that makes the regulatory path a loan condition, whether or not it appears under that heading. Licensing is administered by states, and the requirements for a change of ownership differ among them (Source: ChildCare.gov, retrieved 2026), so give your lender the agency's written answer as soon as you have it. The sequencing is set out in the license transfer timeline for buyers.
The same applies to the lease. If the remaining term plus exercisable options is shorter than the amortization you are requesting, that gets solved before funding, not after; see analyzing the lease and facility. Landlord consent, an estoppel certificate, and a collateral assignment are routine lender requests, and each one depends on a third party who has no deadline of their own.
Present the file so a credit officer can say yes
Lenders are not child care specialists, and a well-organized package does real work. Provide a short memo describing the center, its licensed capacity, current enrollment by room, the tuition schedule, the payer mix, the director's tenure, and the license and inspection status. Reconcile the earnings from the tax return line by line so nobody has to guess where an adjustment came from. State your own operating plan plainly and keep it separate from the historical numbers the loan is sized against.
Where the price came from matters too. If the multiple rests on enrollment that has not been stable, say so and explain the support; the underlying method is discussed in child care center valuation and the price range question in how much does a child care center cost. For an asset purchase, coordinate the purchase price allocation with your tax adviser during drafting, since both parties may need to report it consistently (Source: Internal Revenue Service, retrieved 2026).
What the numbers cannot tell you
A financed acquisition converts a flexible business into one with a fixed monthly obligation. That changes how a soft September feels and how much room you have to raise wages when a competitor opens nearby. Before signing, decide what level of coverage lets you sleep, and treat anything below it as a reason to change price or structure rather than a reason to hope. The broader return question is taken up in is a daycare a good investment, and multi-site borrowers face a different structuring conversation entirely; see buying a multi-site group.
Frequently asked questions
Will a lender count the seller's add-backs
Only the ones it can trace. A vehicle, a family member's payroll, or a personal phone bill usually survives if the tax return and the general ledger support it. Vague categories and one-line adjustments with no documentation tend to be removed, which lowers the earnings the loan is sized against.
How much cash will I need at closing
More than the equity injection alone. Budget for closing costs, professional fees, licensing and application costs, insurance deposits, and enough working capital to run payroll before collections settle. Ask your lender to itemize the full sources and uses rather than quoting a single percentage.
Can a seller note cover part of my equity
Sometimes, if it is structured on full standby and the lender agrees. Treatment depends on SBA program rules and on the individual lender, so confirm the terms before you write a seller note into a letter of intent that you cannot later change.
Will the lender fund before the license is approved
Expect not. A center that cannot lawfully operate on the first morning is not a business the lender can collateralize. Share the regulatory timeline with your lender early so the loan conditions and the agency calendar are built around the same dates.
Should I use 7(a) or 504 for a center with real estate
It depends on what you are buying and how the pieces are structured. Programs differ in what they finance and in how the project is assembled, so bring both the business and the property into the first lender conversation and let the lender model the combinations.