Key Takeaways
- Structure comes first: asset and equity deals send the licensing file down different paths.
- Disclosure schedules carry more risk than the representations they qualify.
- Indemnity is arithmetic — basket type, cap, escrow, and survival period decide what you recover.
- Interim covenants protect the business during the weeks you do not control it.
- No clause compels a licensing agency to act, so draft for slow or conditional approval.
Start with structure, because it changes the regulatory path
Most single-center child care transactions are drafted as asset purchases. You form a new entity, buy the equipment, curriculum materials, playground assets, enrollment relationships, phone number, and goodwill, and you assume only the liabilities the agreement names. Wage claims from a shift three years ago, an old injury claim, a citation history, an unpaid vendor — those stay with the selling entity unless you agreed otherwise or a successor-liability doctrine reaches you anyway, which is a question for counsel in the governing state.
The complication is that a license is not equipment. Licensing standards and monitoring sit primarily with states and territories (Source: ChildCare.gov, retrieved 2026), and many agencies treat a new operating entity as a new applicant rather than as someone stepping into an existing file. That can mean a full application, a facility inspection, director qualification review, and fresh clearances before you may legally operate.
Equity purchases invert the trade. The licensed entity survives, so the license, the lease, the subsidy agreement, and the vendor contracts may continue without assignment — but you inherit the entity's entire history, including liabilities nobody disclosed. Some buyers accept that history deliberately because the state's ownership-change process is shorter when the licensee does not change. That is a jurisdiction-specific judgment, not a rule you can carry across state lines.
The practical test is boring and effective: describe both structures to the licensing agency in writing and keep the written answer, then weigh the regulatory timeline against the liability and tax consequences. A structure that saves six weeks of downtime may cost more in assumed exposure than it earns, or the reverse. Review the mechanics in change of ownership approval explained before committing to a form of deal.
The schedules are the deal
Buyers read the representations and skim the schedules. That is backwards. A representation says the seller disclosed all material contracts; the schedule says which contracts those are. If the schedule is thin, the representation is thin, and the exception you never saw is the one you now own.
Six schedules do most of the work in a child care acquisition:
- Employees. Hire date, position, classification, pay rate, accrued leave, credential status, clearance dates.
- Contracts. Lease, food vendor, curriculum license, enrollment software, alarm monitoring, bus lease, franchise agreement.
- Deposits and prepaid tuition. Refundable deposits, registration fees, and tuition collected for care not yet delivered.
- Licensing matters. Citations, corrective action plans, substantiated complaints, pending investigations over an agreed lookback.
- Subsidy and food program. Participation agreements, provider numbers, open audits, repayment demands.
- Assets and encumbrances. Equipment lists, leased equipment, UCC filings, anything the seller does not actually own.
Run a three-way count on the employee schedule. If it lists nineteen people, the payroll register shows twenty-three, and your staffing model needs twenty-one to cover the rooms, something is unexplained. The usual answers are substitutes, per-diem floaters, a family member on payroll, or staff paid through a second entity — each changes your labor budget. Reconcile as you would for analyzing staffing grids and ratios, and treat any delta as an open exception, not a rounding issue.
Representations worth insisting on in a child care file
Generic asset-purchase boilerplate misses most of what makes this industry risky. The representations that earn their space are the ones tied to operating lawfully with children in the building.
Ask for a licensing representation that names the license number, states good standing, attaches the citation history, and confirms no pending revocation, suspension, or enrollment restriction. Ask for a staff-qualification representation covering required credentials and training, and a background-check representation: federal CCDF rules establish specified background-check components for covered child care staff (Source: 45 C.F.R. §98.43, retrieved 2026), while states control how those checks are run and renewed, so the representation should track the state's own requirements. Confirm what your own clearances demand through owner and director background checks.
Then the money representations. Enrollment as of a stated date, with the roster attached. Published tuition rates and every off-rate discount actually being honored, including sibling arrangements, staff discounts, and frozen legacy rates. Subsidy participation in good standing with no open recoupment. Facility representations covering playground condition and the compliance obligations that apply to child care centers under the ADA (Source: U.S. Department of Justice, retrieved 2026). Wage-and-hour compliance, including classification of assistant directors and cooks.
Survival periods matter as much as the text. A representation that dies at closing is a conversation, not a protection. Match the survival window to when the problem would realistically appear — a subsidy audit and a summer enrollment shortfall do not surface on the same clock.
Indemnity is arithmetic, so do the arithmetic
Assume a $1,900,000 asset purchase. The agreement carries a $19,000 basket, a $285,000 cap, and a $150,000 escrow held twelve months, with fundamental representations carved out of both the basket and the cap. Five months after closing, a former assistant teacher files an unpaid-overtime claim covering the seller's ownership period and it settles for $46,000.
Whether you recover $27,000 or $46,000 depends on one word. A deductible basket means the seller pays only the amount above the threshold: $46,000 minus $19,000. A tipping basket means that once the threshold is crossed, the seller pays from the first dollar: the full $46,000. Same figure in the document, nineteen thousand dollars of difference to you. Buyers concede this point routinely without noticing they have conceded anything.
The escrow decides whether recovery is real. A $285,000 cap against a seller who has moved away and spent the proceeds is worth what you can collect, not what the cap says. Where a seller note exists, an express right of setoff is usually worth more than a larger cap — though lenders have views on subordination and standby terms, so read seller financing in child care alongside the indemnity section, not after it.
| Clause | What the buyer should test | Common failure |
|---|---|---|
| Deal structure | Written agency answer for both asset and equity paths | Structure chosen for tax alone, licensing timeline ignored |
| Employee schedule | Three-way tie to payroll register and ratio model | Headcount that cannot staff the rooms you underwrote |
| Licensing representation | Citation history attached, not summarized | "No material violations" with no lookback defined |
| Basket | Deductible or tipping, stated explicitly | Buyer assumes first-dollar recovery, agreement says otherwise |
| Escrow and setoff | Collectible source of funds, not just a cap | Large cap, no escrow, seller unreachable |
| Interim covenants | Consent required for tuition, staffing, contracts | Seller reshapes the business during the gap |
| Approval condition | Outside date, extension terms, deposit treatment | Condition tied to a date the agency never agreed to |
Covenants that protect the business you have not yet received
Between signing and closing you carry the economic risk of a business someone else is running. Interim covenants are how you keep it recognizable. The ones that matter here are specific to child care.
Require ordinary-course operation with consent gates on the levers a motivated seller can pull: no tuition changes, no new enrollment discounts, no staff terminations or wage changes, no new contracts beyond a stated term or dollar amount, no reduction in insurance. Each can flatter a final month's earnings while damaging what you are buying. A seller who raises tuition eight percent two weeks before closing hands you an earnings bump and a wave of attrition in your first sixty days.
Add affirmative cooperation duties, and pair them with an access clause. The seller should be obligated to sign agency forms, produce records the licensing office requests, introduce you to the landlord, support the consent process described in lease assignment and landlord consent, and let you observe operations on agreed terms. Say who may be told about the sale, when, and by whom. Cooperation is cheap to promise before signing and expensive to obtain afterward.
Closing conditions, approvals, and the outside date
The condition that breaks child care deals is regulatory. Draft it carefully and honestly: the agreement can require agency approval, or written confirmation of the approval path, as a condition to your obligation to close. It cannot make the agency move. Because no private contract binds a state regulator, build an outside date, a mutual extension mechanic, and an explicit statement of what happens to the deposit if approval never arrives.
Resist the temptation to paper around a slow approval with an interim management arrangement. Whether an unlicensed party may direct operations before approval is a state-regulated question, and getting it wrong risks the license you are buying. Confirm it with the agency and counsel in writing, or wait. The sequencing tradeoffs continue in closing on a child care center.
Money mechanics belong in the same section: prorations for rent, utilities, and insurance; treatment of accrued paid leave; the credit for prepaid tuition and refundable deposits, following the logic in tuition deposits and prepayments at closing; and the purchase-price allocation, which for asset deals may require consistent reporting on IRS Form 8594 (Source: Internal Revenue Service, retrieved 2026). SBA-backed financing is delivered through a participating lender and remains subject to that lender's underwriting (Source: U.S. Small Business Administration, retrieved 2026), so confirm those requirements before signing, not during closing week.
Privacy clauses this industry actually needs
Child care files contain material most asset purchase agreements never contemplate: enrollment applications with household financial detail, immunization records, incident and injury reports, custody documentation, and background-check results for employees. Standard confidentiality language is not sufficient.
Build staged access into the agreement and the data room. Coded rosters and age-band summaries answer most early questions. Identifiable child, medical, and personnel records should be counsel-controlled, restricted to named reviewers, and covered by a written return-or-destroy obligation. Specify who holds records after closing and how the seller obtains access for tax or defense purposes. Carry the same rules into your child care due diligence checklist.
Frequently asked questions
Is an asset purchase always better than buying the seller's entity?
Not always. Asset deals leave most historical liabilities behind, which buyers usually prefer. But in some states the licensing file moves faster when the licensed entity survives, because the agency processes an ownership change rather than a fresh application. Ask the licensing agency in writing what each structure triggers, then let counsel and your tax adviser weigh that against liability and basis.
How large should the escrow and indemnity cap be?
There is no standard figure, and anyone quoting one nationally is guessing. Size it to the exposures diligence actually found: wage claims, open citations, subsidy recoupment, deferred repairs. A cap that is smaller than your worst identified exposure is decoration. Escrow length should outlast the period in which that exposure would normally surface.
Can the purchase agreement guarantee the license transfers?
No. Licensing is administered by states and territories, so no private contract binds the agency. The agreement can require the seller to cooperate, make approval a condition to closing, set an outside date, and say what happens to the deposit if approval does not arrive. It cannot promise the outcome or the timing.
What happens to prepaid tuition and deposits at closing?
If you take over the obligation to deliver care that families already paid for, you should receive cash or a price credit for it. Build the schedule from the billing system as of a stated date, separate refundable security deposits from prepaid tuition, and reconcile it again during the bring-down before funds move.
Do I still need an employee schedule if the seller says everyone is staying?
Yes. The schedule is where wage rates, hire dates, classifications, accrued leave, credentials, and pending clearances become checkable facts instead of assurances. It also feeds your ratio model and your payroll budget. A verbal promise that the whole team is staying is not something you can reconcile, price, or enforce.