Key Takeaways
- Define SDE or EBITDA before entering earnings; the same cash flow cannot support two incompatible buyer models.
- Treat the 2.72x default as a cited marketplace median, not as a conclusion about this business.
- Keep real estate separate and include market occupancy cost in operating earnings.
- Reconcile debt, cash, working capital, and capital remedies once in the equity bridge.
- Save the assumptions and run sensitivities instead of presenting one number as certain.
What the calculator actually computes
The worksheet first multiplies normalized annual earnings by the selected factor. It then adds entered excess cash and subtracts entered debt and known adjustments. The output is an illustrative equity indication:
| Step | Formula | Evidence needed |
|---|---|---|
| Normalize earnings | Reported earnings plus supported adjustments | Tax returns, P&Ls, payroll, general ledger, invoices |
| Indicate operating value | Normalized earnings × selected multiple | Relevant closed-sale evidence with the same earnings definition |
| Add included excess cash | Operating indication + included cash | Purchase terms and bank reconciliation |
| Subtract obligations | Less debt and entered adjustments | Payoff letters, working-capital target, capital plan |
| Keep property separate | Add only a separately supported property conclusion | Appraisal, lease evidence, title and environmental work |
This is deliberately simpler than a full valuation. It does not capitalize lease adjustments, forecast growth, price tax attributes, model earn-outs, or decide which assets transfer. Those questions belong in a documented transaction model.
How to define normalized earnings
For an owner-operated center, SDE commonly begins with pretax business earnings and adds one working owner's compensation plus documented discretionary or nonrecurring items. For a managed company or group, adjusted EBITDA should include market compensation for every management role that continues after closing. Calling an owner salary an add-back while omitting replacement management overstates transferable cash flow.
Build a bridge by account and period. Each adjustment should have an amount, source document, business reason, and recurring or nonrecurring classification. Common review items include related-party rent, owner payroll, personal expenses, one-time legal costs, unusual repairs, and normalization of below-market management. Future tuition increases, hoped-for enrollment, an unverified waitlist, and speculative labor savings are scenarios, not historical add-backs.
How to select the multiple
The default 2.72x comes from BizBuySell's reported 2021–2025 child-care transaction data: 425 reported sales and a median SDE multiple of 2.72x. The same source reports a broad distribution, which is the reason a median must not be treated as a price list. Marketplace data may mix geography, size, model, lease quality, real-estate treatment, and reporting quality.
Relevant evidence should match the tested earnings definition, operating model, size, period, asset package, and buyer pool. A licensed multi-site group with independent management is not economically interchangeable with an owner-directed family child-care home. A franchise resale may also carry transfer fees, remodeling requirements, and franchisor approval that the calculator cannot infer.
Run low, base, and high cases
Change one material assumption at a time. A useful sensitivity grid keeps earnings constant while testing several defensible factors, then keeps the factor constant while testing documented earnings cases.
| Scenario | Earnings evidence | Multiple evidence | Purpose |
|---|---|---|---|
| Low | Downside case after unresolved costs | Lower relevant evidence point | Tests execution and diligence risk |
| Base | Maintainable case reconciled to records | Central relevant evidence point | Frames the working discussion |
| High | Supported case, not aspirational growth | Upper relevant evidence point | Shows what must be proven |
If a small assumption change produces a large equity swing, the result is sensitive and should be communicated as a range. The record package matters more than extra decimal places.
Separate the operating company from the building
An owner-occupied center can contain two investments: the licensed operation and the real estate. Normalize the operating business to market rent before applying an earnings factor. Then value the property separately using qualified real-estate evidence. Adding property value without a rent charge overstates the combined conclusion because the same occupancy benefit is counted twice.
Leasehold businesses require their own test. Remaining term, renewal options, assignment rights, landlord consent, rent steps, maintenance duties, and permitted use can change transferable earnings and lender appetite. A profitable center with a short or nonassignable lease may not support the factor entered.
What the result leaves unresolved
The tool does not verify licensed capacity, enrollment, tuition realization, subsidy receivables, staffing ratios, director dependence, inspection history, deferred maintenance, or change-of-ownership timing. Those items can change normalized cash flow or reduce the universe of qualified buyers. It also does not allocate price among goodwill, equipment, covenants, and other assets; buyer and seller generally report an asset acquisition on IRS Form 8594 when Section 1060 applies.
Before using an indication in negotiations, reconcile at least three historical periods, current year-to-date results, enrollment by classroom, tuition by payer, payroll by role, deposit liabilities, subsidy aging, lease economics, and known facility work. A lender may calculate cash flow differently from a buyer, so preserve both bridges.
Common mistakes
- Entering reported profit without identifying owner compensation or replacement management.
- Choosing a multiple first and reverse-engineering add-backs to reach a desired price.
- Treating asking-price listings as closed-sale evidence.
- Adding the building while leaving below-market rent in earnings.
- Counting debt or capital needs both in earnings and the equity bridge.
- Presenting the calculated output as an appraisal or guaranteed sale price.
Frequently asked questions
Is the calculator result an appraisal?
No. It is arithmetic based on user inputs, not an appraisal, broker opinion of value, fairness opinion, offer, or verification of financial records.
Should I enter SDE or EBITDA?
Use the earnings measure that matches the likely buyer and multiple evidence. Owner-operated businesses often use SDE; managed groups more often use adjusted EBITDA with all continuing management roles included.
Why is the sample multiple 2.72x?
BizBuySell reports a 2.72x median SDE multiple for 425 reported child-care sales from 2021 through 2025. It is a broad marketplace observation, not a recommended factor for a specific center.
Does the estimate include the real estate?
No. Value the operating company and real estate separately, charge the business market occupancy cost, and use qualified property evidence before combining conclusions.
What belongs in known adjustments?
Only clearly defined items in the equity bridge, such as an agreed capital remedy or working-capital shortfall. Do not double count debt, property, equipment, or expenses already reflected in normalized earnings.
What should I do after calculating a range?
Reconcile earnings to source records, identify the buyer model, test license and lease transfer, document facility needs, and support the selected multiple with relevant closed-sale evidence.