Topics: Valuation of schools, preschools, childcare, K-12 school. EBITDA multiples valuation of schools, preschools, childcare, K-12 school.
We are frequently asked by sellers and buyers what the EBITDA multiples for schools are. That is how this article originated. In this article we explain how to use this metric and provide some information about the multiples we see today in the marketplace. Finally, we argue that EBITDA multiples are only one indicator to value a school. There is a more precise method. By "school" we mean a network of childcare centers, preschools or K-12 schools or even a single location of any of these educational institutions.
What is EBITDA?
EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortizations. It is a financial measure calculated with information found in the Income Statement of any school. It is widely used, because it is a rough approximation of the cash flow generated by a school in a given period of time.
What taxes are included in the "T" of EBITDA?
Those taxes refer only to income taxes (state and federal).
What interest is included in the "I" of EBITDA?
Typically, that is the interest related to any loan from banks, other financial institutions, and even loans from shareholders.
What EBITDA to calculate?
If the EBITDA is stable, i.e. has not been growing or decreasing over time, typically, the EBITDA to calculate is the trailing last twelve months of operations at the date of the valuation. In deals of schools with growing enrollment or recently opened, this is not an appropriate valuation method. You would have to use the Discounted Cash Flow method or adjust the EBITDA multiple method. How to do this is beyond the scope of this article.
To apply this methodology correctly, the EBITDA to use should be an adjusted EBITDA. An adjusted EBITDA is one that excludes non-recurrent income and expense items. Adjustments to be made include issues related to employee benefits, property taxes, leases, among others. That is, you must be technically consistent in the calculation of your EBITDA, so the calculation of school value is accurate.
What are the EBITDA multiples for childcare, preschools, and K-12 schools today?
There is no simple answer for this. Multiples depend on several school characteristics: geography, location, conditions of the real estate, academy delivery and quality, condition of personal property (e.g. furniture, computers, playgrounds, sports equipment, etc.), management quality, strength of back office, administrative software, security, quality of staff, brand recognition, staff turnaround, etc.
Today, we see EBITDA multiples as low as 4x and as high as 7x EBITDA and even multiples out of this range. Larger network of preschools and K-12 might attract larger multiples.
What are some of the pitfalls in using EBITDA multiples to value a school?
Most of these are related with the calculation of the EBITDA and the incorrect application of adjustments.
Is there a more precise method than EBITDA multiples to calculate the value of a school?
Yes. The method that really captures the equity value (value of a school business) is the Discounted Cash Flow method. It is based on the yearly projection of the school’s future cash flows, balance sheets, and income statements for the next few years. This value is adjusted by excess cash flows (cash flows above the normal levels for the school’s operation), the market value of non-operational assets, financial debt, and hidden liabilities, among others.
The challenge of this methodology is the determination of discount rates used to calculate the present value of the future cash flows. These discount rates will depend on the financing aspects of the school (bank debt and shareholders debt), changes of debt levels through time, and the required rate of return on the owner's equity capital. However, this method really captures all the strengths and weaknesses of the school, as well as all of its intangible assets (brand, students list, community image, etc.).
Additional resources:
If you need assistance selling or valuing your school or acquiring a school, contact us
If you need to read more about selling a school, click here.
If you need to know more about valuing businesses, click here
If you need to know about acquiring schools, click here
If interested in reading more articles and insigths by Mergium, click here
If interested in knowing about our experience in selling / acquiring schools and other transacions in the Education / Knowledge industries, click here