With 2020 in the rearview window, the child care industry is continuing to recover from the challenges presented by the COVID-19 pandemic. In a recent webinar, Kathy Ligon, Founder and CEO of HINGE Brokers, provided an overview of the state of the industry and offered her predictions for the rest of 2021.
Recovery averaging 65-70%
According to Kathy, recovery is averaging around 65-75%. This percentage isn’t based on occupancy of the centers she tracks, but rather takes figures including full-time equivalents (FTEs) and revenue in 2019, and compares them to 2020. A number of factors are contributing to recovery:
- Higher income demographics, which are still paying at least partially, even if their child isn’t attending.
- Schools that accept government subsidies have experienced a steadier financial situation.
- Parents have increased confidence in sending their children to child care.
Staff struggles at an all-time high
However, staffing issues continue to be a big area of concern.
“We already had issues with child care staffing before the pandemic, but now, it’s at crisis levels,” Kathy said.
Kathy is seeing more child care businesses collaborate with universities, government agencies and other organizations to help build their staff and work to improve culture to attract high-quality candidates.
More confidence in increasing tuition rates and limiting discounts
“We are not doing anyone any favors if we don’t charge the actual cost of our services and the amount it requires to re-invest in our business,” said Kathy. “Be bold – now is the time for action.”
According to Kathy, she’s hearing from child care operators that they’re not getting the blowback they anticipated from raising rates.
“People are thankful to have the services available and they have a better understanding for the costs it takes to run a child care business.” Kathy said.
When it comes to discounts, the industry is largely moving away from them, particularly with regard to free days and vacation days.
“To put it into perspective, if you rent an apartment and go on vacation, you don’t get a discount for the days you weren’t in your apartment – child care operators should use that same thinking for their businesses,” Kathy said.
She said many providers are eliminating discounts for multiple children, while some are getting rid of discounts for staff – although she advised to tread lightly here given the staffing crisis and the need to keep morale high.
Expense control getting creative
Since the pandemic hit, child care businesses have instituted a number of creative practices to save money, including:
- Cutting operational hours
- Reducing discounts
- Switching to parent-provided meals
- Requiring automatic draft tuition payments, which is safer, faster and more reliable
- Using more sophisticated operating technologies/systems to facilitate safer and more streamlined check-in/out, parent communication and payment collection
- Switching to staff-provided cleaning
Increased interest from buying groups
Despite the economy downturn, the industry continues to have a lot of interest from investors. Since the end of March 2020, HINGE has closed 11 transactions and is going into 2021 with seven child care centers under contract. And surprisingly, pricing for these transactions is at or above 2019 pricing.
“I have a strong feeling that after COVID, the child care industry will be more highly valued than ever before,” Kathy said.
More complicated transactions
Transactions are taking more time and involve more structured contracts. Before the pandemic, almost all transactions were paid with cash in full at closing. Now, Kathy is seeing more transactions closed with partial cash payments and earn-outs. Earn-outs are agreements made between a buyer and seller, where the buyer pays the seller after meeting certain performance targets following the sale of the business. Kathy has also observed transactions where the seller is willing to sell their business at a lower rate in order to receive an all-cash closing.
Based on what Kathy saw in 2020, she provided a list of predictions for the child care industry in 2021:
- The vaccine release will raise confidence in child care and increase enrollments.
- The industry will be less competitive as providers exit the market.
- We’ll see a continued roll-up of centers into larger organizations as more owners find the industry difficult to navigate and make the tough decision to sell their businesses.
- The industry will become more highly valued.
- Child care businesses will get more support from businesses and government.
- Progressive operators will continue to be innovative and will grow in the market.
To view Kathy’s presentation on the state of the child care industry, click here.