Episode 163 – Financial health directly impacts the ability for a child care business to provide quality programming. In this episode, Kathy Ligon, CEO of Hinge Brokers, shares her top 5 elements that child care business owners should monitor to achieve good financial health for their business – occupancy rates, tuition rates, discounting, expenses and rent. She also talks about the benefits and challenges that child care owners might face when growing their businesses.
And as you grow your company you begin to be a manager of people who have daily interaction with teachers and parents and children. And so to lose that daily connection is typically the number one challenge that I see.
Kathy, welcome to the Preschool Podcast!
Hi, Ron! So good to talk to you.
We are delighted to have on the show today Kathy Ligon. She is the founder and CEO of HINGE Brokers [sic]. And this is going to be an interesting one – we haven’t heard anyone on the Podcast with Kathy’s background and experience. And so we’re going to learn a lot about childcare business and childcare business transactions. So personally I’m interested to learn a lot about this. Kathy, let’s start off learning a little bit about you and what got you to this role where you’re leading this company called HINGE Brokers.
Sure. I’m like a lot of other business owners, Ron, that I sort of fell into this accidentally. I’m an accountant by trade. So, 34 years ago now I was practicing at a CPA firm when I was expecting my second child. And quite honestly I was trying to get out of tax seasons where there were long hours and not much of a break for young female CPA.
So I made it through that tax season but it was really difficult. So I heard that the early education group where my kids went to school was looking for someone to help with their financial management. So I hopped they were there meaning to be there for 20 minutes and that 20 minutes ended up being 18 years because what I found was that the industry was very fast-growing; it was creating a lot of opportunity; it was fun; the people were great; it was dynamic.
And over those 18 years we grew the company from 5 to 120 schools. And what I did at the end of that 18 years was continue the processes and integration and acquisition methods we learned were very successful there into starting HINGE Brokers. So we just passed our 16th birthday at HINGE last week. We’re having more fun than ever. We’ve got a 10-member team across the country. And in addition to helping people either buy or sell their companies we also do training events of our own that focus just on financial and business issues because those are really hard to find in our industry.
Cool. And one of the things we’ve talked about on the Podcast is the importance of having a sound business, financially, in order to provide a quality education to the children in your programs. And so I think it would be great, while we have you here on this podcast, to get some knowledge from you around financials of childcare businesses. In your experience, what are some of the really important things that childcare owners and administrators, directors should think about when it comes to having a sound financial position as a childcare organization?
That’s my favorite question. So, I’m so happy you asked me that because when you give financial data like a financial statement or information from your school’s record keeping system it can be a little overwhelming, honestly. So, what I’ve tried to say to… I have formally said to my directors and now say to business owners is that there are basically five things that you need to pay strong attention to that get you 99% of the way there. So, there are not 99 things. There are five, and four of those you need to monitor constantly and one of those you need to pay attention to on a frequent basis.
So, what those five things are: number one, your school needs to have a healthy occupancy. So, if you’re not pretty well occupied – and I like 70% occupancy at the beginning of financial help – it’s really hard to afford to do very high-quality programming. And I say all the time that those high-quality programming and financial help are not at odds with each other – they’re necessary for each other. So, business owners miss and at times, that in order to do the mission that they got into the business for they absolutely have to be financially strong to support the people and processes and building and children and families and teachers that they’re trying to support.
So, the first thing is that I want them to be at least 70% full. I’ll throw in a little red flag here because – this trips people, as well, sometimes – it’s very important to know that 70% is full-time children, as compared to your licensed capacity. So, just using simple math: if your licensed for 100 children you need to have 70 full-time equivalents, meaning if there are two part-timers they count as one child.
Also pay attention to whether you’re discounting children and whether they pay full rate or not. So, 70 children that pay a full-time rate. So that’s my first thing. I feel like you have to be at least 70% full to be financially strong. And by the way, over that occupancy almost every tuition dollar goes to the bottom line because now your teachers are set, you’re paying for your building, you need a little more food and supplies. But most every dollar over that goes to the bottom line. So, that’s kind of your sweet spot. So, that’s my number one
My number two is that tuition rates have to be strong for your market and for the services that you’re providing. So, I see a lot of business owners fearful of raising tuition rates. A lot of those business owners are doing it out of respect for families but at their own expense and at the expense of their staff who depend on that for their wages. So, I caution our clients to not be timid about tuition rates and setting them at a place that truly reflects the quality of the service they’re providing. So, a lot of business owners are providing services that frankly are above the amount parents are paying for. And that doesn’t work in anyone’s economic system.
The third one is discounting. And this, like calculating occupancy, is my second hidden danger in that discounting too many children can often be a hidden factor that prevents financial help. So, common discounts… and the one I think we’ll never get rid of is staff discounts. It’s difficult to pay staff what they’re worth in this industry.
So, most business owners use discounted childcare for their staff with a common discount being free childcare for directors and half-price childcare for staff. But we see more companies moving toward limiting that to two children per team member and also not discounting infants and toddlers, which are typically lost leaders anyway – you’re typically losing money there. So, I don’t think we’ll get rid of staff discounts.
The next one would be some people discount industries that are in their area. And my rule of thumb for that is sort of, What are they doing for you? Because if they’re not doing anything to promote you those parents are probably going to come to you anyway. So, be sure that industry is giving your information to potential parents.
In some cases owners have to discount for subsidy paid tuition children where the state limits the amount of tuition you can charge and won’t let you charge the difference. And that’s a really tough one. And when I have a brilliant answer for that one day I’ll share with you. So, you can tell people but that’s a really tough one.
But the two I see going away in the industry is, the first one is free or vacation days. And a lot of business owners continue to not require that parents pay when they’re not there. And that discount, if you’re doing that, is costing you a tremendous amount of money. So, I usually recommend maybe a smaller tuition rate increase and eliminate that discount. It can get you farther than a larger tuition increase.
And a good way to explain that to parents is, if you rent an apartment and you go on vacation do you not pay for your apartment? Of course you do there for your use and no one else can move in. It’s for your convenience. So, expenses continue whether you’re there or not.
And then the last one that I see some business owners starting to remove now is discounts for multiple children in the same family. Maybe 10% of the market has eliminated this so this might still be a tricky one for some business owners.
Then the fourth one is some rules of thumb on a percent that you spend for salaries, as compared to your revenue. This is critical because in a business where we spend 50 to 60% of every day every parent dollar on staff-related expenses you can’t let this one slip. And this has to be monitored every single week. So, my benchmark: if you’re not at 70% full like I said you have to staff every room anyway. So, unless you’re at a healthy occupancy it’s really hard to hit these numbers.
But if you’re at 70% full, assuming you have a market-rate director and market-rate assistant director – should you need one at the school size – and all the teachers in the building and all of their pay and benefit pay, my rule of thumb is 45% of that should be spent on salaries. Different buckets for benefits and payroll taxes and things like that. But just for salaries, 45%.
As you get over 70% occupancy that number can easily slip down to 42%. Some of our owners will go into the 30’s but it’s a bit unusual, especially in today’s environment where we’re having to pay teachers more than ever before because of the low unemployment factor.
And then my last one, and this is the one you need to pay attention to occasionally – the first four I mentioned were every week, honestly, if not every day – is that the rent or facility cost works with the potential revenue for the school. So a lot of times we’ll see a business owner spend too much for a building – whether that’s rent or a mortgage payment – and the percent never matches up with what could be financially healthy for them.
So, how I like the council business owners there is to figure out what their revenue would be at 70% full and then spend about 12 to 15% of that on rent. And that’s not property taxes or maintenance or insurance, it’s just pure rent. So kind of a little industry benchmark.
Those are the impactful, powerful places we start with our business owners. And if you get that much right you’ve done 99% of the work.
That is super-duper-duper helpful. I’m pretty sure that this is gold, in terms of information on the Podcast. So, I want to now get a little bit to HINGE in the services you provide. And let’s start off first with your role as a broker, in terms of buying and selling childcare businesses.
Let’s start off with the most natural first question, I guess, is: If you are childcare business owner when do you think about selling your business? Or, when should you think about that.
You have the best questions ever, Ron. Years ahead of time, is the answer to that question. So, we absolutely love it when our business owners get involved with one of our financial training methods or events and they start to think about their succession plan years ahead of time. And what I say to people is, “You never know.” Maybe you’re not thinking about it. And God forbid you aren’t able to operate your business.
But what if someone knocks on your door? And this is a very aggressive buying environment. Our business owners are getting more from their businesses or real estate than I’ve seen in my 34-year history. But what if someone knocks on your door and says, “Would you consider selling your business?” You want your business to be as financially healthy as possible because that is what its value is based on. The amount of cash that it generates is what your business value is based on. So, years ahead of time – very minimally 18 months ahead of time. But 3-to-10 years is fantastic.
Are there any other things other than financial health that you should think about in advance of selling your business?
Yeah, you definitely should be very mindful of preserving the quality of your building, whether you’re renting or you own that building. You should keep maintenance up-to-date regularly. You should… I think every building needs a complete overhaul and rebrand every 10 to 15 years. I’ve sold buildings that were 40 years old and they looked brand new and that was fantastic. And not only does that get you more proceeds for your real estate it also gets you more for your business. So, it helps you keep your tuition rates high; it helps you be prepared for a higher value when you sell. So, really keep that up-to-date.
The other thing is, keep your systems and processes up to date. There are a lot of things out in the marketplace that are making people more progressive in the way they communicate with parents and really stay connected to this parent group and their age and how they like to be communicated with. Those are critical.
And also be sure that you’re keeping up with trends and curriculum and operations. And you have some… there are some cool things that have a little sizzle factor in addition to a very high-quality core curriculum. There are things like language immersion and STEM [Science, Technology, Engineering and Mathematics] curriculums and things like that that might give your company a little sizzle and competitive advantage over others.
Cool. And the rebranding of the building is an interesting one because it reminds me of residential real estate when somebody sells their house. And then the real estate broker comes in like does all the interior design and everything to make it look nice and it’s like a whole new house, basically.
Yes, but do yourself and enjoy that for 10 years because, again, it helps keep your tuition rates high; it keeps quality teachers there. So do it and enjoy it yourself. But yeah, I think you need a complete refresh every 10 or 15 years. And there’s some great resources in the market now that are helping business owners do that that are specific to the industry. So, I’m happy to share some of those with your listeners, if needed
Cool, and that’s a very good point. And so HINGE does a little bit more than just being a broker for top care business transactions. Can you tell us a little bit more about other things that you do?
Sure. So, in our quest to help business owners become more financially healthy – that’s kind of our buzz term – and that’s our mission is to help the business owner be as financially healthy today so that they can accomplish the mission that they got in business for and then realize the value on that in the future.
And most people get into the business thinking, “Well, one day I’m going to sell this and make a lot of money.” But I don’t have to be told how hard our clients are working every day. And it’s my greatest joy in life to help them at the end of their business life really transition with being rewarded not only with a great company to take over their company but financial reward.
So, we do two different training events each year in addition to monthly webinars all on financial and business topics. Those can all be accessed through our website at www.HINGEBrokers.com. You can go back for years and find a lot of content on accounts receivable management or salary management or, “How in the world do I deal with this workforce today?” Or, “What’s my real estate worth?” And things like that.
But we do one-day events that we call THRIVE. And what we do is limit that to 100 guests. And we have them send us their financial data ahead. We meet with them the day before the one-day event to analyze their data and really help them focus on what would help them the most. And then we do a one-day deep dive into everything financial and show them what their numbers should look like as compared to financially healthy these schools in their size group and really help them understand that.
So, our next one’s coming up in Denver on September 13th . And to be honest I think it’s sold out. But if one of your guests would like to attend, if they will reach out I will see if I can find a chair. And then our three-day business conference is being held in Miami in February [of next] year. We have not launched registration there. That will be completely business and financial content as well. So we’ve got some dynamic keynote speakers. We have some very high-profile industry speakers. The HINGE team will present a lot of content on financial metrics. And it’s just one of the funnest things that we do. We have a lot of fun. We treat our guests really well. And we try to pack as much into three days as possible. So, I’d love to have people join us there.
Very cool. I love how focused they are. And my understanding of these events is they can be super impactful both for you financially and also just in terms of inspiration for your childcare programs.
So, we’re quickly running at a time. I did have one other question, though, for you – which I was actually pretty curious about personally – which is, if I own a childcare business and I have one location or one center [and] I’m thinking about expanding to more locations, financially what are the benefits of that and what are the challenges?
Good question! So, first of all, the benefits are that your business is immediately more valuable. So, the biggest change in business value jumps from one school to two schools. So, as you gain more schools your business multiple – or the multiple that someone will pay you for your business – increases. So if you go from one to two it becomes more valuable. The next breaking point is about five and so on but a more financially viable business.
The second thing as a benefit is that you can now start to hire specialty personnel. So, where it’s really difficult for a single center, I’ll just use a curriculum or training expert. It’s hard to afford that. If you have two schools it’s much easier to afford that.
And then my third one would be that you create opportunity for your team members. So, if you have very high-quality, energetic, progressive team members it will be difficult to keep them engaged for a long amount of time if they don’t continue to see opportunity within your company.
So, those are my number one, two and three benefits. And then challenges with that, I think my number one would be the business owner’s own self. So, typically a business owner got into business because they like the daily interaction with families and children and parents. And as you grow your company you begin to be a manager of people who have daily interaction with teachers and parents and children. And so to lose that daily connection is typically the number one challenge that I see.
And the second one would be that successful business owners – and I put myself in that category – sometimes can be a little controlling. And we like things done our way and we don’t think anyone can do it quite as well as we can. And that’s probably all true. But what we have to do is set up the ditches and allow people to operate within those ditches and be able to survive in that type of environment. So, it’s just a completely different way to manage your business. Those would be the main challenges that I see
Very interesting, thank you for saying that. And so in terms of getting in touch with you… so you mentioned your website, www.HINGEBrokers.com. What are ways that people can get in touch with you or your team if I’m interested in one of these upcoming conferences or some getting some materials or information from you? How do I get in touch?
Sure. Info@HINGEBrokers.com will come right to our team. We have a support team that manages our events. We also have a support team that manages the flow of information. I will mention also that we have a spreadsheet that we give freely to our clients and certainly will offer to your listeners where you can input your school’s license capacity and intuition rates. And it will populate and show you what the average school in your size group spends in each expense category. So, depending on the request we’ll get information back out or get the right information in people’s hands, depending on their needs. So Info@HINGEBrokers.com would be great.
Wonderful. Kathy, thank you so much for coming on the show today. It’s been a very informative session. And I’m so glad we finally got the chance to do this.
I know! Thank you so much, Ron. I appreciate the opportunity and it was great to talk to you.