Childcare Center Acquisition with Real Estate Lease Option and Escrow-Backed Licensing Contingencies
This transaction involves the acquisition of a licensed early childhood education center located in a fast-growing suburban market in the southwestern United States. The center serves children aged six weeks to six years and operates with licensed capacity for 114 full-time enrollees. It has maintained an average enrollment rate of 90% over the past three years and achieved $1.72 million in annual revenue with $385,000 in seller discretionary earnings (SDE). The business was acquired for $1.2 million, reflecting a multiple of approximately 3.1x trailing SDE. The buyer used a mix of SBA 7(a) financing and an escrow-based mechanism to hold funds pending the successful transfer of the operating license a critical path item regulated by the state’s Department of Family and Protective Services.
The business occupies a purpose-built childcare facility totaling 8,400 square feet, situated on a one-acre parcel owned by the seller through a separate real estate holding company. The seller offered the buyer a five-year lease with a purchase option at a pre-negotiated price, enabling the buyer to first stabilize the business post-acquisition before pursuing a 504-backed real estate purchase in year two. The lease was structured as a triple-net lease with monthly base rent of $9,200 and 3% annual escalators. The option to purchase could be exercised after 18 months at a fixed price of $1.28 million, providing a clearly defined path for long-term facility ownership.
The childcare center had built a strong reputation in the community over 15 years of continuous operation. It was fully staffed with a director, assistant director, 12 lead and assistant teachers, and two part-time administrative staff. The facility included eight classrooms, a commercial kitchen, administrative offices, indoor gross motor space, and three age-appropriate outdoor play areas compliant with state licensing requirements. The curriculum followed a structured blend of Montessori and play-based learning, with thematic units, monthly developmental assessments, and optional enrichment programs including Spanish immersion and music therapy. The buyer a former teacher and multi-unit childcare investor viewed the center as a well-located, operationally sound, but under-marketed business with potential for tuition optimization and utilization gains.
The acquisition was structured using 75% SBA 7(a) financing ($900,000), 10% buyer equity ($120,000), and 15% seller financing ($180,000) with an interest-only period of 12 months followed by a 48-month amortization at 6.5% APR. In addition to standard SBA underwriting, the buyer and lender agreed to hold $100,000 of the purchase price in escrow pending the successful transfer of the center’s child care license. This was necessary because, under state law, license transfers require a new application, director background check, facility inspection, and parent notification all of which can take 60–90 days. The license contingency escrow was structured to release funds upon written confirmation of license approval, with provisions for partial disbursement if delays extended beyond 120 days without fault of the buyer.
Diligence included enrollment history review, staff retention analysis, building inspection, curriculum and operations review, and confirmation of compliance with all regulatory filings and ratios. The seller provided three years of clean financials prepared on accrual basis with CPA review. Enrollment records were validated through Procare software exports, and class ratios were within state compliance on a spot-check basis conducted over five site visits. The building passed all inspection items other than a few minor repairs (HVAC ducting, fence realignment) which were negotiated into seller responsibility pre-close. Employee files were reviewed to confirm background checks, training, and continuing education credits. All staff agreed to remain post-close, and the director signed a 24-month employment agreement with a $5,000 retention bonus paid quarterly.
The buyer saw immediate opportunities for operational improvement. Tuition rates had not been increased in two years and were below market by 7–12% depending on age group. The buyer implemented a 6% across-the-board increase effective 90 days post-close, generating an additional $7,200 in monthly revenue with minimal attrition. The center had no digital marketing and relied on word-of-mouth and a listing on a generic aggregator site. Within three weeks of close, the buyer launched a new website, local Google Ads campaign, and referral bonus program, increasing tour bookings by 42% over the following two months. Waitlists were established for infant and toddler rooms within 60 days of the transaction, allowing the buyer to raise rates again selectively and prioritize full-pay families over subsidy-based enrollments.
The center also offered summer camp programs and after-school care, which historically operated at 60–70% capacity. The buyer restructured these programs with more defined weekly themes, part-time staffing, and prepayment discounts, increasing utilization to 88% by the second summer. Gross revenue from seasonal programming increased 24% in the first year, while labor cost as a percentage of revenue decreased 6% due to better scheduling and float teacher availability.
One key feature of this deal was the lease-to-own structure for the real estate. Rather than immediately acquiring the building, which would have required a separate SBA 504 loan or significant down payment, the buyer negotiated a lease with the option to purchase within five years. This preserved cash and allowed the buyer to stabilize cash flow and occupancy before layering in long-term debt. The lease included NNN terms with tenant responsibility for property taxes, insurance, and maintenance. However, a cap was negotiated on capital expenditures over $5,000 per year, with landlord responsible for structural repairs, roofing, and mechanical system replacement beyond normal wear and tear.
The real estate purchase option was executed 20 months post-close after the buyer had increased EBITDA from $385,000 to $480,000. At that point, the buyer refinanced through an SBA 504 loan, acquiring the property at the original option price with 10% down and a blended 25-year amortization schedule. This transaction created equity for the buyer and reduced monthly occupancy cost by converting rent into mortgage payments with depreciation benefits. Additionally, property appreciation in the area had pushed fair market value above $1.5 million, giving the buyer immediate equity in the property upon acquisition.
Risks mitigated in the transaction included licensing delays (addressed through escrow), employee turnover (addressed via retention bonuses and cultural alignment), and enrollment dips post-acquisition (addressed through proactive marketing and parent communication). The seller stayed on as a part-time curriculum consultant for six months, assisting with staff development, parent Q&A sessions, and process documentation. No material client attrition occurred, and parent satisfaction increased, as measured through Net Promoter Score surveys and Google reviews.
Within 12 months of closing, the buyer expanded capacity by converting an unused staff room into a preschool classroom, adding eight new seats at a premium tuition tier. Licensing approval for the new room took six weeks, and revenue per square foot increased by 11% center-wide. The center’s reputation improved locally due to a rebranding campaign, and it won a regional award for early childhood program excellence. The buyer plans to replicate this acquisition model across multiple centers, focusing on underperforming schools with strong infrastructure, staff in place, and untapped pricing or real estate equity.
This acquisition demonstrates how proper structuring including SBA financing, seller notes, escrow contingencies, and lease-to-own pathways can de-risk the purchase of a regulated, people-intensive service business. With the right operational expertise and post-close marketing plan, even a single-location childcare center can be turned into a highly profitable, community-focused business with stable cash flow, asset ownership, and strong future scalability.
