Location: Chicago, IL
Children of America is a franchise that educates and watches children ages six months up to 12 years. To be competitive, the business derives most of its revenue from tuition charged to parents. The majority of the business’s expenses go towards salaries for its employees. Children of America has the potential to become very profitable because of its low cost of capital. The owner of the franchise will hire its faculty to supervise and run the school/daycare.
Children of America charges part-time and full-time tuition each month and offers a summer camp for the children. They also receive revenue from registration
The attached spreadsheet model is for Children of America located in the greater Chicago, Illinois area, and is currently listed for sale at $4.6 million. This model includes a pro forma income statement and balance sheet for the daycare based on market assumptions in the area, and an analysis of the costs of capital and internal rate of return forecasted for the day care, plus a high and low market cash flows projection with an optional remodel in the high market. We found through market research that after the housing market crash of 2008, day care services went up by 7%. In our model, the good scenario includes the 7% increase and the bad market shows a 7% decrease. The model allows variables to be changed for all major inputs of the computations, and includes citations for assumed values in the models.
In the model with the input values chosen, the day care would have a weighted average cost of capital and internal rate of return of 6.14%, but this was accomplished using a 77% debt proportion and a purchase price of the assets at $5.8 million. For this reason, we believe the listed sales price for the day care is not a reasonable amount. We believe this might be too much debt to begin the company but might be acceptable after the company was established. A more reasonable initial purchase price would be approximately $4.5 million, which would lead to a 10% return and cost of capital for the day care.