EBITDA Metrics for Childcare Centre Transactions

What you need to know about EBITDA vs. Normalized EBITDA vs. Net Income, and why it matters for Childcare Centre Transactions

Whether you're considering buying a childcare centre or preparing to sell your own, understanding the numbers behind the business is essential. Three key financial terms often come up in childcare centre valuations: Net Income, EBITDA, and Normalized EBITDA.

While they may sound like accountant-speak, these metrics play a major role in determining what your centre is worth—and whether a deal is fair. Let’s break them down in simple terms, with a focus on how they apply to childcare centre transactions.

Net Income: the "Bottom Line"

Net Income is the final profit number on your income statement. It’s what’s left after all expenses have been subtracted, including:

• Staff wages and benefits

• Rent, utilities, and insurance

• Interest on loans or mortgages

• Taxes

• Depreciation and amortization on acquired equipment, furniture and leaseholds

This figure reflects the business’s profit after everything is paid. While it’s important, Net Income is not the best indicator of how well your centre is actually performing, especially if there are unique financing or tax strategies in place.

EBITDA: A Clearer View of Operating Performance

EBITDA stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization

It’s a way to strip out costs that may not reflect the everyday operations of the centre, such as:

• How the business is financed (Interest)

• Tax strategies (Taxes)

• Accounting choices (Depreciation & Amortization)

EBITDA focuses on core operating profitability. It helps buyers and sellers compare different centres on a level playing field—without being skewed by financing or tax planning.

Normalized EBITDA: The True Profit Potential

Normalized EBITDA takes things a step further by adjusting for one-time, unusual, or owner-specific items. These adjustments give a more accurate picture of what the business would be expected to earn under new ownership.

Common examples of normalization in the childcare sector include:

• Owner’s vehicle, travel, or phone expenses

• One-time renovations or equipment purchases

• Temporary staffing costs

• Adjusting the owner’s salary to reflect what a third-party Director would be paid

• Legal or consulting fees for non-recurring events

What if the Real Estate is Owned?

In many cases, the owners of the childcare centre also own the building where it operates. If the building is owned and there is no mortgage, the centre will have higher net income and EBITDA, compared to a similar centre that needs to pay rent or make mortgage payments.

Buyers often want to understand the childcare centre's operations on its own, even if they are interested in buying the real estate as well. That means that the Normalized EBITDA should reflect the centre as a tenant, not as a property owner.

When Normalizing a centre's performance, you should:

• Include a fair market rent expense as part of the normalization. This should reflect what the business would pay if it were renting from a third party.

• Remove mortgage interest and property taxes when calculating EBITDA

A Simple Example

Let’s say the centre has a Net Income of $80,000.

Add back:

• Interest: $5,000

• Depreciation: $10,000

• Taxes: $3,000

EBITDA = $98,000

Now, normalize it:

• Add back $8,000 in personal expenses

• Add $6,000 for a one-time repair

• Subtract $10,000 to adjust the owner’s below-market salary

Normalized EBITDA = $102,000

This $102,000 figure reflects the true earnings potential of the centre.

Why it Matters for Childcare Centre Transactions

Understanding EBITDA metrics is critical for childcare centre transactions whether you are acquiring or selling a childcare centre.

Buyers use Normalized EBITDA to:

• Estimate how much cash flow they can expect after hiring staff to replace the current owner

• Determine how much financing the business can support

• Evaluate the return on investment (ROI)

Sellers use it to:

• Justify asking price based on actual earnings potential

• Present a clean, professional financial story

• Demonstrate stability and value—even during periods of regulatory change

Thank you to Jane Fung for suggesting the topic for this article. If you're looking to acquire or sell a childcare centre, you can visit janefung.ca for listings and find related articles at https://www.janefung.ca/category/article/

If you have any thoughts or would like to discuss how we can help deliver value for you and your centre, please reach out! You can email us at hello@childcarecpa.ca.