EBITDA vs EBITDAR: The $315,000 Gap That Flatters Every Childcare Franchise Comparison

Primrose Schools reports two margin figures that look like they describe different businesses:

• EBITDAR (before rent): 29% — $824,000 on $2.81M average gross revenue
• EBITDA (after rent): 18% — $509,000 on $2.81M average gross revenue
• The gap: $315,000 — that is rent, and it is real money leaving your account every month

These figures come from the 2025 FDD profit-and-loss data across 413 reporting Primrose facilities. Both numbers are accurate. Only one of them reflects what you actually keep.

The “R” in EBITDAR stands for rent. Stripping it out was originally designed for comparing operators across different lease structures — airlines, hotels, hospital systems. It was never meant to be pitched as a profitability metric to someone writing a $5M check for a single-location childcare center with one lease.

When you see EBITDAR in a franchise presentation, ask one question: who benefits from hiding the rent line?

Childcare is a real estate business with an education service layer bolted on top. The physical plant is not incidental to the model — it is the model.

Consider the footprint difference:

A Primrose location consumes 5x to 8x the square footage of a typical franchise concept. That is not a detail. That is the single largest variable in your investment thesis.

Rent is the third-largest expense

At $315,000 average (11% of revenue), rent sits behind only two line items:

1. Payroll and benefits — the dominant cost in any staffed childcare operation
2. Franchise fees — royalties, brand fund, and advertising fees that stack higher than most candidates expect
3. Rent — $315,000 average across 413 facilities

And rent does not travel alone. Total occupancy cost — rent plus utilities, maintenance, property insurance, and CAM charges — averages 17% of revenue ($465,000). That is $150,000 on top of the rent figure that EBITDAR already excluded.

Ignoring rent in a childcare franchise is like ignoring fuel costs in a trucking company. It is the load-bearing expense of the entire model.

Franchise brokers and brand development teams love EBITDAR comparisons because they flatten the one variable that makes childcare look expensive relative to lower-footprint concepts.

The misleading comparison table

On EBITDAR, all three look roughly comparable. But Primrose is paying $315K in rent while the tutoring center pays $48K and the fitness studio pays $36K. The actual cash-flow stories are wildly different.

EBITDAR makes different investments look identical

A Primrose location paying $200K/year in rent (suburban secondary market, favorable lease) and one paying $450K/year (high-cost metro, premium site) are fundamentally different investments. EBITDAR collapses that $250,000 annual difference into a single number.

If you are modeling returns, that $250K gap across a 10-year hold is $2.5 million in cumulative cash flow difference — before accounting for annual escalators that compound the spread.

The terminology shell game

You will encounter at least three margin metrics during due diligence, each progressively more flattering:

• EBITDAR — excludes rent (the $315K gap discussed here)
• “Adjusted EBITDA” — excludes rent plus whatever the presenter decides to “adjust” out (one-time costs, owner perks, above-market salaries)
• Owner’s Discretionary Earnings (ODE/SDE) — adds back the owner’s salary, making the business look like it generates far more cash than any working owner actually captures

Each layer of adjustment moves further from reality. When someone hands you an “adjusted” number, ask: adjusted by whom, and for whose benefit?

For a deeper look at how reported averages can mislead, see our analysis of Primrose Item 19 quartile spreads.

The $315,000 average rent figure is drawn from 413 facilities spread across dozens of U.S. markets. That average is doing a lot of heavy lifting.

Geographic variance is enormous

Primrose operates in markets ranging from suburban Texas (where the brand originated) to the New York City metro area. The rent variance across those markets is easily 3x or more.

Consider what $315K average actually contains:

• Low-rent markets (parts of TX, GA, NC): $180K–$240K/year
• Mid-range markets (suburban DC, Atlanta metro, Charlotte): $280K–$360K/year
• High-rent markets (NJ, parts of CA, metro Boston): $400K–$500K+/year

A prospective franchisee in a high-rent market who runs EBITDAR math — projecting 29% margins without plugging in their actual lease cost — is modeling fantasy returns.

Rent escalators compound the problem

Commercial leases in childcare typically include annual rent escalators of 2–3%. On a $400K starting rent:

• Year 1: $400,000
• Year 5: $433,000–$463,000
• Year 10: $478,000–$537,000

Your EBITDAR stays flat (in theory). Your EBITDA erodes every year unless revenue growth outpaces rent escalation. The Federal Reserve’s data on commercial real estate trends shows that lease cost growth has consistently outpaced CPI in high-demand suburban markets — exactly where childcare centers locate.

NNN vs gross lease structures

Some Primrose locations operate under triple-net (NNN) leases where the franchisee pays property taxes, insurance, and maintenance on top of base rent. Others have gross or modified gross leases that bundle some of these costs.

The FDD average does not disaggregate by lease type. Two operators reporting identical “rent” figures may have very different total occupancy costs depending on what their lease structure includes or excludes. The National Association of Realtors commercial leasing guide provides useful context on how different lease types affect total occupancy cost.

If you are seriously evaluating a Primrose investment, here is the waterfall that matters.

Step 1: Start with EBITDA, not EBITDAR

Use 18% ($509K on average revenue), not 29%. If anyone pushes back on this, they are either confused or selling you something.

Better yet, do not use the system average at all. Build your P&L from your specific market’s rent, labor rates, and enrollment assumptions. The enrollment ramp and cash burn timeline is critical context for first-year modeling.

Step 2: Subtract debt service

Most Primrose investments are financed through SBA 7(a) loans. At Primrose’s total investment range ($5.1M–$8.4M per the 2025 FDD), a typical SBA loan generates annual debt service of:

• $5.5M financed at 10.5% over 10 years: ~$740K/year
• $7.0M financed at 10.5% over 10 years: ~$940K/year

Yes, debt service alone can exceed EBITDA in the early years. This is why understanding your financing structure is not optional — it is the single largest determinant of whether the investment cash-flows.

Step 3: Subtract owner’s salary replacement

If you are leaving a $150K–$250K job to operate a Primrose, that salary needs to come from the business. It is not “profit” — it is the cost of your labor.

Step 4: Calculate actual return on invested capital

Here is the waterfall for a median Primrose operator:

At the median, a fully leveraged Primrose investment is cash-flow negative before the owner takes a dollar in salary.

This does not mean the investment is bad. It means:

• You need significant equity injection to reduce debt service
• OR you need to operate well above the median
• OR you need a long time horizon where enrollment maturation and loan paydown create positive cash flow in years 4–7

What it definitely means is that quoting 29% EBITDAR margins paints a picture that has nothing to do with the economic reality of a leveraged single-unit operator.

Step 5: Stress-test with quartile data

The Item 19 quartile analysis shows that revenue spread within the Primrose system is wide. If your model only works at top-quartile revenue, you are not modeling an investment — you are modeling a bet.

Ask yourself:

• What happens at 25th-percentile revenue with my actual rent?
• What happens if enrollment ramp takes 18 months instead of 12?
• What happens if I hit median revenue but in a high-rent market?

If the answer to any of these is “I run out of liquidity,” the risk profile is not what the EBITDAR number suggested.

EBITDAR is a legitimate analytical tool when used for its intended purpose: comparing operating efficiency across different real estate structures. It is not a profitability metric, and it should never be the headline number in a franchise investment presentation.

For Primrose Schools specifically:

• $315,000 is the average annual gap between EBITDAR and EBITDA
• That gap represents rent — a fixed, escalating, non-negotiable cash outflow
• In high-rent markets, the gap widens to $400K–$500K+
• Once you add debt service and owner salary, the median unit economics look nothing like 29%

Every dollar excluded from a margin calculation is a dollar someone does not want you to think about. In a $5M–$8M investment, you cannot afford to not think about $315,000 per year.

Is EBITDAR ever the right metric to use?

Yes — when comparing operating performance across locations with different lease structures owned by the same multi-unit operator. It strips out the real estate variable to isolate operational efficiency. It is the wrong metric for evaluating whether a single location generates adequate returns.

Where does the $315K rent figure come from?

The 2025 Primrose Schools Franchise Disclosure Document, Item 19 financial performance representations, based on P&L data from 413 reporting facilities.

Does Primrose disclose rent separately in the FDD?

The 2025 FDD provides a P&L breakout that includes occupancy costs. The $315K rent figure and 17% total occupancy figure are derived from those disclosed line items.

What if I own the real estate?

If you own the building (or an entity you control does), rent becomes an intercompany transfer. Your consolidated return improves because the rent payment stays within your economic orbit. This is a common strategy for well-capitalized multi-unit operators — but it requires significantly more upfront capital and introduces real estate risk alongside the franchise operating risk.

Should I use EBITDA or net income for my model?

Neither in isolation. Build a full cash-flow waterfall: revenue, less all operating expenses (including rent), less debt service, less capital reserves, less owner salary. What remains is your actual free cash flow — the only number that matters for an investment decision.