How to Start a Daycare Business

Countless working parents rely on quality daycare every weekday, which makes it an absolutely necessary and crucial service across the United States and beyond. If you love young children, you could open your own daycare business and play a key role in their early development.

Starting any kind of business, however, takes a lot of work. The key is to have the knowledge that will help you avoid common mistakes and the patience to move through the development and launch process detailed in this step-by-step guide.

Step 1: Decide if the Business Is Right for You

Starting a daycare business requires time, effort, and commitment, not to mention a love of toddlers. You will be taking a major risk, so educating yourself is critical before deciding whether to dive in.

Pros and cons

Every business has its pros and cons. You will need to weigh these factors to decide if starting a daycare business is your best choice.

Here are some basic pros and cons of starting and running a daycare business.

Daycare industry trends

Sector growth is being driven by an increase in the number of working parents, even though the pandemic reduced demand due to the increase in parents working from home.

There is a direct link between economic fluctuations and the daycare industry. When the economy is growing, more people are employed and need child care services.

Industry size and growth

• Industry size and past growth – The US daycare industry is valued at around $55 billion, after growing marginally at 0.5% per year on average over the past five years.((https://www.ibisworld.com/industry-statistics/market-size/day-care-united-states/))  
• Growth forecast – The global child daycare services industry is predicted to grow 9% annually through 2026.((https://www.thebusinessresearchcompany.com/report/child-day-care-services-global-market-report))
• Number of businesses – There are more than 600,000 daycare businesses in the US.((https://www.ibisworld.com/industry-statistics/number-of-businesses/day-care-united-states/))
• Number of people employed – The industry employs more than 1.4 million people.((https://www.ibisworld.com/industry-statistics/employment/day-care-united-states/))

Trends and challenges

Trends in the daycare industry include:

• Expected increase in employment of mothers
• Post-lockdown return to work orders
• Adoption of technologies providing video streaming services to keep parents updated

Challenges in the daycare industry include:

• Lack of workers to low pay
• Earning the trust of parents
• Regulatory compliance

Consumer spending

• Average consumer spend – Americans spent $11,266 on average per year for the cost of center-based care for children under 5 years old in 2020, according to online lending marketplace Lending Tree.((https://www.lendingtree.com/debt-consolidation/child-care-costs-study/#annualcostsspikeperchildforcenterbasedcareprovidersamidcoronaviruspandemic))
• Potential customer base – More than 6 million parents in the US rely on child care centers.((https://www.zippia.com/advice/us-child-care-availability-statistics/))
• Average prices – In 2020, the price of center-based child care increased 5% to $12,411 for infants, 5% to $11,379 for toddlers, and 7% to $10,008 for 4-year-olds.

What kind of people work in daycare centers?

• Gender – About 89% of all child daycare workers are female, while 11% are male.((https://www.zippia.com/child-daycare-worker-jobs/demographics/#gender-statistics))
• Average level of education – 42% of child daycare workers hold a high school diploma.((https://www.zippia.com/child-daycare-worker-jobs/education/))
• Average age – The average age of a child daycare worker is 38 years old.((https://www.zippia.com/child-daycare-worker-jobs/demographics/#age-statistics))

How much does it cost to start a daycare business?

The startup costs for a daycare business range from $12,000 to about $52,000. You could run a daycare from your home for much less, but you will have less capacity.

You will need to procure a few different items to successfully launch a daycare business. Here is a list of things to get you started:

• Toys and games
• Art supplies
• Educational materials
• Food-service equipment

Start-up Costs	Ballpark Range	Average
Setting up a business name and corporation	$150 - $200	$175
Licenses and permits	$200 - $300	$250
Insurance	$100 - $500	$300
Business cards and brochures	$200 - $300	$250
Website setup	$1,000 - $3,000	$2,000
Space lease security deposit or purchase down payment	$5,000 - $30,000	$17,500
Space remodeling and preparation	$5,000 - $10,000	$7,500
Toys and supplies	$1,000 - $8,000	$4,500
Total	$12,650 - $52,300	$32,475

How much can you earn from a daycare business?

Your profit will vary depending on how large your space is and how many children it can accommodate.

The average cost for full-time care of one child at a US daycare center is $340 per week, while industry profit margins average 6.5%. The primary costs are labor and overhead, including rent and materials. If your center can cater to 15 children, your annual revenue will be around $265,000, with a profit of more than $17,000.

As your brand gains recognition you might cater to 40 children and increase your weekly price to $400 per child, leading to annual revenue of $832,000 and a profit of more than $54,000.

What barriers to entry are there?

There are several barriers to entry for a daycare business. Your biggest challenges will be:

• Building a reliable reputation and standing out from the competition
• Securing a prime location, accessible to many parents
• High startup costs, mainly rent and labor

Step 2: Hone Your Idea

Now that you know what’s involved in starting a daycare business, it’s a good idea to hone your concept as you prepare to enter a competitive market.

Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.

Why? Identify an opportunity

Since you will have no track record in the business, you need to find a way to stand out from the competition. An important first step is to find a densely populated area with few or no other daycare businesses.

Next, you should determine how you can establish trust with potential clients, and what you can offer that will make your business seem superior to other daycare options.

What? Determine your products or services

Think about what you can offer in your daycare center that will give you an advantage. These might be nutritious food choices or advanced educational activities using special toys and games.

How much should you charge for daycare services?

Again, the average cost of daycare per week is $340 per child. You could initially charge a little less than average, but you want to be careful not to position yourself as a discount daycare center, which could reduce customer trust.

Research daycare businesses in your area to determine the best prices for your market. Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

Your target market will be working parents who need daily child care. You might also target parents who need after-school care by contacting schools in the area.

After you get started, word-of-mouth referrals and repeat customers will be your biggest source of business, so be sure to provide a reliable service.

Where? Choose your daycare location

Selecting the right location for your daycare business is crucial for attracting parents and ensuring its success. Look for a spot in a safe and child-friendly neighborhood, with ample space for indoor and outdoor activities.

Consider accessibility and convenience, ensuring that the location is easily reachable by parents. By strategically choosing the right location, you can establish a profitable and trusted daycare business that offers a nurturing and educational environment for children and stands out in the competitive childcare industry.

You can find commercial space to rent in your area on sites such as Craigslist, Crexi, and Instant Offices.

When choosing a commercial space, you may want to follow these four rules of thumb:

• Central location accessible via public transport
• Ventilated and spacious, with good natural light
• Flexible lease that can be extended as your business grows
• Ready-to-use space with no major renovations or repairs needed

Step 3: Brainstorm a Daycare Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

• Short, unique, and catchy names tend to stand out
• Names that are easy to say and spell tend to do better
• The name should be relevant to your product or service offerings
• Ask around — family, friends, colleagues, social media — for suggestions
• Including keywords in the name, such as “child” or “care”, boosts SEO
• Choose a name that allows for expansion: “ABC Daycare Center” rather than “Toddler Time Childcare”
• Avoid location-based names that might hinder future expansion
• Use online tools like the Step by Step business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these. 

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that set your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Step 4: Create a Daycare Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

• Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
• Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
• Product and Services: Describe your shop’s services in detail.
• Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
• Competitive Analysis: Analyze main competitors, assess their strengths and weaknesses, and create a list of the advantages of your services.
• Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
• Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
• Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
• Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
• Appendix: Include any additional financial or business-related documents.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist to create a top-notch business plan for you.

Step 5: Register Your Business

Plus, registration is exciting because it makes the entire process official. Once it’s done, you have your own business!

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to daycare centers. 

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your daycare business will shape your taxes, personal liability, and business registration requirements, so choose wisely.

Here are the main options:

• Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
• General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
• Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
• C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
• S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just need to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using an online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.

Step 6: Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate on a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Step 7: Fund your Business

Securing financing is your next step and there are plenty of ways to raise capital:

• Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
• SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
• Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
• Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
• Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
• Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
• Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best options, other than friends and family, for funding a daycare business. You might also try crowdfunding if you have an innovative concept.

Step 8: Apply for Daycare Business Licenses and Permits

Starting a daycare business requires obtaining a number of licenses and permits from local, state, and federal governments.

Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits. 

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more. 

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Step 9: Open a Business Bank Account

Before you begin making money, you will need to have somewhere to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your daycare business as a sole proprietorship. Opening a business bank account is quite simple, and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account. 

Step 10: Get Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

• General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
• Business Property: Provides coverage for your equipment and supplies.
• Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
• Worker’s compensation: Provides compensation to employees injured on the job.
• Property: Covers your physical space, whether it is a cart, storefront, or office.
• Commercial auto: Protection for your company-owned vehicle.
• Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
• Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.

Step 11: Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business.

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks. 

You may want to use industry-specific software such as illumine, Storypark, and HiMama to manage billing and attendance, share reports, and communicate with the parents. 

Accounting

• Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
• If you are unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.

You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google. 

Marketing

Some of your business will come from the casual passerby or online visitors, but you should still invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness. 

Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products: 

• Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area. 
• Instagram: Same benefits as Facebook but with different target audiences.
• Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Enroll Now”. This can sharply increase the number of clients.
• Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.

Kickstart Marketing

Take advantage of your website, social media presence, and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:

• Signage – Put up eye-catching signage at your daycare center and website.
• Flyering – Distribute flyers in your neighborhood and at industry events.
• Post a video – Post a video about your daycare center. Use humor and maybe it will go viral!
• Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal. 
• Start a blog – Start a blog and post regularly. Change up your content and share it on multiple sites.
• Seek out referrals – Offer incentives to generate customer referrals to new clients.
• Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
• Do a webinar – Share your expertise online with a video seminar.
• Testimonials – Share customer testimonials about how your daycare center helped them
• Create infographics – Post infographics and include them in your content.

Focus on USPs

Unique selling propositions, or USPs, are the unique characteristics of a product or service that sets it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your daycare center meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.

Global pizza chain Domino’s is renowned for its USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your daycare business could be:

• Extended hours, into the evening
• Advanced educational activities
• Certified teachers
• Healthy food options

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a daycare business, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in daycare for years and can offer invaluable insight and industry connections. 

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in daycare. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.

Step 12: Build Your Team

Even a fledgling daycare business needs employees to fill various job roles, including:

• General Manager – Scheduling, ordering, hiring and firing
• Daycare Workers – Care for children and clean up.
• Food Service Workers — Provide breakfast, lunch, and snacks.
• Marketing Lead – Social media marketing and SEO for your website

Your business may at some point need to hire all of these positions, or just one or two of them, depending on the size and needs of your business. You might also hire multiple workers for a single role, or a single worker for multiple roles, again depending on your needs.

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent. 

Step 13: Run a Daycare Business – Start Making Money!

Now that you have all the knowledge you need to open a daycare center, you’re ready to take the first step in your entrepreneurial journey. The next thing to do is to work on your regulatory requirements, look for the ideal location, and hone your networking skills to find your first clients. 

Running a daycare center may require utmost attention, a lot of patience, and long hours from you and your staff, but it’s emotionally and financially rewarding. Besides, you’ll be your own boss. With proper planning and research, your daycare center is well on its way to success!

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