If you love kids, are responsible, and are a great multitasker, then opening a daycare might be a great business opportunity. When you own a daycare, you’ll have the chance to care for children while their parents are at work, and your days are sure to be full of excitement and energy.

Starting a daycare is a fantastic way to combine your love for children with your entrepreneurial spirit. But it takes more than just loving children to succeed in the daycare industry. Our guide is here to walk you through the process, providing an overview of the business, steps to get started, and answers to common questions.

Business Overview

Daycares offer supervision, care, and sometimes the education of children. These facilities may be designed for infants, toddlers, preschool-aged children, and even older children. Most daycares offer care in a group setting during weekdays, as well as before and after-school care.

Child care centers fill an important need by supervising and caring for children while their parents are at work. Some offer part-time care, while others can accommodate full-time care, depending on the parent’s needs. Daycares are designed to be fun and stimulating for children, with games, outdoor time, learning activities, and more being a standard part of their services. Daycares may be located in the provider’s home, in a professional center, or paired with other programs, such as within a school.

Running a daycare is hard work, especially when starting up the business, and this is one profession where you truly have to love your work. As the owner, you’ll be responsible for daily operations, including staff supervision, adhering to state licensing regulations, marketing your services, and managing finances. While hands-on childcare skills are important, you’ll also need to develop business, managerial, and marketing know-how.

Industry Summary

According to IBISWorld, the daycare industry is expected to generate over $65 billion in 2023. Currently, 556,000 daycares employ 1 million people.

The daycare industry caters to a vital need: childcare for working parents. With an increasing number of households having both parents in the workforce, the demand for quality daycare services has experienced significant growth and demand in recent years. With more parents joining the workforce and a growing emphasis on early childhood education, the need for reliable and high-quality daycare services has never been greater.

Steps To Start A Daycare

Step 1: Assess the Market

When you’re thinking about opening a child care center, one of the first steps is to look at the market. This means understanding the community you want to serve and figuring out if there’s a need for another daycare.

To begin with, check out the demographics of the surrounding neighborhoods. To gather this demographic information, you can utilize sources like the U.S. Census Bureau, city planning documents, or online demographic tools. Look for data on the current number of children under five and projections for the next 5-10 years. A growing population of young children signals a potential increase in demand for local daycare services.

Next, consider engaging with neighborhood parent groups and utilizing social media platforms to gauge interest and identify pain points regarding childcare. Conduct surveys or interviews to understand parents’ preferences, challenges, and expectations. This information will provide valuable insights into their needs and help you tailor your services. By actively listening to parents in your target market, you can better position your daycare business to meet their requirements.

Another factor to look at is local economic conditions and employment trends. A healthy local economy is essential for driving demand for childcare services. Consider the local economic conditions and employment trends in your area. Are there many working parents who need childcare services? Is there a high rate of single-parent households? Are there new or expanding businesses in the area? These factors can help you evaluate whether there is a demand for your services.

Last, take stock of existing childcare centers, preschools, after-school programs, and in-home daycares in your area. Determine the number of options already available and research their enrollment levels or waitlists. Long waitlists can suggest a high unsatisfied demand for childcare services. Anonymously, call centers to ask questions and gauge demand. This research will help you understand the level of competition and potential opportunities for your daycare business.

Step 2: Write a Business Plan

After conducting market research and gaining a better understanding of the potential for your daycare, the next step is to write a business plan. One of the key reasons for writing a business plan is to define your strategy and vision more clearly. This process helps you get the ideas out of your head and on paper to better identify who you intend to serve, what will set you apart from competitors, facilities, staffing, and more.

In a business plan, you will also create financial projections and calculate expected enrollment, tuition rates, and staff and facility costs, which allows you to estimate the profit potential and capital required for your daycare.

Related: How to write a business plan

Step 3: Source Funding

Once you have determined that there is a market for your daycare and completed your business plan, the next step is securing the necessary funding. Funding can be a challenging aspect of starting a business, but there are several options commonly available to daycares.

Personal investment: The first source of funding to consider is the owner’s savings. Before exploring outside funding sources, assess how much personal savings you have available to finance your daycare, and if these are not enough to cover the startup costs, you will need to look for additional funding sources.

Lenders: A common source of funding for daycares is through lenders, such as banks or credit unions. Lenders typically require borrowers to invest at least 15% of their personal funds towards the total cost of the project, have a good credit score, and provide sufficient collateral. It is worth noting that if the bank perceives the loan as too risky, they may require an SBA (Small Business Administration) loan guarantee to lower their risk.

Friends and family: Seeking funding from friends and family is another potential source. Treat these agreements just like any other business deal and put agreements in writing. This helps avoid misunderstandings and ensures everyone is clear on the terms and expectations.

Microloans: In cases where the funding needs are relatively low, or credit is not readily available through a lender, you may consider applying for a microloan. Microloans are small-scale loans specifically designed for startups and small businesses. Some microloan programs even offer business training along with the funding, which can be beneficial for first-time business owners.

Related: Finding the money to start a business

Step 4: Register the Business

Daycares are highly regulated and require careful planning to comply with the various legal requirements. Every state is different, but here is a general overview to get you started.

Choose a business structure: The most common business structures include sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC). The structure you choose impacts the way you are taxed, your personal liability, and how you operate.

• Sole proprietorship: This is a one-person business. It’s the simplest and cheapest to start, but your personal assets are not protected if your business is sued.
• General partnership: If you’re starting with someone else, this might be your choice. It’s also simple, but know that each partner will be personally responsible for the business’s debts and liabilities.
• Corporation: This structure is more complex but offers liability protection, meaning the owner’s personal assets are usually safe if there’s a legal problem with your business.
• Limited Liability Company (LLC): Combining the ease of a sole proprietorship with the liability protection of a corporation, an LLC can be a good choice for a daycare. It’s commonly used because it protects personal assets without the complexity of a corporation.

Related: Comparison of business structures

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

Related: Tips and ideas for naming a daycare

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain business licenses and permits: Child care licensing and regulations vary from state to state, but expect to meet requirements regarding the number of children your facility is approved to care for, teacher-to-child ratio, building safety, the safety and nutrition of food served to children, and professional development requirements. Licensing requirements generally require background checks, CPR training, disaster preparedness, and passing regular inspections. Contacting your state’s Department of Children and Family Services early in the process will ultimately make the state regulation and the child care licensing process requirements easier to complete.

Licensing from your local health department will be needed to serve food. The Health Department will also regularly inspect the facilities to check that all health and safety protocols are followed.

In addition to childcare licensing requirements, a daycare also needs to hold any required local and state business permits or licenses, such as a sales tax permit and Employer Identification Number.

Related: State guides for general business licensing

Zoning: Depending on the location you choose, you may need to look into zoning restrictions to ensure that your facility can legally function as a daycare center.

Step 5: Acquire & Set Up the Daycare

As you begin putting your daycare business into action, the next step is to set up operations.

When choosing your location, it’s important to prioritize areas with high demand for childcare services. A good place to start is in residential areas with many families or near workplaces where parents might need childcare. Some daycares will run out of the owner’s home, and others will use a variety of commercial buildings, while some will utilize space in churches.

Age-appropriate equipment is crucial for setting up a daycare facility. Consider allocating separate rooms for each age group with age-appropriate equipment. For example, infants may need cribs, while school-age children may need work desks.

Last, establish policies and procedures that are in line with state regulations and licensing requirements for things like enrollment, payments, emergency situations, meal time, and transportation. You should also have an employee handbook that outlines all these policies and procedures, which should be made available to parents and staff.

Step 6: Hire Staff

When setting up a daycare, hiring employees may become a part of the process. Hiring and managing staff come with responsibilities and legal obligations that should not be overlooked.

The first task when hiring employees for your daycare is to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This nine-digit number will identify your business as an employer, and you will use it in various transactions with the IRS, such as filing tax returns, providing W-2 forms to your employees, and paying employment taxes. You can apply for an EIN online, by fax, or by mail, and once you receive it, you can use it immediately.

Another legal requirement you should address before hiring employees is verifying their eligibility to work in the United States. By law, you are required to complete a Form I-9 for each employee, which verifies their identity and employment authorization. The employee must provide acceptable documents, such as a passport or a valid driver’s license and social security card, and you must review and keep copies of them. You should also re-verify the employee’s work authorization if their employment authorization expires.

Each state also has its own regulations regarding hiring and employment, so it’s important to check with your state’s labor department for specific requirements. State hiring requirements can include obtaining workers’ compensation insurance, reporting new hires, and more.

Finally, the owner must adhere to labor laws, which cover areas such as minimum wage, overtime, meal and rest breaks, and safe working conditions. 

Related: State guides for hiring your first employee

Step 7: Prepare to Open!

Starting a daycare involves several important steps to ensure a successful launch. While the specific needs may vary, there are several other loose ends to tie up before getting started. Let’s take a look at a few of the common tasks to consider:

Business insurance: Caring for other people’s children is a higher-risk activity with significant consequences if something happens, so it’s important to obtain the appropriate insurance. Daycares will need multiple policies for complete coverage, and they are generally grouped under a single “daycare insurance” offering.

Related: What types of insurance does a daycare need?

Bookkeeping: To manage your daycare’s finances, it’s important to set up proper bookkeeping systems. Consider using accounting software like Wave Accounting (FREE) or Quickbooks to handle daily transactions, track expenses, and generate financial statements. This will help you stay organized and meet tax obligations.

Contracts: Having clear contracts like an Enrollment Contract, outlining the terms and conditions of childcare services or a Parental Consent Form, for activities and emergency medical treatment are important to have. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.

Business bank account: A separate bank account for your daycare business will help streamline accounting, track income and expenses, and simplify tax filings.

Marketing strategy: Once the logistics are in place, it’s time to let the world know about your daycare. A logo and a website are great starting points to create a recognizable brand. Utilize social media platforms, local community events, and word-of-mouth referrals to spread the word about your services.

Grand opening: With all these pieces in place, it’s time to prepare for the grand opening. This could involve decorating the daycare, arranging an open house for families to visit, or organizing activities for the children on the first day.