Working out a business plan for your daycare center can be a challenge. There are many expenses you must calculate—more than you’d think! Projected enrollment growth and market demand can also be tricky to estimate.
From knowing your competition to picking the right place to establish your daycare center, there are a lot of lessons to be learned. As someone who owns eight successful daycares in the Chicago area, I know the strategies and approaches that work when it comes to developing a sound business plan for a daycare center.
A business plan should look about three to five years into the future. It serves as a cornerstone of your vision as you move forward. You want to put a lot of thought and solid analysis into your daycare center business plan, because it will more than pay off in the end.
Here are some questions you want to have in the back of your mind:
- Who will your daycare center serve?
- What sets you apart?
- How will you grow?
What makes your daycare center unique?
First of all, start with a description of your daycare center. You want to review all the different components of your business model. This description should basically be an elevator pitch for potential partners and business investors to get excited about what you’re offering and your unique location, philosophy, and approach.
What’s your curriculum based on? What criteria will you use in hiring staff? Write about the market and how you’re fulfilling demand. Write down particular statistics and characteristics of the neighborhood where you’ll locate your daycare center that make your center uniquely promising. Real estate sites like Loopnet and Zillow often provide helpful demographic analyses of neighborhoods; the most in-depth info is usually on commercial properties. For example, if the area around your future daycare center has 3,000 kids under five-years-old and only two daycare centers serving them, you’re in good shape.
In writing your company description, make sure to pay special attention to what sets you apart. Maybe it’s your prime location, your previous experience starting or helping start a daycare center, connections with top-notch staff willing to work for your daycare center, or other unique tools or services you can offer that distinguish you from your competition.
Do a focused market analysis
Next up is a market analysis. Study statistics of the childcare industry: how big is it? How much do economists and experts project that it will grow in the next five years?
How big is your target market?
For detailed information on the size of your primary market, there are helpful resources such as this market research guide from the US Small Business Administration.
Who is your target market? Describe who you’re targeting. Using some of the information from real estate websites can be a good approach, like I mentioned above. For example, is the median age of your daycare center’s neighborhood quite young or more elderly? Are you in a bedroom community of a nearby city? Note down how your daycare is going to help these different kinds of parents.
Also, keep in mind other factors: Are you in an area with large amounts of seasonal work where the workforce and population shrinks during winter or grows massively during summer? Like it or not, this will likely affect your revenue and enrollment, especially if you are offering part-time care.
What is your business model?
In addition to analyzing your market, note your pricing structure, gross margin levels, and other nuts and bolts of your business model. Will you offer discounts, or accept government-subsidized or reduced payments from lower-income parents? What employee childcare discount will you offer?
For detailed information on the size of your primary market, there are helpful resources, such as this guide from IBISWorld. This insightful article from Forbes is also a good resource, and notes that the U.S. Bureau of Labor Statistics expects daycare to be one of the fastest growing industries in the next few years.
Location and rental agreements
Pay special attention to the obvious: What is the square-foot-per-child requirement in your town, city, and state, and what is the price-per-square-foot of the daycare center you plan to lease? These two facts are absolutely key to putting together a solid business plan. You will generally need more square-feet-per-kid the younger they are (i.e. toddlers get more square feet than preschoolers).
Pro tip: things like the arc of a door’s inward swing and required sinks will eat up square footage, so take them into account. Always leave at least 10 percent breathing room when calculating required square footage for the classroom sizes you want.
Also, aim for using at least 60 percent to 80 percent of your daycare center on classroom size. Other square footage will be used for office space, hallways, required sinks, foyer, and so on, but you want to be using at least 60 percent for classrooms because that’s where you make your money.
Let’s use the example that you need 35-square-feet for every kid in a classroom up to a max classroom size of 20. That means you need a classroom of at least 700-square-feet (20 multiplied by 35). However, as I mentioned above, you want to leave breathing room of between 20 percent to 40 percent (for things like door swing radius, required baby changing tables, required sinks, future building modifications) so you should actually have a room that’s bigger than 700-square-feet.
In noting the lease information on your business plan, aim to negotiate free months of rent with your landlord. Opening a new daycare takes a long time for construction build-outs, permits, licensing and many other factors—sometimes up to a year. Explain this to the landlord. They want a tenant and commitment. Consider agreeing to a longer lease in return for a few months free or a landlord investment in build-outs.
Alternately, the landlord may agree to defer rent in return for a larger security deposit or added monthly payments. Asking for free months shows you’re a competent negotiator who takes his business seriously and has a long-term profit goal in mind.
Another thing to watch out for with monthly rent is all the added costs. Say your price is $20 per square-foot and your building is 5,000 square-feet. This adds up to $100,000. Divide that by 12 to get your monthly rent: $8,333. Make sure to find out if it is a gross or net rate.
Gross includes everything, but net doesn’t include the following:
- Property taxes
- Landlord insurance
- Common area maintenance fees
- Various other charges
Other questions to answer
How many kids are in your daycare center’s neighborhood and how many daycare centers already exist to serve them?
Take an average daycare center in a city that has, say, 100 kids enrolled. If you’re in a neighborhood that has 2,000 kids you still have room for a few daycare centers to serve demand, assuming around 10 percent to 20 percent of parents will enroll their kids in daycare.
There’s a pretty high demand for good childcare in the United States right now and many other countries. Whether you’re urban or rural the chances are you’ll be in demand—but you should still crunch the numbers before the contractors start working.
Who are your competitors?
How much market share do they have? What makes them strong and what are their weak points? Are there some more general impediments that could get in the way of flourishing, such as increasingly burdensome regulations in your state, or a lack of reasonably-priced leases to choose from?
There are a lot of regulatory requirements in the childcare industry (a lot!), so keep these all in mind when calculating the costs. There’s so much to keep track of!
Things to keep in mind:
- Understanding your building’s zoning details
- Organizing utilities and garbage pickup
- Having the required playground
- Cribs (for infant room)
- Meeting daylight requirements in each classroom
- Two points of exit from the center
- Up-to-code kitchen with three-compartment sink and grease trap
- Fire alarm system hooked up to a central box
- Buzz-in security system
- Parking requirements
- Maintenance and repair fees
You’ll work with a daycare licensing representative from your town or city from the beginning of the process. They will help guide you through the regulatory process (you have to follow both city or town and state regulations), but it is still entirely your responsibility to keep track of all the costs that regulations and requirements.
Who will run your daycare center?
Next, you want to list organization and management of your daycare center. Who’s the director and assistant director? What are the details of your ownership structure, board of directors, investor list, partners, and so on?
Write down the responsibilities and roles of everyone on your team. List an advisory board if you have one, list all employee salaries, incentives, referral bonuses for recruiting, and all such details. Also in this part of your business plan, you want to be clear about the legal structure of your business in terms of incorporation, type of partnership (I recommend a passive partnership) and other such information.
All percentages of ownership, investor details, stock details, and so on should be listed. Profiles of staff, directors, investors, and board members should include everything from past track record to education and unique skills.
What’s your marketing plan?
Following your organizational details, you should describe your marketing plan. Budget-friendly marketing strategies are the name of the game here.
Reach your target market
There’s no one way to do this, but I recommend thinking specifically about who your customer base is and marketing accordingly. In my case, I had great success with a marketing campaign where I put ads on the baby seat of grocery carts at a grocery store close to my daycare center.
Know your target audience and what they’re looking for, and then show them that you fill that need.
Your marketing strategy should look at how to explain the unique strengths of your daycare center, how you’re going to grow, what staff, if any, you’re going to hire in marketing roles, and what methods you will use, from online ads to brochures and billboards. Having a solid marketing plan will help you get clear on your sales strategy.
Have a plan for funding
Finding funding is another area you’ll want to pay attention to when you’re crafting your daycare center’s business plan.
A funding request should list:
- How much you need now and in the coming three to five years
- What the money will be used for
- Any perks such as free months of rent you negotiated with a landlord that show the viability of your model
- Future potential situations such as a buyout, selling the business, and so on
Your financial projections should include forecasted income, expected enrollment growth, balance sheets, cash flow statements and projected/needed capital expenditures.
Keep in mind that as enrollment goes up you will need more staff as well, in order to meet required student-to-teacher ratios. You’ll also need more food and supplies when you have more kids enrolled.
Financial projections need to factor in many things including:
- Registration fees
- Wait-list fees
- Construction cost
- Staff appreciation day costs
- Software costs
- Supply costs
- Training costs
- Utilities costs
- Marketing costs
- Bank service charges
- Monthly nurse consultant costs
- Interior daycare supplies from clocks to filing cabinets to computers
- Accountant and legal costs
When you first start a daycare, you’re going to be in the red. It costs a lot to start a daycare, and it takes time to get going, as I mentioned. This is normal. You should see profits start kicking in after an initial period of six to 12 months of operation.
In terms of capital expenditures, the list is long, from monthly rent and utilities to staffing, construction, repair and supply costs as mentioned above. Digging deeper in these categories reveals even more items. Infants need everything from towels and cubbies to cribs and toys. Preschoolers need crayons, games, tiny chairs, craft supplies, and much more. List everything you can think of and then add more estimated cost.
For construction, you need to calculate the cost of:
- HVAC systems and ductwork
- Baseboards and finishing work
- Interior doors
- Buzzer system
Get a contractor and tradesperson or two to quote you on the job so you have an idea what it will cost. Don’t forget to factor in architectural fees and the cost of heating, electric, and utilities for the months the daycare is empty of students but contractors are working on it.
To get a bank loan for a new daycare center you’ll have to base a loan off the income of another business you own. That said, loans through the SBA can be standalone based on the viability of your business plan, so I recommend looking into them. If you buy a business, an SBA loan can also be a possibility.
For example, if you pay $500,000 for someone’s existing daycare and are required to put a typical 20 percent down ($100,000), you can cover the rest with an SBA loan. You’ll need to show a solid business plan and have good credit, but an SBA loan has the advantage of not drawing on your other sources of income as collateral.
Funding from investors
Another funding source, of course, is to drum up investors. Some people turn to family, friends, or colleagues. I would recommend keeping it strictly business and avoiding family or friends. If you do go this route, however, have a strong paper record to refer back to if this turn sour down the road.
In finding a partner you want to ideally find someone who loves your plan but doesn’t have time or interest in being directly involved. This is called a passive partnership, where one partner supplies an investment and the other operates the business.
In terms of a repayment scheme, this will depend on your unique situation. For example, if an investor or investors give me cash up front for my financial projection that my daycare center will be making $200,000 per year after several years, I will repay 50/50, so one investor would get back $100,000 per year once the income target has been reached or if there are two investors they will get back one-third each, and so on.
After you address funding and costs in your business plan, add an appendix with supporting documentation. Keep this on hand for investors to look over.
Your appendix can include:
- Credit history
- Reference letters
- Backup details and sources of your market analysis
- Licenses and permits
- Legal documents
- Copies of lease agreements
- Building permits
- Utilities, maintenance, construction, plumbing, and other contracts
- List of all individuals associated with your daycare such as accountants, lawyers, and consultants
Write your executive summary
Lastly, write down your executive summary. If you’re starting a daycare center, there’s only so much you can know before you have been in operation for multiple years. However, you can write down a lot about the purpose and strategy of your company, your own background and motivations for starting the daycare center, and your projections of future growth and customer needs.
At the end of the day, if you provide a great service and have a business plan methodically anticipates the needs of customers and kids, you will be a huge success in starting a daycare center!
Sholom Strick is a daycare owner and the CEO of Hopping In, a free, web-based app that lets parents earn money when their child is absent from daycare. Hopping In is an easy-to-use, innovative tool that makes it simple for parents to book vacant spots on short notice. He is passionate about developing innovative solutions to improve the childcare industry. You can contact him at firstname.lastname@example.org.