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How to start a daycare business in 10 steps

The COVID-19 crisis has fundamentally shifted how many people work. Even before the pandemic, 23% of children under the age of 5 attended a daycare, according to the Center for American Progress. So when nearly 1/4 of children need your service, at some point, there's a massive market for those starting a childcare business.

Here's a step-by-step guide to help you avoid being one of the 50% of small businesses that fail in the first 5 years. Read on to find strategies to launch a successful daycare business.

Located in California? Read our guide to opening a daycare in California.

1) Choose between home daycare or daycare center

Potential new business owners want to know how to start a home daycare business or daycare center. But before you can begin either, what's the difference? Just like in real estate, it all comes down to location. As the name suggests, home daycare, also called in-home daycare, is in the business owner's dwelling. In contrast, the primary site for a daycare center is a commercial space.

Home daycares have lower startup costs, fewer regulations, and more individual attention. Daycare centers lend themselves more to a team atmosphere and accommodate more children. Home daycares typically charge lower rates, and daycare centers have a higher cost to pay for the increased overhead. For those interested, watching your own child or getting free childcare is possible with either business type with caveats.

Check out this quick summary to help you decide which path is best:

Home Daycare Daycare Center
Easier to watch own children Harder to watch own children (more kids/age separation)
Fewer germs More germs (more kids)
Flexible structure/curriculum More structured curriculum
Less regulation More regulation
Limited backup (teacher illness or emergency) Greater redundancy (multiple teachers)
Lower rates Higher rates
Lower startup costs Higher startup costs
More free play Less free play
Siblings stay together Aged-based classes
Smaller team Larger team

2) Create a daycare business plan

"If you don't know where you are going, you'll end up someplace else."

Yogi Berra, the New York Yankee catcher and part-time philosopher, dropped that nugget—he must have had a good daycare teacher impart such wisdom. Skipping the business plan can leave a childcare entrepreneur way off base, but even a one-pager can get you closer to hitting a home run with your venture. When you're ready to take a swing at your plan, here are questions to ask yourself before you start a business:

  • Executive Summary: How would you describe the business and your potential success?
  • Overview: What's the business's background, legal structure, and other key attributes?
  • Industry Analysis: What does market research reveal about the daycare industry in your area, including size, opportunity, and current trends?
  • Competitive Analysis: Who are your competitors, and what are their strengths and weaknesses?
  • Marketing: What is your marketing strategy to reach potential customers?
  • Management: What unique skills do you bring to the business?
  • Operations Plan: How will you manage the day-to-day tasks of the business?

3) Find your daycare niche

Your niche is your area of focus that helps you specialize and sets your business apart from the competition. A niche is like shouting your ideal clients' names in a crowded marketplace. It helps them find you.

Brand-new daycare businesses often err by accepting every child nearby instead of building an environment where each new student bolsters the collective chemistry. Saying yes to everyone limits the number of kids you can accept who best fit your daycare and early education style. Here are some daycare niches to help you think:

  • Faith-based/religious
  • Head start
  • Language immersion
  • Montessori
  • Preschool
  • Reggio Emilia
  • School-age
  • Special needs
  • Vacation and summer
  • Waldorf

4) Uncover your unique selling proposition (USP)

After you find your niche, you can move on to your unique selling proposition. Your USP tells your potential clients what precisely makes your daycare different from other daycare businesses. Families have an abundance of choices for every service, so they often flock to a specialist over a generalist. Because the marketplace is more competitive than ever, some of the top business authorities say it's better to lock in 90% of a small market than 10% of a large market.

Your USP gets you closer to 90% of the pie. For example, your childcare program may have the USP, "Spanish Immersion Preschool for Children 18 Months to Under 5."

A specific USP communicates what your business offers potential families. Your daycare becomes more memorable, referable, and targeted. The testimonials you receive will carry more influence because they speak to your ideal customer. And you build expertise and an environment that readily welcomes similar families.

What if there are not enough households to support your daycare USP? You can widen your target market. In the above example, you might increase the age limits to children in school or offer another language (if you speak one, of course). Profitable daycares balance their niche, USP, and marketplace.

5) Pick your daycare business name

So many successful daycares start with a love of children, a dream, and an unforgettable name. Your name should unite your niche and USP in a catchy way that makes families pay attention like a hungry toddler staring at the last animal cracker. Sometimes simplicity does the job like "Spanish Immersion Child Care Center," or you could go with something fun like "Niño Noggins Spanish Immersion Preschool."

You can start with your competition or try a business name generator for ideas. Next, you can poll friends and family. When everyone has cast their ballots, make sure you get the final vote. Pick a name that will cause you and your prospects to smile even when all the kids are crying.

6) Choose your daycare location and supplies

If you plan to start a home daycare, then you've already completed the first part. If not, track down a suitable place to locate your child care facility. Some of the best candidates are local churches, schools, businesses, and recreational centers. Try websites and newspapers, and of course, you could link up with a commercial real estate agent to find a spot.

Before you sign any lease, check zoning laws and any licensing requirements. It's also good to gauge how close you are to other daycare providers. Ideally, you want to have few nearby competitors and space that is centrally located, child-friendly, and easily accessible. The perfect place might not be on the table, but sweat equity can turn a humble start into a success story.
Once you pick your location, here are some things to help you build your shopping list:

  • Art and crafts
  • Cleaning and childcare supplies (such as disinfectant and diapers)Education technology (such as a a Smartboard)
  • Furniture and sleep supplies
  • Safety supplies (such as fire extinguishers and first aid kits)
  • Toys

7) Figure out your financial plan

Too many new daycare owners make the mistake of skipping the step. Careful accounting and attention to the finances can mean your business goes beyond survival to thriving. You're far more likely to make a wise investment of time and effort when you focus on your startup costs, possible grants, and sources of financing.

a) How much does it cost to start a daycare?

According to several small business authorities, it cost between $10,000 and $50,000 to launch a daycare business. The most significant differences come down to whether you choose a home daycare or daycare center, along with your supplies and style of education. So what can you do if you don't have an extra $10,000 or more in the bank?

b) How to start a daycare center with government grants

The Department of Health and Human Services offers assistance to help you fund or improve your childcare program. There is even money for nutritious meals and those wanting to create a Head Start program. The government recommends contacting your local Child Care Resource and Referral (CCR&R) Agency through Child Care Aware (more info in the Bonus section).

c) Other ways to finance your business

You may have started your business as a side-hustle with the added benefit of a tax deduction for the portion of your house you use for the daycare. Others might have bought into a franchise or had a vision of a special place to educate little ones.

Whether you're in-home or out, check out these simple and creative ways to pay for your new venture:

  • Ask friends or family.
  • Crowdfund with community help.
  • Finance equipment and with vendors.
  • Open a line of credit.
  • Secure a personal or business loan, such as a Small Business Administration (SBA) loan.
  • Use personal or business credit cards.

8) Get your paperwork in order

The planning part is done. Now you get to make your daycare more than a daydream.

a) Register your daycare with the state

Before you start accepting families, you must establish your business entity with the state and local business authorities. Start by selecting the type of business structure for your daycare business, such as sole proprietorship, limited liability company (LLC), or corporation.

b) Apply for your EIN

Your Employer Identification Number (EIN) identifies your business for tax purposes. Fortunately, it's free and easy to get your EIN from the IRS.

c) Meet licensing requirements

Experience as a babysitter, nanny, or educator helps, but you must meet the state's requirements to launch your daycare business. As mentioned earlier, your local Child Care Resource and Referral (CCR&R) agency is an invaluable resource. Your Department of Children and Family Services (DCFS), the name may differ in your state, sets the guidelines for child care licensing.

Your local licensing agency may require a clean driving record, CPR certification, and criminal record clearance for you to offer child care services. State regulations may be stricter for daycare centers versus those in their own homes.

d) Get daycare business insurance

When you're working with children, safety is your utmost concern. After licensing, insurance is just one more way to give parents confidence that your daycare puts the little people first. Every child care services business needs dependable small business insurance—that's why it's crucial to shop around to lock in the best deal.

Below are key coverages to insure your daycare:

  • Workers' compensation: This coverage protects your employees if they get sick or injured while working in your daycare business. Every state requires worker's comp, and the consequences of skipping this coverage could cause the state to close your business. (You can get a quick estimate on what you'd pay for workers' comp with our 60-second workers' compensation calculator.)
  • General liability insurance: This policy protects your daycare business if you're sued for an injury or property damage claim. (Expensive lawsuits can quickly put a child care service out of business.)
  • Accidental medical: This coverage protects a child (activity participant) who gets injured at your daycare by paying medical costs.
  • Property insurance: This policy protects your daycare equipment, essential for expensive childcare furniture, materials, and educational technology.
  • Commercial auto insurance: This policy covers vehicles that are used for business purposes.

e) Draft a contract

Even in-home daycare should have contracts, and it's beyond a necessity when you run a daycare center. Written agreements protect you, the parents, and the children by setting expectations before issues arise. You should consider the help of a contract lawyer to create the document or search started for a template through a legal website. Your contract should outline concerns like refunds, pick-up times, and sick children.

9) Hire your first employees

As soon as you add your first team member, you'll need workers' compensation insurance to operate legally.

Once you've finished the proper paperwork and legal requirements, you can find a checklist of what you need before hiring from the Small Business Administration. You may have decided you start solo until the number of children prompts you to hire to meet the state's required ratios.

When you're ready to hire staff, friends, family, colleagues, and associated businesses all provide rich sources of employee referrals. Temp agencies and job advertisements may help too. For the safety of the children, you'll need all potential hires to pass criminal background checks. Try to find the most experienced help you can afford because you build a reputation one happy kid at a time.

10) Spread the word about your new daycare business

Too often, daycare workers worry about a bug going from child to child, but now you can happily hope that your business goes viral. Take a look at these winning strategies to market your daycare:

  • Build a website. Get the URL for your business name. A service with templates like Weebly or Squarespace can make this easy.
  • List your business on Google and Yelp. Sign up for your Google My Business and a Yelp profile.
  • Launch your social media profiles. Get your unique Facebook, Twitter, LinkedIn, Instagram, Pinterest, TikTok, and other handles relevant to your niche.
  • Create word-of-mouth. Small business owners recognize word-of-mouth advertising is king, and the best way to place your business on the throne is superb service and ecstatic families. Ask satisfied clients for reviews or even video testimonials that you can post to your social media profiles and website.
  • Distribute brochures, business cards, and flyers. It's an old-fashioned method that still gets new clients in the 21st century if you don't forget your contact information.
  • Offer discounts. Give price breaks to customers as part of a loyalty program or after they refer a new client for enrollment.

Bonus: Check out these tips for running a successful daycare business

Learning how to run your own daycare center requires a passion for early childhood education coupled with an endless appetite for success. The business owner is like Cookie Monster, and success is the ooey-gooey chocolate-chip goodness. When you're ready for yet another bite, chomp on these resources:

If you bit off more than you can chew, here's one way to stay sane as an entrepreneur. Another is to focus on the little bits of sunshine beaming up at you every day. The joy of childcare is seeing the world through their eyes.

If you're looking to move one step closer to the daycare you envisioned, you can get business insurance with Huckleberry in about the same amount of time you take to read a child that favorite story, "just one more time." (Getting a quote is free, easy, and 100% online.)

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