Building a childcare facility is a significant undertaking, particularly when coupled with the start-up of a business in a new location. While the rewards can be large, so are the risks given the additional cost, uncertainty of the time required to grow a sustainable enrollment, and lender requirements.
The operator's thorough due diligence during planning is critical to ensure that the investment scale matches the facility's value to the business.
Based on my 30 years' experience with construction loans, here's my suggested list of best practices when planning to build or remodel a childcare facility.
1. Establish new/upgraded facility requirements with a business plan
Write a description of what you want to build/upgrade as part of your business plan that includes identification of the market where you plan to locate. Work on the facility development information early, checking local building codes, zoning and planning requirements, as well as consulting design-build professionals who can help determine the likely cost of your project.
Your plan will assure lenders and the local government that the facility fits your business as well as the community.
Click here to download my brief Business Plan Guide to write the most effective business plan.
2. Research, research, research
Research is required to understand the local market where you plan to build. Who lives there? What are their age ranges? Area income averages? Average home values? Which elementary schools serve the area? And most important, what's the number of children in the area?
Once you've learned about the market, turn your attention to the industry. Who provides childcare services in this area now (your future competitors)? Do these centers have waiting lists or class vacancies? Answering these questions can begin to confirm that conditions are right (or not) to build in this area.
3. Get started on the design/building process early
Developing a new facility includes working through a long list of requirements, starting with selecting a site and continuing all the way through producing a 'punch list' at the project's end.
And to make matters more challenging, most of the people you must consult see you as a prospective customer, meaning you will be subject 'being sold' plenty of options that you may or may not need.
Here's a starter list of what you need to know to prepare for building & financing a new facility:
- Site Selection--Choosing a new site based on proximity to your planned business market is the first priority, with due consideration of zoning, adjacent development, traffic count, ingress/egress, topography, size adequacy, building codes, suitability for a childcare facility, and cost.
- Design--Designing a facility with an architect is the next step, and must be 1) Consistent with local building codes; 2) Suitable for the site shape/size/access; 3) Compliant with state & local regulations for a childcare center; and 4) Affordable within your business plan and financial capacity.
- Builder--Contracting with a builder whose track record confirms the competency and financial wherewithal to construct your building on time and within budget. Be sure to check lender requirements before signing a contract.
4. Don't forget FF&E and transportation in your plans
While the focus will be on the building, your planning must include a facility plan and budget for furnishings, including the classrooms, administrative areas, kitchen (compliant with the local health code), and playground areas. Depending on your business plan and market, you may also need to plan for acquiring vans/buses to provide transportation for the enrolled children.
Your bank will be looking to ensure your planning includes these costs in addition to the facility and working capital requirements of the enterprise.
5. Prepare financial projections to estimate future operations
Whether you're already in business or not, detailed financial projections are needed to ensure that you've carefully evaluated the changes in revenues and expenses that will occur by opening a new facility (or improving an existing one).
Your bank will rely heavily on these projections, and critically review their reasonableness when deciding whether to lend you funds for the construction. Get familiar with how these projections serve as a crucial tool that helps owners manage the planning/budgeting process and will enhance your future operating success.
6. Start the loan application process early
You're going to be knee-deep in the details of the building codes, topo surveys and paving contractors. Early in your building design process, identify your lender and begin the loan application process.
Best case, you'll be pre-qualified for a loan subject to getting a reasonable contract with a qualified builder. Worst case, you'll identify business or personal issues that can be resolved up front before you're counting down to a closing deadline.
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7. Are you really ready?
It's a good place to mention that talented individuals who've not had previous hands-on experience in the childcare business will have the added burden of proving to a lender that they can successfully adapt to the rigors of the business quickly. The many challenges faced by those already in the trade are exaggerated for anyone who's never competed in this business.
Parenthood and years spent as a school teacher are not without merit, but don't necessarily prepare anyone to start a new business operation in a new location with only peripheral familiarity. The larger the loan request, the more scrutiny an applicant will face in this category.
If you've never been a childcare center operator before this venture, the best course of action is to prepare yourself thoroughly ahead of time. Enroll in classes and certification tracks offered by the state regulatory agency and trade associations to broaden your knowledge of what's actually required in the trade beyond what you already know about business.
Further, it's strongly suggested that you recruit a seasoned person with plenty of industry experience to become either a partner or key-employee to support your learning curve during the first two or three crucial years in business.
8. Setting realistic expectations
Taking on the construction of a new facility, or even just renovating an existing facility, is a major undertaking that relies on dozens of third parties to complete. The process is always subject to frustrating delays for many reasons, and no single party can be counted on to meet a logical timeline consistently. Build a 'time contingency' into your planning, meaning that if all the estimates and promises you hear suggest it will require 12 months to complete, be prepared for that to take 60-90 days longer. And of course, that extra time will cost something, like more interest on your construction loan and money spent on "rush" charges along the way.