Starting a new childcare facility is a significant undertaking. While the rewards can be large, so are the risks given the cost, uncertainty of the time required to grow a sustainable enrollment, and lender requirements. The operator's thorough due diligence is critical to ensure that the investment scale matches the future business prospects and there's sufficient working capital available to grow the business into profitability.
Based on experience in dozens of start-up business loans, here's my suggested list of best practices and due diligence to perform when planning to start a childcare business:
1. Establish new childcare center with a business plan
Start writing a business plan at the very beginning with a description of the business you want to create, the market where you want to locate, the families you plan serve, services you plan to offer them, and the business scale that fits your ambition and budget.
These are just a few of the criteria needed in your plan and the earlier you get started, the better prepared you will be to start.
Click here to download my brief Business Plan Guide to writing 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? What facilities are available?
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 start a business in this area.
3. Start the search for a facility early
A childcare business requires a facility with specific requirements and features, and the locale will need to have close proximity to the families you plan to serve. Any facility must be approved by your state childcare regulator and the requirements of your local fire department chief.
Here's a starter list of what you need to know to begin selecting a facility:
- Site Location--The first priority is to choose a site convenient to the neighborhoods where you plan to find customers, with consideration to zoning, adjacent development, traffic count, ingress/egress, size adequacy, suitability for a childcare facility, and cost.
- Buy or Rent--You will probably identify opportunities to buy or lease a facility within the list of sites you consider. This decision is specific to your circumstances, including: 1) Your ability to contribute a building down payment in addition to funds needed to start the business; 2) Cost of preparing building to house a childcare center; 3) Offered price and terms; and 4) Uncertainty of future success.
- Improvements--Whether the proposed facility is to be leased or bought, it's common that some renovations will be required to conform the space to a childcare business. Determine the cost of these improvements ahead of committing to the facility. If the costs exceed $50,000, get your lender involved to understand how it will impact your loan requirements.
4. Don't forget FF&E and transportation in your plans
While the focus will be on securing a facility, your planning must include a 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 have to make plans for acquiring vans or 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 likelihood of success
When starting a new business, detailed financial projections are needed to ensure that you've carefully evaluated the revenues and expenses that will occur in the normal course of business.
Your bank will rely heavily on these projections and critically review their reasonableness when deciding whether to lend you funds for the cost of starting up. Get familiar with how these projections serve as a crucial tool that helps owners manage the planning/budgeting process and enhance your future business operating success.
6. Start the loan application process early
You'll be knee-deep in the details of site selection, buying furniture and hiring teachers in the start-up planning phase. Early in your business planning, identify your lender and begin the loan application process.
Best case, you'll be pre-qualified for a loan subject to getting a location qualified for a license. 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 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 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 start-up of a new business is a major undertaking that relies on the mustering of many resources and talents to complete. The process is always subject to delays, unexpected barriers and an uncertain total cost. Read, review and edit your business plan regularly through the process to ensure you're on track with your original ideas, that you've included any new information discovered, or recorded the pivot to a modified direction.