7 Key Factors When Buying an Operating Preschool

Purchasing a preschool is not just about owning a property; you're taking over a business that impacts children’s education. To make a smart investment, focus on these 7 key factors:

1. Financial Health: Review profit/loss statements, cash flow, tax returns, and expenses. Staffing is the largest cost (45-55% of revenue). Check if income growth opportunities exist, like offering enrichment programs or adjusting tuition rates.

2. Licenses & Compliance: Ensure all permits (state, health, fire, zoning) are valid. Preschool licenses are often non-transferable, so be prepared to reapply.

3. Building & Safety: Inspect classrooms, outdoor play areas, HVAC, plumbing, and emergency systems. Meet federal and state safety standards.

4. Enrollment & Market Demand: Analyze student numbers, waitlists, and local market trends. Check if the location has growth potential based on demographics and competition.

5. Staff Quality: Evaluate teacher credentials, turnover rates (industry average: 33%), and employee benefits. A stable, qualified team is critical.

6. Reputation: Look at parent reviews, licensing history, and community ties. A strong reputation can boost enrollment.

7. Legal & Contracts: Examine property deeds, vendor agreements, and service contracts. Ensure zoning and operational compliance.

Quick Overview:

• Biggest Cost: Staff wages (45-55% of revenue)

• Licenses: Non-transferable; reapplication needed

• Market Insight: U.S. childcare market valued at $61.7B (2023)

Tip: Work with legal and financial experts to ensure a smooth transition. This structured approach safeguards your investment and supports educational quality.

1. Financial Health and Income Review

Assessing financial records is a critical step in evaluating a childcare business. With the childcare industry projected to hit $436.63 billion by 2031 [1], it's essential to ensure the business has a strong financial base before moving forward. Focus on key documents, expense analysis, and income growth opportunities.

Key Financial Documents

Start by examining these financial records to get a clear picture of the business's performance:

• Profit and Loss Statements: Review at least three years to understand revenue patterns and expense trends.

• Balance Sheets: Check the business's assets, liabilities, and equity.

• Cash Flow Statements: Analyze monthly cash flow to evaluate liquidity.

• Tax Returns: Cross-check these with profit and loss statements to confirm reported income and uncover any inconsistencies.

Operating Costs Breakdown

Understanding operating expenses is essential for gauging efficiency. Childcare worker wages average about $30,000 annually (roughly $14.60 per hour) [2], making staffing the largest expense. Here's a breakdown of typical expense categories:

Plan for around $100 per week per child for supplies and $600 per child for equipment [2]. Regularly reviewing expenses can help pinpoint areas for potential savings.

2. Required Licenses and Regulations

State and Local Permits

Preschools must meet various state and local licensing requirements. These standards differ depending on the state, so it's important to understand the specific regulations in your area before making a purchase. While preschools often fall under daycare licensing rules, the exact requirements can vary widely by location.

Here are some common permits you may need:

For example, in Texas, the Child Care Regulation (CCR) issues specific permits depending on the type of facility. These include licenses for child care centers, registrations for home-based care, and compliance certificates for employer-based operations [4]. Knowing these requirements is essential, especially since preschool licenses are non-transferable.

License Transfer Process

Preschool licenses generally cannot be transferred to a new owner [5]. If you're purchasing an existing preschool, here's what the process typically looks like:

1. Notification Requirements: The current owner must notify both the licensing department and enrolled families at least 30 days before the transfer or as soon as a bona fide offer is received, whichever comes first [5].

2. Application Timeline: Submit your application for a new license within five days of the purchase offer. Processing usually takes up to 60 days [5].

3. Interim Operations: While waiting for your license, you may qualify for an Emergency Approval to Operate (EAO) [5].

Next, we'll look at certifications that can improve a preschool's standing.

Quality Certifications

Certifications can significantly enhance a preschool's reputation. Among these, accreditation from the National Association for the Education of Young Children (NAEYC) is considered the highest standard for early learning programs [6].

NAEYC-accredited facilities excel in areas like:

• Safe and healthy environments for learning

• Well-qualified teaching staff

• High-quality educational materials

• Age-appropriate curriculum planning

When assessing certifications, check their current status through the NAEYC Accreditation Portal. Also, consider how these certifications align with the needs of your local market [7].

3. Building and Safety Check

Safety Standards Review

Federal law sets minimum health and safety standards for all licensed childcare facilities [8]. When assessing a preschool property, pay attention to these key areas:

Outdoor play equipment should be age-appropriate and well-maintained to ensure safety [10].

Building Systems Check

Conduct a thorough inspection of the building's systems to ensure they meet the demands of a childcare facility:

1. HVAC Systems

• Check the system's age and maintenance history.

• Confirm energy efficiency ratings and proper ventilation.

• Ensure even air distribution throughout the building.

2. Plumbing Infrastructure

• Verify consistent water pressure and a reliable hot water supply.

• Inspect bathroom fixtures for wear and tear.

• Assess the effectiveness of drainage systems.

3. Electrical Systems

• Ensure the system complies with current codes and can handle the facility's needs [9].

• Look for adequate circuit capacity and proper placement of outlets.

• Test emergency lighting and confirm the availability of backup power systems.

These checks can identify areas needing improvement or upgrades to enhance safety and functionality.

Facility Features Check

Evaluate the property for additional safety measures:

• Indoor Safety Features: Child-safe furnishings, secure storage for cleaning supplies and medications.

• Outdoor Safety Features: Fenced play areas and well-maintained equipment.

Make sure the facility adheres to state-specific requirements, like the minimum square footage per child [8]. Document any areas needing upgrades to meet standards or improve the property's value. Also, confirm that cleaning supplies and medications are locked away and furniture is secured to reduce injury risks [11].

4. Student Numbers and Market Study

Student Count Analysis

Understanding your student numbers is key to assessing financial health. Here's what to focus on:

Key areas to examine include:

• Age group distribution across programs

• Seasonal enrollment patterns

• The mix of part-time vs. full-time enrollment

These details provide a foundation for understanding local market conditions.

Local Market Research

In 2023, the U.S. childcare market was valued at $61.70 billion, with an expected annual growth rate of 5.86% from 2024 to 2030 [12].

Demographics and Growth Factors to Consider:

• Local population, household income, and employment rates

• New housing developments in the area

• Presence of corporate offices

Local demographics play a big role in shaping demand for childcare services.

Market Trends and Dynamics: The increasing return-to-office trend has driven up childcare demand [12]. To gauge your potential, look into:

• The number of providers within a 3-mile radius

• Local tuition rates

• Population of children under age 5

Tips to Boost Enrollment:

• Keep staff-to-child ratios competitive

• Invest in teacher training and qualifications

• Build strong community ties

• Use digital tools to streamline operations [12]

Tracking these metrics regularly can help identify new opportunities for growth, while keeping in mind how local economic changes may influence enrollment [12].

5. Staff Quality and Stability

When evaluating a preschool, the quality and stability of its staff are key indicators of operational success.

Teacher Credentials Check

Review the qualifications of the teaching staff to ensure they meet the necessary educational standards:

Steps to verify credentials:

• Confirm staff qualifications align with state requirements.

• Check for ongoing participation in professional development.

• Evaluate the teaching experience of staff members.

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Staff Turnover Risk

The childcare industry faces a high turnover rate, currently averaging 33% in the U.S. [16]. Understanding turnover trends can provide insight into a preschool's operational stability:

Employee Benefits Review

Employee benefits play a critical role in retaining staff. In 2022, turnover among childcare workers was 65% higher than the average for other industries [15].

Benefits to evaluate:

• Competitive salaries

• Health insurance

• Retirement plans

• Opportunities for professional development

• Policies promoting work-life balance

Professional development programs alone have been shown to increase staff retention by 34% [17]. Here are some proven strategies to address turnover:

6. School Rating and Local Standing

Parent Reviews Check

Parent reviews can give you a clear picture of a preschool's reputation. According to BrightLocal, 73% of consumers trust a local business more after reading positive reviews [20]. To get a sense of how a preschool is perceived, focus on these key areas:

When reading reviews, pay close attention to:

• How often and effectively the preschool communicates with parents

• The way staff interact with children

• Cleanliness and upkeep of the facilities

• The quality of the educational program

• How safety measures are implemented and maintained

Compliance History

State licensing websites are excellent resources for checking a preschool's compliance with regulations. For example, the Colorado Department of Early Childhood provides detailed records on inspections and investigations [19].

Community Links

A preschool's connections within the community can signal its stability and growth. Look for collaborations with local businesses, partnerships with educational institutions, participation in community events, and memberships in professional organizations.

For example, Denver Child Care Academy's January 7, 2025, supervisory inspection report highlights its dedication to fostering transparent relationships within the community [19].

Combining these insights with a review of financial and operational practices can provide a well-rounded evaluation of the preschool's standing. This adds an extra layer of confidence to your earlier research.

7. Legal Documents and Contracts

Property Documents

Carefully review property documents to confirm ownership, zoning compliance, layout details, and insurance coverage. Here's a quick breakdown:

Additionally, request HOA-specific documents, such as:

• HOA bylaws related to business operations

• Rules on signage placement

• Traffic flow guidelines

• Property use restrictions

Once property details are confirmed, review all service agreements for ongoing obligations or requirements.

Service Agreements

Service agreements should be reviewed to clarify terms, obligations, and transfer conditions. Here's what to watch for:

These agreements ensure a smooth transition and help avoid unexpected liabilities.

Legal Requirements

Legal documentation is just as critical as financial and operational reviews when transitioning ownership. To ensure compliance, focus on these areas:

1. Business Structure Documentation

• Business licenses

• DBA (Doing Business As) registration

• LLC or corporation paperwork

• Tax identification numbers

2. Local Compliance

• Special use permits from Planning & Zoning

• Business permits issued by local authorities

• Health department certifications

• Fire safety compliance records

3. Operational Requirements

Stay on top of operational compliance with the following:

Work with legal professionals experienced in early education acquisitions to identify potential issues and ensure all documents are properly transferred during the purchase process. This step is essential for a seamless transition.

Conclusion: Steps to Buy a Preschool

Buying a preschool involves careful planning and detailed evaluation. Proper due diligence helps protect your investment and ensures a smooth transition. Here's a quick overview of the key phases and activities:

Key Steps to Evaluate a Preschool Purchase

1. Gather and Review DocumentsStart by collecting all essential financial, operational, and legal documents. This step provides the foundation for your evaluation.

2. Seek Professional ExpertiseConsult with specialists in finance, law, education, and property to assess:

   • Financial health and growth opportunities

   • Legal compliance and contract terms

   • Quality of education programs

   • Facility condition and potential upgrades

3. Plan for Risk ManagementOnce you've reviewed all documents and expert opinions, develop strategies to address potential risks:

   • Negotiate favorable terms in the purchase agreement

   • Update insurance policies to cover identified risks

   • Make necessary operational improvements

   • Develop plans to retain key staff members

Involving experienced childcare professionals can help you anticipate and resolve challenges. A structured approach - combining document review, expert evaluations, and proactive risk management - lays the groundwork for a successful preschool acquisition. This ensures the school maintains its operational standards and educational excellence.

FAQs

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What financial documents should I review before buying a preschool, and why are they important?

When evaluating a preschool for purchase, it’s essential to review key financial documents to understand the business’s financial health. These include the profit and loss statement, cash flow statement, balance sheet, and tax returns. Together, these documents provide a clear picture of the preschool’s revenue, expenses, profitability, and overall financial stability.

By analyzing these records, you can identify trends in income, assess operational costs, and evaluate liabilities or potential risks. This information is crucial for making an informed decision and ensuring the investment aligns with your financial goals.

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How can I confirm that the preschool I want to buy meets licensing requirements, and what should I do if the licenses can’t be transferred?

To confirm the preschool meets all state and local licensing requirements, start by contacting your state’s childcare licensing agency or your local Child Care Resource and Referral (CCR&R) agency. These organizations can provide detailed information about the specific rules for operating a preschool in your area. Reviewing your state’s childcare licensing regulations is also essential to ensure compliance.

If the licenses for the preschool are non-transferable, you’ll need to apply for a new license under your name or business entity. This process can vary by state, so it’s important to familiarize yourself with the application timeline, required documents, and inspections needed to secure a new license before finalizing your purchase. Consulting with a childcare licensing expert or attorney can also help you navigate this process smoothly.

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What should I look for when assessing the preschool's staff stability, and how does high staff turnover affect the preschool's success?

When evaluating staff stability at a preschool, focus on key factors like retention rates, employee satisfaction, wages, and the overall work environment. Stable, well-supported staff create a nurturing and consistent learning experience for children, which is essential for their development.

High staff turnover can negatively impact a preschool in several ways. It disrupts the learning environment, making it harder for children to form bonds and maintain consistent progress. It can also lower program quality, as frequent staff changes interrupt curriculum continuity and reduce overall effectiveness. Additionally, turnover increases operational costs for hiring and training new employees and can lead to trust issues with families, potentially causing enrollment declines.

Prioritizing a preschool with a stable, well-compensated, and engaged team is crucial for maintaining a thriving and high-quality childcare environment.