Feasibility Study: Opening a Child Care Facility in Michigan

Introduction and Purpose of Study

In the United States, two-income households and single-parent families are becoming the norm. The increase in single-parent homes and dual-working households has led more and more children to spend their days in child care while parents are at work. Since the demand for quality child care has grown, this type of business has become an ideal starter venture for an entrepreneur.

The purpose of this study is to determine the feasibility of opening a child care facility in Southeastern Michigan.

With the growing rate of two parents working and single-family homes, there is a clear need for quality child care in Southeastern Wayne County, Michigan. Although many child care facilities exist in the current market, the demand for a quality facility that stands out from the rest suggests that a new entrant can be economically feasible.

This paper addresses the following research questions about opening a child care facility in Southeastern Wayne County, Michigan:

1) What are the start-up and operating costs for a child care facility?
2) Should this start as an in-home business until it is established and can be expanded?
3) What are the legal implications?
4) What federal, state, and local licenses need to be acquired?
5) What are the federal, state, and local guidelines for owning and operating a child care facility?

Child Care Bureau — The Child Care Bureau supports low-income working families through child care financial assistance and promotes children's learning by improving the quality of early care and education and after-school programs.

Child Care Facility — A licensed child care service that takes place in a school-like setting.

Child Care Home Provider — A licensed child care service that takes place in an individual's home.

Corporation — An artificial legal entity which, while made up of a number of natural persons or other legal entities, has a separate legal identity from them. As a legal entity, the corporation receives legal rights and duties. Five rights always exist for a corporation: the ability to sue and be sued; the right to a common treasury; the right to hire agents; the right to a common seal; and the right to make by-laws. Governments and courts may add other rights and duties, which vary from jurisdiction to jurisdiction.

Literature Review: Business Acquisitions, Legal Structures, and Business Planning

DHS — The Department of Human Services is Michigan's public assistance, child, and family welfare agency. DHS directs the operations of public assistance and service programs through a network of over 100 county offices around the state.

Direct Competition — A competitor that fills the same buyer need in the same way. Direct competitors offer similar products or services to the same customers. The goal is to recognize direct competitors and differentiate one's product or service to achieve competitive advantage.

Market — Customers or potential customers with the need, desire, authority, and purchasing power to purchase the product or service being offered.

Market Share — The percentage or proportion of the total available market or market segment being serviced by a company. It can be expressed as a company's sales revenue divided by the total sales revenue available in that market, or as a company's unit sales volume divided by the total volume of units sold in that market.

Marketing Analysis — The process of systematically gathering, analyzing, and interpreting data pertaining to the company's market, customers, and competitors, with the goal of improving marketing decisions.

Marketing — The process of identifying and satisfying customer needs.

Partnership — A type of business entity in which partners share profits or losses of the business undertaking in which all have invested. In most countries, a partnership is a contract between individuals who agree, in a spirit of cooperation, to carry on an enterprise, contribute to it by combining property, knowledge, or activities, and share its profit. Partnerships are often favored over corporations for taxation purposes, as a partnership structure eliminates the dividend tax levied on corporate profits.

Target Market — A fairly similar group of customers to whom a company wishes to sell its product or service. It is important for the marketer to define and research the target market, as it is an essential tool for reaching interested consumers.

SBA — The U.S. Small Business Administration was created in 1953 as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns, to preserve free competitive enterprise, and to maintain and strengthen the overall economy of the nation (US Small Business Administration, 2007).

Sole Proprietorship — A type of business entity that legally has no separate existence from its owner. All debts of the business are debts of the owner. A sole proprietorship essentially means a person does business in their own name with no partners. It does not pay corporate taxes; rather, the owner pays personal income taxes on profits, making accounting simpler and avoiding the double taxation faced by corporate entities.

Limitations of the study include the comparative literature regarding child care facilities and the unique nature of each individual facility. The information and data compiled for this research are limited to demographic and business data specific to Southeastern Wayne County, Michigan.

Every day entrepreneurs open new businesses, but only a small proportion of those businesses succeed beyond the first year. For most people, seeking the dream of owning a business is a significant risk to personal financial stability. Entrepreneurs typically enter into business through one of three avenues: (1) by launching a new business they have developed; (2) by buying an existing business; or (3) by contracting for a franchise outlet. Purchasing a business or franchise can require a large amount of capital, while starting a new business usually requires a smaller investment. There are pros and cons for each choice, and the entrepreneur must decide which works best for them.

Opening a new business from the ground up is the most difficult way to start. It takes considerable work, sleepless nights, and capital, but many entrepreneurs feel it is their only path. The owner must provide capital and build clientele from scratch, while also covering start-up and early operating expenses. The business owner may not be able to draw a minimum salary and may need to supplement the business personally until it shows a profit. Operating costs and future sales can be difficult to predict because there is no history to rely on.

The single biggest disadvantage of starting a new business is the unknown. There are many rules, regulations, statutes, and taxes that the owner may not be aware of when the business opens. A new business owner may have a product that is not very marketable, or not marketable in the area selected. Given the many risks, it is essential that thorough research is conducted before opening.

There are many benefits to buying an existing business. Start-up time and costs would be lower; it may be possible to negotiate with the seller to purchase existing equipment and stock. Existing employees may also come with the purchase, eliminating the need to hire from scratch. Obtaining credit may be easier, especially if prior financial statements show profitability. However, purchasing a business can also mean acquiring liabilities or lawsuits incurred under previous ownership. If customers had a prior negative experience, it can be very difficult to win them back. It is therefore important to have a lawyer involved and to research all aspects of the business thoroughly.

A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol and an individual or group wishing to use that identification in a business. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor's quality standards (US Small Business Administration, 2007). A benefit of opening a franchise is that many details are already decided, leaving the entrepreneur with less to worry about. Typically, a franchise operation resembles a large chain with standardized trademarks, uniforms, equipment, storefronts, and services. The individual franchisee does not handle large-scale marketing campaigns, as the franchisor manages marketing plans and analysis.

One of the most basic and most important decisions for an entrepreneur is selecting the legal structure of the business. The entrepreneur should investigate all advantages and disadvantages of each form of ownership, including tax laws and liabilities. Legal business structures fall into three categories: sole proprietorship, partnership, and corporation.

Sole Proprietorship — The individual owner of an unincorporated business operates it as an extension of themselves. Profits and losses are reported on the owner's personal tax return; there is no separate business filing. The owner is personally responsible for all liabilities of the business. The major advantage is simplicity and low cost, as there is little to set up or maintain beyond registering the business name.

General Partnership — Two or more people own the business jointly and share profits and losses as specified in the partnership agreement. Each partner is potentially responsible for the full amount of all liabilities. Distribution of profits and losses is determined by the partnership agreement and passes through to the individual partners. Like a sole proprietorship, no state filings are required to create the business entity.

Limited Partnership — The basic structure and tax implications are the same as for a general partnership, but this form allows for one or more limited ("silent") partners who own a portion of the business without participating in management. The partnership must have a general partner with personal liability for all obligations. This structure allows a partnership to have outside investors without subjecting them to the liabilities of the business.

Limited Liability Partnership (LLP) — The LLP is a relatively new structure that emerged from demand by attorney and accounting firms seeking to limit liability between partners. An LLP is taxed like a partnership but limits the liabilities of all partners similarly to an LLC. However, LLP laws vary significantly from state to state. For example, California and New York only allow this form for attorney and accounting firms, making the LLP generally a good choice only for such firms in states with limited-shield laws.

C Corporation — A C Corporation is owned by one or more stockholders, managed by a board of directors elected by the stockholders, and run day-to-day by officers appointed by the board. Stockholders, directors, and officers are protected from the liabilities of the company in most circumstances. The corporation files its own tax return and pays its own taxes, and may also be subject to state franchise taxes or other annual fees.

S Corporation — After a corporation is formed, stockholders may elect S Corporation status by filing with the IRS. An S Corporation is taxed like a partnership, with profits and losses flowing through to the federal tax returns of owners in proportion to stock ownership. Owners are protected from liabilities as in a C Corporation. This structure is generally preferred when most shareholders are employed by and involved in the day-to-day activities of the corporation.

Limited Liability Company (LLC) — An LLC is a hybrid of a corporation and a partnership and is rapidly becoming the most popular structure for small businesses due to its flexibility and low cost, while still offering most corporate advantages. Ownership percentages, profit and loss distributions, and voting powers are determined by the LLC Articles of Organization rather than by stock ownership. An LLC can choose to be taxed like a partnership, an S Corporation, or a C Corporation. Owners and officers are protected from the liabilities of the company.

There is no single right answer when choosing a legal structure. Many advantages of incorporating can be gained in other ways — for example, through liability insurance. In practice, while a corporation may shield owners from personal liability for debts, in the first two to three years of business it is unlikely the corporation will be able to obtain business credit without a personal guarantee, which would forfeit that protection anyway.

Businesses fail for many reasons. According to the U.S. Small Business Administration, over 50% of small businesses fail in the first year and 95% fail within the first five years. Major issues that often lead to business failure include: (1) lack of experience, (2) insufficient capital, (3) poor location, (4) poor inventory management, (5) over-investment in fixed assets, (6) poor credit arrangements, (7) personal use of business funds, (8) unexpected growth, (9) competition, and (10) low sales.

Making the decision to start a business requires careful and thorough planning. The owner must be aware of legal requirements, proper accounting practices, inventory, marketing, personnel, and the products or services being offered. Most new businesses do not start making a profit for at least six months, so it is essential to have enough capital not only to launch but also to sustain the business until it becomes profitable.

Location is a critical factor. Where a business is located can determine whether it will succeed or fail. The competitive environment must be appraised through a market analysis that determines the need for the business and the right way to enter the competition. Entering too quickly or too slowly could result in failure.

Developing and implementing an inventory management system can be key to success. Starting from the first day inventory is received, a system must be established to track all arrivals and departures. Good records make ordering more accurate and save money. It is also possible to over-invest in fixed assets. Buying non-essential assets or paying a premium for higher quality is not always necessary in the beginning.

Business owners must keep business and personal funds separate — not only for tax and auditing purposes, but to avoid the temptation of drawing from business funds for personal use. This alone accounts for many business failures. Businesses must also be constantly ready for change, including unexpected growth. A business can grow so rapidly that management and inventory cannot meet demand, causing customers to look elsewhere.

Competition in today's market is fierce. Businesses must explore all available avenues to reach their customers. It is recommended to have an experienced professional assist with marketing and promotion. A business cannot survive without revenue; low sales will destroy even the best-managed operation. The owner must constantly develop new and creative ideas to attract and retain customers.

Market Analysis and Marketing Strategy

An overall market strategy should include a market penetration strategy, a strategy for growing the business, a channels-of-distribution strategy, and a communication strategy. When describing the management organization, each position should be listed with roles and responsibilities, supported by an organizational chart. Ownership information, including the names of owners and the type of legal structure, should also be included.

Once the prior sections are researched and drafted, the financial portion of the plan can begin. The purpose of the financial section is to formulate a credible, comprehensive set of projections reflecting the company's anticipated financial performance. Established businesses must provide historical income statements, cash flows, and balance sheets. All businesses — whether start-up or growing — must provide prospective financial data. Creditors typically want to see projections for the next five years, with monthly or quarterly projections for the first year and quarterly or annual projections for years two through five (US Small Business Administration, 2007).

Having a well-researched business plan is key to a successful launch. It is easy to stray from a plan when things change, but returning to it for guidance is essential. The plan should be kept up to date even after the business is established, and used to remain aware of goals, objectives, market share, the competitive landscape, and the need to be ready for change.

Information for this project was gathered as secondary data from journals, periodicals, books, and highly regarded internet resources on the following subjects: business plans, entrepreneurship, business strategies, starting a business, and opening a day care and the requirements involved.

This feasibility study developed a business plan using the research gathered from those sources. The business plan consists of an executive summary, an organizational plan, a market analysis, and financial statements. Using the research gathered, the feasibility of opening a child care facility in Southeastern Wayne County was then determined.

Dino's Garden is a day care with an initial capacity of 60 children, located in the residential area of Southeastern Wayne County. The day care will be dedicated initially to two age segments: 1–3 years old and 3–5 years old, as demand for day care services appears highest for these groups. In the future, the center aims to integrate as many age segments as possible to provide full-package services for families with children of different ages. The center will also work toward integrating children with special needs in coming years.

Operating hours will run from 6:00 a.m. to 9:00 p.m., though hours can be extended further if required. Initial personnel will consist of 9 full-time and 4 part-time employees. The business will be structured as an LLC (Limited Liability Company) and will require an initial investment of $92,000, expected to be recuperated almost entirely in the second year of activity. The day care will be positioned as an average-priced service of medium-to-high quality, targeting parents with low and average incomes. The primary marketing emphasis will be on price strategy and low-cost local promotion such as direct mailing.

Population size and distribution serve as fair indicators of market size and the potential number of clients. For results to be meaningful, population data must be considered alongside demographic indicators such as population growth rates and the proportion of children under five years of age.

According to U.S. Census Bureau data, Wayne County had a total population of approximately 1,971,853 as of July 2006, representing a decline of roughly 0.96% from July 2005. Most cities within the county experienced population decreases over that period, with only Flat Rock, Romulus, Woodhaven, and the townships and villages segment recording any growth; however, those gains were insufficient to offset the overall county-level decline.

A deeper analysis of the 0–9 year-old age segment showed that the young population's growth has been negative across all three chosen sub-segments for the last six years, following the overall population trend. The 0–9 year-old segment accounts for 14.72% of Wayne County's total population. Assuming this proportion holds across regions within the county, Southeastern Wayne County is estimated to have approximately 58,000 children between the ages of 0 and 9.

More than one-third of Wayne County's population falls within the 18–44 year-old segment — the demographic targeted by a child care business. This group has also experienced a negative growth rate over the past six years. Nevertheless, average wages have shown impressive positive growth: the average wage grew by 12% from 2001 to 2006, according to Bureau of Labor Statistics data, which is a positive signal for the business environment.

The county's unemployment rate was 9.9% in July 2007, rising 2.8% from July 2006. A 3% unemployment rate is generally considered the "fully employed" level. The labor market in Wayne County appears to be shrinking, with labor force participation falling steadily while unemployment rises faster than the national average. Michigan recorded inflation close to 10% — one of the highest rates among U.S. states — suggesting worsening job instability. Despite these challenges, 98.1% of workers commute outside their homes to work, implying that the need for child care during working hours remains substantial.

There are several types of child care establishments: infant care (ages 0–1), toddler care (ages 1–3), preschool care (ages 3–5), and school-age care (ages 6–12). In Wayne County, the 5–9 year-old segment represents the largest share of the underage population (50%), followed by the 1–4 year-old segment (40%), suggesting high demand for toddler, preschool, and school-age care.

There are also indirect competitors, including family members, babysitters, or friends caring for children either in the provider's home or in the parent's home; cooperative arrangements among parents; preschool and Head Start programs; and Boys and Girls Clubs. These alternatives lower the demand-to-supply ratio but generally serve distinct sub-segments, particularly lower-income households that prefer home-based care.

According to the U.S. Census Bureau, there were 370 child day care establishments in Wayne County in 2005, employing 3,592 individuals. Assuming each establishment can serve 100 children (totaling 37,000 places) and that approximately one-quarter of the existing child population requires day care (roughly 72,000 children), the demand for child care is considerably above supply — in fact, supply is only about half of demand. This gap strongly favors the creation of a new private day care facility.

The 370 establishments include both public and private entities. Only privately owned entities represent direct competitors for a private day care, as public entities receive state support and do not compete on the same price segments. Key competitors identified in Southeastern Wayne County include Creative Child Care, Dawn to Dusk Child Care, Discovery Daycare, Duckie Daycare, First Step Children's Centre, Island Kiddie Kampus, Kiddie Kastle, Meadowbank Schools, Miss Theresa's Child Care, Riverside Child Care & Learning Center, Sandy's Small World Child Care Center, Sebrea's, and St. Patrick Child Care Center. Competitor operating hours generally range from 5:00 a.m. to 6:00 p.m., Monday through Friday, with some facilities offering Saturday and extended evening hours.

Michigan law establishes required minimum staff-to-children ratios for licensed child care centers. These ratios must be met and maintained in order for a facility to remain compliant with state regulations.

Regarding the cost of child care services, according to Michigan in Brief (2002), a Michigan family spends an average of $5,700 per year per child for child care, with some families spending up to $10,000 per year. At the national level, the Urban Institute (2000) found that families spend approximately $1 for every $10 earned on child care.

Regarding quality, a study by the University of North Carolina (1999) found that only 10% of child care establishments offer high-quality services, 70% offer mediocre quality, and the remaining 20% fall below adequate standards. The study noted that quality can be improved by increasing adult-to-child ratios and ensuring staff are well-trained and adequately compensated.

On the question of affordability, there are two schools of thought. Some argue that the state bears high responsibility to ensure all families have access to proper child care. Others contend that state support should be more limited, either because they believe excessive support may push children into day care unnecessarily, or because they believe responsibility should rest with charitable or community institutions. In practice, Michigan's state child care support rose from $185 million in 1996–1997 to $436 million in 2000–2001, reflecting strong policy focus on helping parents transition from welfare to work.

Regarding child care professional compensation, the national average weekly earning in public establishments was $299 in 2004, compared to $529 in private establishments (Bureau of Labor Statistics). Median hourly wages vary by occupation: general and operations managers earned approximately $23.78 per hour in child day care services, while preschool teachers (except special education) earned $9.34 per hour, and child care workers earned $7.34 per hour — all slightly below the all-industries averages for those roles.

Product — Dino's Garden will provide day care services to children aged 1–9. The product will be positioned as medium quality targeting medium-wage parents, reflecting Wayne County's current economic challenges (high unemployment, declining population). Management will emphasize hiring licensed, talented, and experienced child care providers while balancing payroll costs. The center will also seek to hire staff with special skills — foreign languages, musical instruments, sports, or mathematics — to enrich children's development. Facilities will be equipped with age-appropriate furniture and toys. A minimum furniture set for a standard 18-child, 2-teacher preschool classroom includes entry cubbies, room dividers, mats, reading tables, child seats, adult chairs, shelving, cribs, art and science stations, a kitchen area, an eating area, and restroom fixtures. Services offered will include full-time child care, part-time child care, and spontaneous drop-in care.

Price — The pricing strategy is central to the business's competitive positioning. The company plans to charge below the national private-establishment average of $5,700 per year. The charge per child will range from $5,400 to $5,640 per year, depending on the child's age and applicable promotional pricing. Families placing more than one child in the center will receive a discount proportional to the number of children enrolled.