Daycare Business Plan: NJ Daycare Inc. Startup Guide

Industry Overview

Mission Statement: NJ Daycare Inc. aims to provide the highest quality daycare service, combining a stimulating, education-forward environment with convenience and low cost for parents, in its mission to be the best daycare in northern New Jersey.

The daycare industry is large but highly fragmented. The market research company IBIS World (2014) estimates the size of the market at $46 billion, but with no dominant market player. Not one company holds market share of note, making daycare one of the most heavily fragmented industries in the country. The daycare industry is believed to be positively correlated with a healthy economy, which means it should be growing at present. This is because parents who were not working re-enter the workforce during economic boom times, and working parents have more discretionary income — both factors that contribute to demand growth in the industry (IBIS World, 2013). There are 887,745 daycare businesses in the United States, meaning the average daycare earns annual revenue of $54,114. This tiny revenue per business indicates that most are likely part-time operations or run by just one or two people. There are around 1.7 million people employed in the industry — again, approximately two per business. Thus, daycares are small and usually not very profitable (IBIS World, 2013).

Demographic and Market Factors

Another factor that drives demand for daycare businesses is demographic. Daycare depends on the number of young children in an area. There is preschool-age daycare and school-age daycare, but in either case demand is driven by the number of working families in the region. Northern New Jersey is either within or adjacent to the New York metropolitan area, and housing prices are lower than in the city, making the area a draw for working families. The percentage of the population under the age of 18 is slightly lower than the U.S. average for most northern New Jersey counties — 22% in Bergen County, for example, versus 27% nationwide — and the general trend is that the teenage cohorts are larger than those under the age of 10, indicating that the birth rate is slowing (U.S. Census Bureau, 2010).

However, a shrinking market is not necessarily a problem. First, the industry has few barriers to entry and exit, which means it tends to contract and expand based on demand, with constant turnover of providers. Second, it is highly localized, so demographic considerations at the local level are more important than national trends. Third, businesses are small, so capturing just a small percentage of the market is enough to succeed as a new daycare business. Thus, while demographics are not entirely favorable, this does not necessarily pose a problem for a new entrant into the industry.

Form of Business Organization

There are many different forms of business organization. A sole proprietorship is a simple structure that offers the benefits of being easy to establish, low cost, and allowing taxation flow-through from the business to the proprietor. The disadvantage of this form is that there is downside risk to the proprietor, which is typically mitigated through insurance. A partnership requires multiple people in the ownership group, and profit distribution must be built into the partnership agreement, but is otherwise similar in pros and cons to a sole proprietorship. A corporation can take multiple forms; it is more complex and more expensive to set up, but it also limits the downside risk to the owner, who would be liable only for the money invested in the business rather than all personal wealth (Investopedia, 2014).

This business will be formed as a sole proprietorship. The risks are generally low and are covered by insurance. Beyond that, the low cost and simplicity of this structure, along with income flow-through, make the sole proprietorship the most logical form of business organization for a startup daycare business.