Buying a Daycare: Due Diligence Checklist & Red Flags (2026)

Red flag: Significant discrepancies between reported enrollment numbers and actual tuition collected, or a high percentage of past-due accounts suggesting poor collections practices.

Ask: Can you provide detailed monthly enrollment sheets and corresponding tuition payment histories for the past three years, separated by age group and payment status?

Red flag: Undocumented off-the-books payments, high staff turnover rates impacting payroll stability, or benefit costs that are not clearly itemized in the P&L.

Ask: Please provide detailed payroll reports, including gross wages, taxes, and benefits, for all employees for the last three years, along with a staff roster by position and tenure.

Red flag: Lack of proper records for food purchases and child attendance, indicating potential non-compliance or fraud, leading to loss of reimbursement.

Ask: If participating in the CACFP or similar programs, can you provide audit reports and a detailed breakdown of reimbursement revenues versus actual food costs for the last three years?

Red flag: Consistently operating significantly below licensed capacity without a clear explanation for lost enrollment, or conversely, exceeding licensed ratios in certain age groups.

Ask: What is the licensed capacity for each age group, and what has been your average daily attendance for each group over the past 24 months?

Red flag: A history of unaddressed or repeat serious violations related to child safety, staff-to-child ratios, or facility hygiene, indicating systemic operational issues.

Ask: Please provide copies of all state licensing inspection reports, violation notices, and corrective action plans for the past five years.

Red flag: An outdated or non-existent curriculum, haphazard daily routines, or complaints from parents about poor communication, suggesting disorganized operations.

Ask: Can you outline your current curriculum framework, provide examples of weekly activity schedules for various age groups, and describe your parent communication system?

Red flag: High staff turnover (over 30% annually), lack of documented ongoing training, or instances of unqualified staff working directly with children.

Ask: What are your staff hiring and onboarding procedures? Can I review staff certification records, recent training logs, and statistics on staff turnover for the last 3 years?

Red flag: Undocumented or deferred maintenance on major systems (HVAC, plumbing) or play equipment in disrepair, posing safety hazards and indicating significant upcoming capital expenditures.

Ask: Can I review the maintenance logs for facility systems and major equipment? What is the average age and expected lifespan of the core classroom and playground equipment?

Red flag: The target daycare's pricing is significantly higher than competitors without a clear value differentiator, or numerous high-quality competitors have extensive waiting lists while the target does not.

Ask: Who do you consider your primary competitors in the immediate area? How do your pricing and services compare, and do you currently maintain a waiting list for any age groups?

Red flag: A declining birth rate, aging population, or significant outbound migration of young families in the target’s service area, indicating future enrollment challenges.

Ask: Have you observed any significant demographic changes in the neighborhood over the past five years relevant to families with young children? What data do you track regarding your service area?

Red flag: Numerous recent negative online reviews citing consistent issues with staff, safety, or communication, without evidence of seller attempts to address them.

Ask: How do you gather parent feedback, and what has been the general sentiment? Can you provide access to your accounts on major review platforms and any internal surveys?

Red flag: Reliance solely on word-of-mouth with no active marketing strategy, or a strategy that primarily attracts families likely to churn quickly.

Ask: What is your current marketing strategy for attracting new families, and what sources typically generate your highest quality leads?

Red flag: A short-term lease (under 3 years) with no renewal options, a non-assignability clause, or a landlord unwilling to work with the buyer, jeopardizing business continuity.

Ask: Please provide a copy of the current lease agreement. Is it assignable to a new owner, and what is its remaining term and renewal options?

Red flag: Key staff members on short-term contracts with no non-compete clauses, or employment agreements that grant automatic severance upon change of ownership, posing retention risks.

Ask: Are there employment contracts or non-compete agreements in place for key staff, particularly the director or lead teachers? May I review these?

Red flag: Undisclosed lawsuits related to child injury, negligence, or staff misconduct, which could result in significant liabilities for a new owner.

Ask: Have there been any lawsuits, legal disputes, investigations by licensing bodies, or significant insurance claims related to the operation over the last five years?

Red flag: The facility is operating under an outdated or conditional use permit that may not transfer, or it is in violation of current zoning regulations for childcare facilities.

Ask: Can you provide documentation confirming the property's zoning compliance for a childcare facility, and are there any special use permits specific to the current owner that would not transfer?

Red flag: The seller offers minimal or no transition support, or expresses a desire to exit immediately post-closing, indicating potential knowledge gaps for the new owner.

Ask: What kind of transition support and training are you prepared to offer post-sale, and for what duration, to ensure a smooth handover of operations and relationships?

Red flag: No plan to incentivize key staff to stay during the transition, risking a mass exodus that destabilizes operations and client relationships.

Ask: What is your strategy for retaining critical staff throughout and after the transition period? Are there any retention bonuses or incentives in place?

Red flag: Critical vendor contracts approaching expiration with no renewal options, or reliance on a single vendor for essential services with no backup.

Ask: Please provide a list of all current vendor contracts (food, cleaning, educational supplies). Are these contracts assignable, and when do they expire?

Red flag: No communication plan for families, leading to uncertainty, rumors, and potential enrollment attrition, or a plan that alienates existing clients.

Ask: How do you envision communicating the sale and ownership change to the enrolled families to ensure continuity and minimize churn?