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

Red flag: Tax returns show significantly lower revenue than internal statements, or revenue is flat/dropping while enrollment appears steady because rates were quietly raised.

Ask: Can you walk me through the revenue by source—private-pay tuition, state subsidy vouchers (CCDF), food program (CACFP) reimbursements, and any wraparound-care grants—for each year?

Red flag: Consistently 20% or more of reported “enrolled” children do not appear in the sign-in/sign-out logs, indicating ghost enrollment or misreported capacity.

Ask: May I see the last 12 months of weekly attendance sheets and compare them with the corresponding bank deposits to verify that no-show slots are being billed and collected?

Red flag: Payroll exceeds 55% of gross revenue with no mitigating subsidy, or the center is habitually out of ratio and relies on uncounted owner hours to stay legal.

Ask: What is the current staff-to-child ratio for each age group, and can you provide a list of all employees with wages, hire dates, and turnover over the last 24 months?

Red flag: A five-year locked-in lease-to-own contract for a proprietary curriculum that parents don’t care about, offsetting fake “revenue” but actually a cash drain.

Ask: What are the remaining terms of any food vendor, curriculum provider, or janitorial contracts, and will any rebates or prepaid deposits transfer to the buyer?

Red flag: Rent already consumes 25%+ of gross revenue on a triple-net lease with a building that needs a $30,000 HVAC replacement next year.

Ask: What is the current monthly rent including triple-net charges, how often does it escalate, and in the most recent fire marshal inspection, were any capital improvements required that haven’t been completed?

Red flag: Multiple repeat violations for supervision, ratio, or background checks—especially any that resulted in a conditional or provisional license.

Ask: May I review the complete public file from the state’s child care licensing portal, including every complaint and surprise inspection report for the last five years?

Red flag: The director’s credential is expired and no one else qualifies, which automatically places the license in jeopardy at renewal.

Ask: Who holds the required director credential, do they have an active CDA or degree, and have all staff completed mandatory annual training hours for CPR, first aid, and child abuse recognition?

Red flag: The playground has worn grass patches under swings with no impact-absorbing mulch, and the fence has gaps a toddler could climb through—immediate Title 22/OFS failure.

Ask: When was the last playground safety audit and what is the remaining useful life of the poured-in-place surfacing; also, have you ever had a positive lead-in-water test in the facility?

Red flag: Waitlist is fabricated on a spreadsheet but there are zero verified contact details; 40% of private-pay families leave within 3 months with no exit interview.

Ask: How many families are on the waitlist by age group, and over the last 12 months, what percentage of your private-pay families left before kindergarten—and why?

Red flag: The “curriculum” is TV time every afternoon and there has never been a QRIS application—this limits tuition increases and makes the center vulnerable to competitors.

Ask: Are you currently rated in the state’s quality rating system, and does the center follow a recognized curriculum (Creative Curriculum, Montessori, etc.) that parents can name?

Red flag: The nearby 0–5 population has declined by 10% over five years and the only large employer just announced permanent remote work.

Ask: How many children under 5 live within a 3-mile radius according to the latest Census tract data, and are there any large employers nearby that offer dependent-care spending accounts or back-up care benefits?

Red flag: Three new centers with shiny playgrounds have opened within a mile, each with a “now enrolling” banner, while your center sits at 65% occupancy.

Ask: How many licensed centers and home daycares are within a 2-mile ring, and what is your average enrollment percentage versus their publicly visible posted capacity?

Red flag: State subsidy rates haven’t been re-benchmarked in a decade and the agency frequently takes 90 days to pay, creating a cash-flow hole that private-pay cash must fill.

Ask: What is the state’s current daily reimbursement rate for infant, toddler, and preschool care under the CCDF voucher system, and have there been any payment delays or rate cuts in the past two years?

Red flag: Multiple reviews mention “dirty bathrooms,” “staff always on phones,” or “my child got hurt and no one called me” without the owner replying or fixing the issue.

Ask: May I see the private parent-satisfaction survey results from the last two years and the center’s Google/Facebook reviews, including any responses from the owner?

Red flag: 60% of enrolled children are children of nurses at one hospital and there is no written contract—just a handshake.

Ask: What proportion of enrollment comes from a single institution (e.g., a hospital system with a dependent-care contract), and what would happen if that institution changed its benefit?

Red flag: The lease states that any change in ownership constitutes a default, and the landlord has verbally said they plan to repossess the building for their own use.

Ask: Does your lease explicitly allow assignment to a new business owner without landlord consent being unreasonably withheld, and will the landlord consent in writing before we go under contract?

Red flag: The seller has never asked the licensing agency about a transfer and the agency’s published policy says a new application—which takes 6–9 months—is required.

Ask: What is the exact state licensing agency’s process for a change-of-ownership transfer, how long does it typically take, and have you submitted a pre-application already?

Red flag: The center is a legal nonconforming use that expires upon sale; the buyer would have to install a sprinkler system and add 10 parking spaces to re-open legally.

Ask: Is the daycare operating under a conditional-use permit or a grandfathered nonconforming use, and would any change of ownership trigger a new public hearing or require updating parking/drop-off to current code?

Red flag: The policy is a basic general liability with no molestation coverage and a $250,000 per-occurrence limit, which is far below the $1M/$2M standard most parents and landlords require.

Ask: May I see the current child care liability policy including the abuse and molestation endorsement, and what is the claims history for the past five years?

Red flag: There are no signed agreements, families come and go on verbal commitment, and three lead teachers have side gigs caring for children from the center on weekends—creating liability.

Ask: Do you use signed enrollment contracts with families, what notice is required for withdrawal, and are any families prepaid beyond 30 days—and do you have a noncompete in place for yourself and any key teachers?

Red flag: Seller wants to depart the day after closing and says “it’s all in QuickBooks”—which it clearly is not.

Ask: Will you stay on for at least four weeks post-close at no extra charge to introduce me to every family and walk me through the monthly subsidy billing cycle and CACFP claims process?

Red flag: Staff have no idea a sale is possible and the two infant-room teachers both have family plans that would make them quit within a month of a change.

Ask: Have the lead teachers and assistant director been informed of the potential sale, and would they sign a retention agreement that includes a 90-day stay bonus if we close?

Red flag: Seller forbids any parent contact before closing because “parents will panic” — likely because the reason for selling would alarm them.

Ask: How will we jointly introduce me to parents before closing, and will you allow me to hold a parent meet-and-greet during business hours under your supervision?

Red flag: All attendance, billing, and incident reports are kept in a spiral notebook that the seller plans to take with her.

Ask: Which parent communication app do you use (Procare, Brightwheel, etc.) and what is the process for transferring the administrator account and historical records to me without data loss?

Red flag: The licensing agency says the new license will take at least 90 days post-application, but the seller insists on closing in 30 days — which means the center would have to shut down.

Ask: Will the state licensing agency issue a temporary operating permit or provisional license in my name on the closing date so that we do not have a gap in legal operation, and what happens if it’s delayed?