The U.S. childcare industry is prospering, but with that comes increased competition for school business owners and operators.

The Committee for Economic Development recently found that the U.S. childcare industry has an economic impact of $99 billion. Additionally, school businesses are predicted to have some of the fastest employment growth of all industries through 2020, and childcare businesses have consistently increased sales in recent years.

In several previous blogs, we discussed the disadvantages of working exclusively with private equity groups. However, there is another threat school business owners need to keep in mind as well— franchising companies!

Defining School Franchising Companies

Franchising refers to companies (franchisor) that sell franchises to an individual (or franchisee) to operate the business under a specific trade name — e.g., Primrose Schools or McDonald’s — while using the franchising company’s curriculum, prototype building, marketing, and business model.

School franchising companies are on the rise as new locations are added each quarter. According to Forbes research, the industry generated $2.6 billion in 2016, a figure that is expected to grow by 6.5 percent each year through 2021, with the total number of franchises forecast to hit 2,126.

Franchising companies by definition do not operate schools; they make money by charging an up-front franchising fee (typically between $60,000 to $135,000). They then require the school operator (franchisee) to pay the franchisor a certain percentage of the monthly revenue (usually in the 6 to 8 percent range) beginning on day one of opening.

More Competition, More Problems?

Franchising companies are motivated to add new locations, which is how they make money. Today, these companies are adding locations at an alarming rate, and they are often doing so in local markets already saturated with schools. These new, state-of-the-art schools generally cost $3 million or more to build at the franchisee’s expense.

While a healthy amount of competition is good for any industry — as it often encourages innovation and improved customer service — the growing number of franchises is something every school business owner should monitor.

Franchise schools enroll children who otherwise would be available to existing school operators in the area. These schools offer their own high-quality program package with a corporate education department available to aid franchisees’ implementation of the curriculum. Further, they tend to pay employees a higher rate to attract high-quality teachers, often from their competitors.

Keeping Pace With an Evolving Market

If a “School Opening Soon” sign goes up near your location, there is a good chance it is one of the franchising companies. As a school business owner, it is important to watch for new openings and be proactive to keep pace with the competition.

From making simple improvements to your facility to updating your curriculum and marketing efforts, there are several ways you can help ensure your school business remains competitive in an evolving market.

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