With long hours and low profits, who wants to open a child care business?

Tammy Hagenbeck-Westerberg knows as well as anyone what it takes to operate a child care business.

She ran one out of her northeast Minnesota home for more than a decade before quitting to care for her two young children with special needs.

That was 17 years ago. Now, the children are older and one of them, Leslie, wants a career in child care. But, fearing Leslie’s disability would make finding work difficult, Hagenbeck-Westerberg restarted her business and became Leslie’s employer.

Yes, it means longer hours and lower pay. But, Hagenbeck-Westerberg said, “not everything is about money. One of the main reasons that I was willing to do this again was my daughter, Leslie. Leslie cares deeply about kids and loves kids.”

In many ways, child care is more difficult now than the last time Hagenbeck-Westerberg was in business. Regulations are tougher, demand for care has shifted toward less-profitable infant care, and expenses are higher. Many providers say they pay themselves little, and some rely on a spouse’s income.

Yet, last year, the state of Minnesota received more than 800 applications for child care licenses. That’s a 13 percent increase over 2021, which itself was a 9 percent increase over 2020. Who are the people willingly entering such a business? Child care experts say that many, for a variety of reasons, have very modest income requirements. Like Hagenbeck-Westerberg, they often aren’t in it for the money.

Child care is essential for working parents to remain fully employed; a shortage of care may force parents, mothers especially, to work fewer hours or quit. In that regard, having more Minnesotans start child care businesses is a good thing. But it’s not enough. The number of Minnesotans exiting the business is even higher, resulting in a loss of child care capacity statewide.

Long decline in provider numbers

The majority of applications are for “family child care” (FCC) licenses. These are typically home-based businesses with a maximum capacity of 14 children. FCCs are very common because they’re less difficult to start than child care centers (CCC), the other main type of licensed provider. Typically based in commercial spaces, centers have an average licensed capacity of 80 children.

The recent rebound in the FCC license applications follows years of decline (Figure 1), according to Minnesota Department of Human Services data. Between 2010 and 2019, their numbers fell by more than 20 percent. In 2020, when the pandemic arrived, they fell by another 30 percent.

By contrast, applications for CCC licenses, while far fewer in number, have trended upward. Between 2010 and 2019, their numbers rose by more than 70 percent. They, too, fell in 2020 but returned to pre-pandemic levels by 2021.

Yet the total number of child care businesses is still in decline, and more importantly for parents in search of care, so is the number of children these businesses can care for. For every successful FCC applicant, nearly two established FCC providers exit the industry (Figure 2). This loss of capacity is partially offset by the growing number of CCC providers, which have much greater capacity than FCC providers (Figure 3). But FCC providers are so numerous and their decline so severe that the net loss in capacity continues.

Who are the applicants?

Child care has long been a precarious business with providers subsisting on thin margins.

Caring for children is very labor intensive, governed by strict student-teacher ratios meant to ensure the appropriate level of care for each age group. Complex safety regulations requiring a lot of paperwork add to providers’ workload. But tuition is constrained by what’s affordable for parents of young children, who are often at the beginning of their career when earnings are modest.

Since the start of the pandemic, child care businesses have struggled with inflation and CCCs in particular have struggled with higher labor costs. CCC and FCC owners alike say they’ve had to cut their own pay to cope with rising costs.

But despite the challenges, many people still want to start child care businesses.

Liz Baumberger is one of them. She quit her child care center job two years ago while pregnant with her second child. The work environment was stressful and her husband’s job allowed her to stay home with her children. But in April 2023, she opened her own child care business at her southeast Minnesota home.

Baumberger said she is all too aware of the challenges of the business, but she also enjoys child care.

“I had already been a stay-at-home mom for a year or so … I might as well take on more kids that I can care for. I know that I can do good in their lives and their parents’ lives,” she said. “It adds more joy to my day than it does exhaustion because my kids love being with the other kids.”

Consultants who help people start FCC businesses say a vast majority of clients are mothers of young children or expecting mothers.

Many want to be there for their children’s first steps or first words, and an FCC business would allow them to do that. It might not pay very much, but it’s more than what most stay-at-home moms can earn without full-time jobs.

Gwen Lynch, a consultant with the state’s Child Care Wayfinder program in southeast Minnesota, said she’s been hearing more from mothers with jobs that pay much more than child care, such as social workers or teachers, who want to know if they can afford to stay home by starting a child care business. “They know they’re going to take a cut. They just don’t know how hard that might be.”

For other moms, child care costs can be so high that quitting their jobs and opening FCC businesses is the better option, according to Leah Budnik, a Wayfinder consultant in northeast Minnesota. “It doesn’t make sense for them to have two young children going to child care and then taking the majority of their paycheck. So they spend the time at home instead, and then provide care to a few other kids.”

Overlapping with stay-at-home moms is another large group of would-be FCC providers. These are people for whom caregiving is a calling. Many are already in caregiving professions that translate well to in-home child care, such as working at child care centers or nursing homes.

As a girl, Hagenbeck-Westerberg said she dreamed of becoming a child care provider. As an adult, when she wasn’t a provider she worked in assisted living and as a school paraprofessional, in addition to adopting six children from foster care and, now, caring for her father with Alzheimer’s. “I’ve always been in the caregiving field,” she said.

Many immigrants who start FCC businesses feel the call of caregiving as well, according to Camila Mercado Michelli, a child care consultant at CLUES, a St. Paul–based nonprofit group helping Latinos advance economically. “We have people who may have been teachers or lead teachers or even pre-K principals in their country. Then they came here, and now none of those credentials work for them,” she said, but they still want to educate children.

In some cases, providers want to provide Spanish-language education to help Hispanic children stay in touch with their roots, which, they found, is in high demand among non-Hispanic parents as well, Mercado said.

Other clients, she said, are mothers and grandmothers already caring for their own children or grandchildren and, often, children from one other family, which doesn’t require licensing. These clients now want FCC licenses so they may care for more children.

Those seeking CCC licenses are much less common, according to Wayfinder consultants. Some are FCC providers looking to grow their business while others are civic leaders with nonprofit connections, who see a need for more child care in their community. Because of the steep learning curve and significant investment required to apply for a CCC license, most clients aspiring to open child care centers are still in the planning stage, meaning they have yet to apply, or have abandoned their plans.

Barriers to licensing

Stringent regulations intended to provide a safe learning environment for young children are a hurdle for many would-be providers, child care experts say. The regulations may be one reason why about 20 percent of applications do not result in issued licenses.

For FCC license applicants, safety requirements that force them to update their homes are especially challenging. Fencing to keep children from wandering away from backyards and egress windows to provide fire escapes from care spaces in basements cost thousands of dollars, which can be hard for many households to afford.

Other requirements can be time consuming, such as putting together detailed policies ranging from what food is served to grievance procedures for parents, or submitting household members to background checks.

Hagenbeck-Westerberg said the background check for her father, who was moving from Texas to live with her family, took 12 weeks. It was the last step before she could open her FCC business, she said. “I did have families waiting to start, but I couldn't have them come until after his background study cleared the end of July. It was quite an ordeal.”

For CCCs, these challenges are magnified. Not only are the regulations more complex but building updates are much more costly.

Budnik said a client trying to start a child care center at a school found that safety updates, such as a firewall and fire escapes for each age-based classroom, would cost several million dollars. “That’s the end of that project,” she said. “The expense for construction for startups is just wildly out of control.”

CCCs also must be able to hire enough staff to operate, a challenge exacerbated by the low wages that CCCs with their slim margins can afford to pay.

“It’s like the perfect storm has to come together: a building, your financing, your staffing,” said Tori Breiter, a Wayfinder consultant in south-central Minnesota. “Once they sit down and have an informational session of how to do it, it’s like ‘I’m out. Wow, I didn’t realize how much work this is.’”

Many successful CCC applicants are owners of established child care centers expanding to new locations. In 2022, more than a third of new centers were opened by owners of established centers.

Can this last?

Despite the uptick in applications for child care licenses, there are questions about whether this will be enough to eventually reverse the overall decline in child care capacity.

Because many FCC applicants are mothers choosing to be home during their children’s formative years, many don’t expect to remain in the child care business when their children are older.

Lynch, who used to run a child care business herself, said she knew many older FCC providers who made child care a career. But young providers don’t think like that, she said, especially those with well-paying jobs to return to. “The nurses I’ve talked to say, ‘Nope, I’m gonna just do this for about seven years then I can get them in school and then I’m gonna go back in. I’m gonna keep my [nursing] license.”

Baumberger, whose children are 3 and 1, said she’s unsure if she will remain open when they’re school age. She said she loves child care but she doesn’t love all the requirements for renewing her license each year.

For new child care centers, there are questions of sustainability, too.

“It could take 10 years to actually turn a profit, especially with the loans that you need to take out for construction and things like that, that are going to be required for licensing,” Budnik said.

The only groups Budnik has seen that can sustain an unprofitable business for many years are nonprofit groups and people with other sources of income to draw from.

“The centers that I see that are successful in my area are—‘successful’ in air quotes—run by women who don’t take a salary,” she said, “and are fortunate to have a partner who makes enough money in their family that they can run their business at a loss, and essentially donate their time and finances towards it in order to keep the business alive.”