The Texas Legislature’s passage of Senate Bill 2 (SB 2) in April 2025 marks a seismic shift in the state’s educational landscape. With the imminent rollout of a universal Education Savings Account (ESA) program, Texas is poised to launch the largest day-one school choice initiative in the nation, granting families unprecedented access to public funds for private K-12 education^[1][2][3][4]. While much of the public debate has centered on K-12 schools and public school funding, the implications for the preschool and daycare industry are equally profound—and, for many operators, potentially transformative. This article explores in depth the changes brought by Texas’s new school choice law, focusing on how it will affect the preschool and daycare industry, the sector’s excess capacity, the potential for preschools to expand into elementary education, effects on business valuations, and the broader positive and negative impacts for providers across the state.

1. Overview of the Texas School Choice Law

What Passed?

• In April 2025, the Texas Legislature passed SB 2, establishing a $1 billion ESA program. Governor Abbott signed it into law in May, with the program set to begin for the 2026-2027 school year^{[5][6][1][2][7][3][8][4]}.
• The law enables all Texas K-12 students to apply for an ESA, funded at over $10,000 per student per year, with students with disabilities eligible for up to $30,000 annually^{[6][1][7][3][4]}.
• ESA funds can be used for a variety of education-related expenses, including private school tuition, tutoring, transportation, and special needs therapies^[1][7][4].
• The program prioritizes low- and middle-income families and students with disabilities if demand exceeds available funding^[7][4].

Who Can Participate?

• All 5.3 million Texas K-12 students are eligible, with priority for families earning up to 500% of the federal poverty level (about $160,750 for a family of four in 2025)^[7][4].
• The program is optional: private schools may opt in, and families must apply for ESA funds^[4].

How Does It Work?

• Families receive ESA funds in an online account, which can be directed to pre-approved educational providers, including accredited private schools^[1][4].
• Participating private schools must administer norm-referenced tests in grades 3-12 and report scores for ESA students but retain autonomy over curriculum and admissions^[4].
• Schools may charge families the difference if tuition exceeds the ESA amount^[4].

1. The Texas Preschool and Daycare Landscape in 2025

Capacity and Demand

• Texas has approximately 1.16 million licensed child care slots, but only about 140,000 children per day are served through state-subsidized programs—just 12% of total licensed capacity^[9].
• Despite this, Texas faces persistent “child care deserts,” with an estimated 485,000 more low-income children ages 0-5 with working parents than available subsidized child care seats^[10][11].
• The industry has not fully recovered from pandemic-era closures: about 27% of providers remain closed, and those that remain face rising costs and staffing shortages^[12][11].
• Enrollment has increased post-pandemic, but many providers operate below full capacity due to staffing and regulatory constraints^[10][11].

Financial Pressures

• Federal pandemic relief funds that kept many centers afloat have expired, and state funding is limited^[10][12][11].
• Providers face escalating costs for staff, property taxes, rent, and supplies, squeezing margins and threatening viability for many centers^[12][11].
• Waitlists for subsidized care remain long—over 90,000 children as of September 2024^[10][11].

III. How School Choice Will Affect Preschools and Daycares

1. New Opportunities: Expansion into Elementary Education

Why Would Preschools Consider Expanding?

• With $10,000+ per student available for K-12 private education, the financial incentives for existing preschools and daycares to add kindergarten and elementary grades are significant^[1][4].
• Many preschools already have educational infrastructure, staff with early childhood expertise, and facilities that could be adapted for older children.
• The law allows any accredited private school to participate, and there is no requirement that a provider be an existing K-12 school—opening the door for preschools to expand their offerings^[4].

Excess Capacity and Facility Utilization

• Some preschools and daycares have excess or underutilized capacity due to fluctuating enrollments, pandemic-related closures, or demographic changes^[10][12][11].
• By adding elementary grades, these centers can maximize use of their facilities, spread fixed costs across more students, and tap into a new, stable revenue stream backed by state funds.

Business Model Transformation

• Preschools that successfully expand into K-5 or even K-8 education could transition from primarily tuition-dependent early childhood centers to full-fledged private schools with diversified income streams.
• This shift could make them more attractive to buyers and investors, increase operational resilience, and enhance long-term viability.

1. Effects on Valuations of Preschools and Daycares

Key Valuation Drivers

• The value of a preschool or daycare is traditionally based on enrollment, tuition rates, operational margins, facility quality, reputation, and growth potential^[13].
• The new school choice law introduces several new factors:
  • Potential for Expansion: Centers with the physical and regulatory capacity to add elementary grades may see a significant increase in value due to future cash flow potential^[13].
  • Enrollment Stability: Access to ESA funds may reduce enrollment volatility, as families have more resources to pay tuition, making revenue streams more predictable.
  • Market Demand: Increased demand for private elementary education may drive up tuition rates and occupancy at high-quality centers, boosting profitability and, by extension, valuations^[13].

Valuation Methodologies

Approach	Impact of School Choice Law
Income (DCF)	Higher projected cash flows from expanded grades, increased enrollment, and more stable tuition payments from ESA funds
Market (Comparables)	Rising transaction multiples for centers with K-5 programs or potential for expansion; increased buyer interest in scalable operations
Asset-based	Facility upgrades or expansions may increase asset value, especially if centers are retrofitted for elementary use[13]

  Potential for Value Polarization

• Centers that are well-positioned to expand or that already offer high-quality pre-K and early elementary programs may see significant appreciation in value.
• Conversely, providers unable to adapt—due to facility constraints, regulatory hurdles, or lack of capital—may face declining valuations as competition intensifies and market share shifts.

1. Positive Effects of School Choice on Preschools and Daycares
2. Increased Enrollment and Revenue Stability

• With ESA funds available, more families may choose private early education, boosting enrollment at participating centers.
• Providers that expand into K-5 can capture a larger share of the educational journey, improving student retention and long-term financial outlook.

2. Incentive for Quality Improvement and Innovation

• The competitive environment fostered by school choice may drive preschools and daycares to enhance curriculum, facilities, and teacher quality to attract and retain families.
• Centers that innovate—by offering specialized programs, extended hours, or wraparound services—can differentiate themselves and command higher tuition.

3. Enhanced Business Valuations and Exit Opportunities

• For owners considering a sale, the potential for expansion and higher earnings multiples may make this an opportune time to seek buyers or investors.
• The market for educational businesses may become more dynamic, with increased interest from private equity, charter operators, and nonprofit organizations.

4. Greater Parental Choice and Satisfaction

• Families will have more options for early and elementary education, especially in areas where public schools are underperforming or do not align with family values^{[1][14][15][16]}.
• Access to ESA funds may allow more children to attend high-quality preschools and private elementary schools, narrowing achievement gaps and improving school readiness^[17].

1. Negative Effects and Challenges for the Industry
2. Intensified Competition and Market Disruption

• Existing private schools and new entrants—including charter operators and national chains—may compete aggressively for ESA-funded students.
• Smaller, independent preschools and daycares may struggle to compete on price, facilities, or marketing, leading to potential closures or consolidation.

2. Staffing and Regulatory Hurdles

• Expanding into K-5 education requires hiring certified teachers, upgrading facilities, and navigating new regulatory requirements—challenges that may be insurmountable for some providers^[10][12][11].
• The ongoing shortage of qualified child care and early education staff may be exacerbated as more centers compete for a limited talent pool^[10][11].

3. Uneven Geographic Impact

• In affluent or urban areas with existing private school infrastructure, the transition may be smoother; in rural or low-income areas—already classified as “child care deserts”—the benefits may be limited by lack of providers and capacity^[10][11].
• Some providers may lack the capital to expand or upgrade facilities, widening disparities between well-resourced and struggling centers.

4. Public Funding and Policy Risks

• The diversion of state funds to private education could reduce resources for public pre-K and early childhood programs, especially in districts already facing budget shortfalls^[18][17][8].
• Future legislative changes or funding cuts could create uncertainty for providers that have invested heavily in expansion.

5. Potential for Overcapacity and Market Saturation

• If too many providers expand into elementary education without sufficient demand, some markets may become oversaturated, leading to price competition, declining margins, and potential closures.
• The risk is particularly acute in areas where demographic trends point to declining numbers of young children.

1. Strategic Considerations for Preschool and Daycare Owners
2. Assessing Readiness for Expansion

• Facility Audit: Does your center have the space, zoning, and infrastructure to add classrooms for older children?
• Regulatory Review: What are the licensing and accreditation requirements for K-5 education in Texas? Are you prepared to meet them?
• Financial Modeling: Can you secure the capital needed for expansion? What are the projected returns under different enrollment and tuition scenarios?
• Staffing Plan: Can you recruit and retain certified teachers and support staff?
• Positioning for Success in a Competitive Market

• Quality and Differentiation: Invest in curriculum, teacher training, and facilities to stand out in a crowded market.
• Community Engagement: Build strong relationships with families, local businesses, and community organizations to enhance your reputation and referral base.
• Partnerships: Consider alliances with other providers, charter schools, or nonprofits to share resources and expertise.

1. Preparing for Valuation and Sale

• Document Financials: Maintain detailed, accurate financial records, including enrollment trends, tuition rates, and operating expenses^[13].
• Highlight Growth Potential: Emphasize your center’s readiness to expand, quality of programs, and reputation in the community.
• Engage Experts: Work with valuation professionals who understand the education sector to ensure a fair and accurate assessment of your business’s worth^[13].

VII. The Future of Early Childhood Education in Texas The passage of universal school choice in Texas is a watershed moment for families, educators, and business owners. For preschools and daycares, the law presents both significant opportunities and daunting challenges. Those who can adapt—by expanding their offerings, investing in quality, and positioning themselves as leaders in private early and elementary education—stand to benefit from increased demand and higher valuations. However, the transition will not be easy. Providers must navigate a rapidly changing policy environment, rising costs, staffing shortages, and intensified competition. The risk of market disruption is real, particularly for smaller or under-resourced centers. Ultimately, the success of Texas’s school choice revolution—and its impact on the preschool and daycare industry—will depend on the ability of providers to innovate, collaborate, and deliver high-quality education that meets the needs of families across the state. For preschool and daycare owners considering their next move, now is the time to assess your readiness, explore expansion opportunities, and position your business for success in a new era of educational freedom in Texas. Contact Gateway School Sales today to explore your options – (972) 267-9003 This article is intended for informational purposes only for current and prospective owners, operators, and investors in the Texas preschool and daycare industry.