Start a test prep business by following these 10 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your test prep business. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
Check out our How to Start a Business page.
STEP 1: Plan your business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How much can you charge customers?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a test prep business?
The costs involved in opening a test prep business are potentially very low. If you are willing to work from home and conduct lessons either at your home or the homes of clients, then you have very little overhead. You could open such a business with less than $2,000, with $500 going towards a professional website, $750 going towards building your own library of test prep books, and the remaining $750 going towards advertising your business.
What are the ongoing expenses for a test prep business?
If you are meeting clients in your own home or theirs, then your only real ongoing expenses will be fuel for driving around and the cost for hosting your professional website (typically less than $100 a year). You may also choose to print new fliers each month (typically less than $50 a month).
Who is the target market?
While it can vary by area, your best clients are typically high school juniors and seniors preparing to take the ACT and/or SAT. This is because there is typically a surplus of these students compared to people preparing for higher tests such as GREs and LSATs. These younger students are also used to a high school environment, so they will typically take instruction well.
How does a test prep business make money?
A test prep business makes money by charging clients for test prep lessons. This is typically an hourly fee, with the fee being larger if you are conducting a one-on-one lesson and lower if you are conducting a group lesson.
How much can you charge customers?
How much you charge is largely dependent on the format for your courses as well as the competition in your area. Some well-known test-prep businesses charge a relatively low hourly fee (such as $21 for Kaplan Test Prep), but customers must agree to a longer-term of courses (such as 34 hours), so the prep business knows they will get a decent amount per customer. And those lower costs are for group lessons: for one-on-one sessions, it is appropriate to charge between $40 to $75 an hour, with some tutors charging $100.
How much profit can a test prep business make?
Potentially, you can make a lot of profit: as of 2015, test prep was a $4.5 billion business. Your own business would not initially be major competition for the national test prep businesses, but your job has no real overhead, so any money you make is contributing to your bottom line. For example, if you have sixty students in a year and meet with each one thirty hours and charge them $50 per hour, you can make $90,000 in a year/
How can you make your business more profitable?
Don't be afraid to raise your prices as you establish your reputation and get a feel for your competition. Considering selling packages with added value, such as access to free online lessons, videos, etc. You may also consider helping clients complete college applications. Finally, be sure to follow-up with students and secure their permission to use their quotes and success stories to advertise the effectiveness of your business.
What will you name your business?
Choosing the right name is important and challenging. If you don’t already have a name in mind, visit our How to Name a Business guide or get help brainstorming a name with our Test Prep Business Name Generator
When registering a business name, we recommend researching your business name by checking:
- Your state's business records
- Federal and state trademark records
- Social media platforms
- Web domain availability.
It's very important to secure your domain name before someone else does.
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC or corporation protects you from being held personally liable if your test prep business is sued.
Form Your LLC
Read our Guide to Form Your Own LLC
Recommended: You will need to elect a registered agent for your LLC. LLC formation packages usually include a free year of registered agent services. You can choose to hire a registered agent or act as your own.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
Small Business Taxes
Depending on which business structure you choose, you might have different options for how your business will be taxed. For example, some LLCs could benefit from being taxed as an S corporation (S corp).
You can learn more about small business taxes in these guides:
There are specific state taxes that might apply to your business. Learn more about state sales tax and franchise taxes in our state sales tax guides.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Additionally, learning how to build business credit can help you get credit cards and other financing in your business's name (instead of yours), better interest rates, higher lines of credit, and more.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Read our Best Banks for Small Business review to find the best national bank, credit union, business-loan friendly banks, one with many brick-and-mortar locations, and more.
Open net-30 accounts
When it comes to establishing your business credit, net-30 vendors are considered the way to go. The term "net-30," which is popular among vendors, refers to a business credit arrangement where the company pays the vendor within 30 days of receiving goods or services.
Net-30 credit terms are often used for businesses that need to obtain inventory quickly but do not have the cash on hand.
Besides establishing business relationships with vendors, net-30 credit accounts get reported to the major business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business Credit). This is how businesses build business credit so they can qualify for credit cards and other lines of credit.
Recommended: Read our guide on the best net-30 vendors so you can start building business credit now, so you never have to worry about cash flow in the future. Keep in mind that poor cash flow is the #1 reason businesses fail!
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
Certain state permits and licenses may be needed to operate a test prep business. Learn more about licensing requirements in your state by visiting SBA’s reference to state licenses and permits.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
For information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
Certificate of Occupancy
A test prep business is generally run out of an office or home. Businesses operating out of a physical location typically require a Certificate of Occupancy (CO). A CO confirms that all building codes, zoning laws and government regulations have been met.
- If you plan to lease a location:
- It is generally the landlord’s responsibility to obtain a CO.
- Before leasing, confirm that your landlord has or can obtain a valid CO that is applicable to a test prep business.
- After a major renovation, a new CO often needs to be issued. If your place of business will be renovated before opening, it is recommended to include language in your lease agreement stating that lease payments will not commence until a valid CO is issued.
- If you plan to purchase or build a location:
- You will be responsible for obtaining a valid CO from a local government authority.
- Review all building codes and zoning requirements for your business’ location to ensure your test prep business will be in compliance and able to obtain a CO.
STEP 7: Get business insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
If you aren't feeling confident about designing your small business logo, then check out our Design Guides for Beginners, we'll give you helpful tips and advice for creating the best unique logo for your business.
How to promote & market a test prep business
Be sure your professional website includes a mixture of info about your business as well as customer testimonials and success stories. Be sure that you have a social media presence on sites such as Facebook and possibly Twitter: many of your clients will be younger and may prefer reaching out to you this way. Considering that most of your business will be your local community, don't discount more traditional marketing, such as leaving fliers and business cards at local high school and community college campuses.
How to keep customers coming back
In addition to the ideas above, considering offering a free taste of your business. Offering something like a “become a better test-taker in half an hour” class at a community college or after school at a high school helps build buzz and establish your reputation. Consider offering referral bonuses for clients who refer their friends to you. For retaining customers, be sure you structure lessons in such a way that customers are compelled to come back (such as offering different lessons for the different sections of the ACT test, encouraging repeat client visits).
Still unsure about what kind of business you want to start? Check out the latest Small Business Trends to help inspire you.
STEP 9: Create your business website
After defining your brand and creating your logo the next step is to create a website for your business.
While creating a website is an essential step, some may fear that it’s out of their reach because they don’t have any website-building experience. While this may have been a reasonable fear back in 2015, web technology has seen huge advancements in the past few years that makes the lives of small business owners much simpler.
Here are the main reasons why you shouldn’t delay building your website:
- All legitimate businesses have websites - full stop. The size or industry of your business does not matter when it comes to getting your business online.
- Social media accounts like Facebook pages or LinkedIn business profiles are not a replacement for a business website that you own.
- Website builder tools like the GoDaddy Website Builder have made creating a basic website extremely simple. You don’t need to hire a web developer or designer to create a website that you can be proud of.
Using our website building guides, the process will be simple and painless and shouldn’t take you any longer than 2-3 hours to complete.
STEP 10: Set up your business phone system
Getting a phone set up for your business is one of the best ways to help keep your personal life and business life separate and private. That’s not the only benefit; it also helps you make your business more automated, gives your business legitimacy, and makes it easier for potential customers to find and contact you.
There are many services available to entrepreneurs who want to set up a business phone system. We’ve reviewed the top companies and rated them based on price, features, and ease of use.
Recommended: Find the best phone system for your business; check out our review of the Best Business Phone Systems 2021.
Start A Test Prep Business In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
Obviously, this business is good for those who are great at taking tests and have already taken many standardized tests. It is a great business for a current or former educator, as this helps you in teaching fundamentals of test-taking to customers. Above all, it is great for those who want to improve their local community by helping people get into the universities and programs of their dreams and better themselves.
Want to know if you are cut out to be an entrepreneur?
Take our Entrepreneurship Quiz to find out!
What happens during a typical day at a test prep business?
A part of your days will be spent communicating with existing clients about upcoming sessions as well as reaching out to prospective clients. You will review the specific lesson(s) you will offer that day, typically by reviewing a specialized test prep book. Depending on your business model, you may spend part of the day driving around the area to meet clients for sessions. Finally, you will spend time conducting the actual lessons.
What are some skills and experiences that will help you build a successful test prep business?
You should be very familiar with all of the typical standardized tests; be sure to buy and thoroughly read test prep books for each one, and make sure they include practice tests. You should also be familiar with typical “tricks” and techniques used to improve scores on these tests. To do this, you should speak with some veteran test prep instructors. You should also develop a solid relationship with local high schools and junior colleges so that you can advertise on their campuses and receive referrals for clients.
What is the growth potential for a test prep business?
The growth potential for this business is moderate. While overall college enrollment has decreased 1.5 percent from 2016 to 2017, many colleges are becoming increasingly competitive, which provides incentive for students to get assistance preparing for tests. In your area, you may also consider advertising and networking more heavily with local academies and magnet schools that are likelier to have a higher number of students wanting test prep services to get into their college of choice.
Not sure if a test prep business is right for you? Try our free Business Idea Generator and find your perfect idea.
TRUiC's YouTube Channel
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Learn from other business owners
Want to learn more about starting a business from entrepreneurs themselves? Visit Startup Savant’s startup founder series to gain entrepreneurial insights, lessons, and advice from founders themselves.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
What are some insider tips for jump starting a test prep business?
Be sure that your prices are competitive with whatever is offered in your area. Develop a rapport with local guidance counselors so that you are the first person they think of when someone needs help preparing for a standardized test. Finally, don't rule out the potential of technology such as Skype for expanding your business far beyond your local area.
How and when to build a team
The decision to build a team is tricky, as the ability to conduct all of the lessons yourself is a major part of what keeps the overhead low. However, if you have more clients than time, you can start with a partner or two in order to help more of your community.