It will only last briefly because once she is full the rest of the people have to go somewhere else. Make a point in your interviews about how you do give receipts and keep everything above board and legal and meet standards etc. Explain to prospective clients how they will need the receipt to claim the daycare deduction on their taxes. Eventually word will spread and the other woman will have a harder and harder time of getting clients since most will want to be above board and not risk their daycare getting closed down.

What you can watch for is proof that she is taking in more than 5 daycare children or whatever is legal in your area and that would be a reportable claim as it addresses safety issues.