I would tell them this...

Your daughter is adorable and we've enjoyed spending this time with her. Unfortunately, we don't feel she has acclimated to a group care setting. You might want to consider a nanny while she is still so young, as she will receive more one-on-one care. I wish you the best in finding the perfect child care setting for your little girl. Sadly, her last day with us will be xx/xx/xxxx.

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