The independent school sector’s resilience is being tested like never before, but what business model for financial survival would suit your school? Partners at law firm Veale Wasbrough Vizards, Robert Collier and Kenji Batchelor report

By any measure, the past few years have been extraordinary. The pandemic was very difficult for many businesses. However, the sector adapted well and, in many areas, even thrived.

The challenges really are relentless, though. Despite memories of Covid starting to fade, a new set of such challenges and risks have appeared. In no particular order, these would seem to include:

• A rise in the cost of living, making affordability more acute for many existing (and potential future) parents
• The consequences of high inflation rates on the cost of running a school, in particular the costs associated with heating, utilities and transport
• The likely further increase in the cost of participating in the Teachers’ Pension Scheme (with an announcement expected soon to take effect in September 2024)
• The spectre of a change in the tax regime insofar as it relates to independent schools, and particularly those operated by charities.

These are the challenges we know about – it would be naïve to think that there won’t be other bumps and shocks going forward. So it will be wise for schools to keep these risks under review and strategy planning high on their agendas. This really should not be seen as a sign of weakness, but just a very sensible and pragmatic approach.

Approach

Schools have always needed to keep their general strategy under review and the most successful schools have been those that:

• Recognise that they are running a business and need to generate a surplus
• Collate and measure key performance indicators and react quickly to changes in those KPIs
• Undertake regular strategy reviews
• When undertaking those strategy reviews, do so with an open mind so that nothing is off the table and recognise that just because a strategy has worked in the past, that will not always be the case going forward. and
• Are proactive rather than reactive.

Effectively nothing has changed – all schools should note this and take similar steps. However, insofar as there are new considerations, those probably are that:

• There really is no question now that size and scale will be key to weathering any storms which may lie ahead, and that it will be increasingly difficult to operate successfully as a smaller stand-alone school
• While the possibility of a change in the UK tax regime affecting UK independent schools (and in particular schools run by charities) is not certain at this stage and the details of what it may entail are unclear, it is a significant risk that any such changes may have an adverse effect on school transactions (most notably merger transactions between charities). Therefore, if you are already contemplating a transaction of that nature, you should probably ensure that it is pushed forward promptly and completed during the next two years.

Options

Strategic change for a school can take different forms. This can include:

• A change of business model, maybe changing the age range or becoming co-educational
• A charity merger with another local school
• A transfer or sale to a group, and
• A joint venture arrangement.

The remainder of this note will focus on options (3) and (4).

Sale to a group

A sale to a group is not something new and has been occurring for many years. Most of the groups which operate on a commercial basis will have at least one school which used to be operated by a charity. However, the frequency of those sales has increased over the past decade.

There are several advantages to this option. In particular a group of schools:

• Will likely have the necessary personnel and management tools to enable a school to thrive
• Will have the financial weight to provide a safe have
• Will likely benefit from its portfolio nature, so that short-term support can be provided to parts of the group when required
• May be well-placed to invest in the fabric of a school
• May be better-placed to provide training and specific career progression opportunities to staff.
• Any transaction involving a sale of a school by a charity to a commercial group will be structured as a sale of businessand assets. This will involve an asset purchase agreement being drafted and agreed; the purchaser’s due diligence of the school and its property; the transfer of any (freehold or leasehold) property interests; and employees transferring through the operation of TUPE (Transfer of Undertakings (Protection of Employment) Regulations).
• The asset purchase agreement is likely to contain a suite of warranties – contractual promises about the school and its affairs – which, together with the remainder of its terms, will often be subject to detailed negotiation. The inclusion of warranties may also mean that a disclosure letter needs to be prepared to protect the position of the selling charity.In addition – as a change of proprietor will have occurred as a consequence of the transfer – it is likely that a material change will have occurred and therefore prior consent of the Department for Education will be required. If a school has a child student and/or student licence from UK Visas and Immigration in place, a fresh application for a new licence will need to be made following completion of the transaction.
• The governors of a school will always be under a fiduciary duty to act in the best interests of the charity and its beneficiaries, and therefore must be reasonably satisfied that the commercial terms agreed are appropriate. However, on the assumption that the sale of most schools will involve a disposal of a property interest, it should be noted that the provisions set out in sections 117 to 121 of the Charities Act 2011 will need to be complied with and therefore either a supporting report from a suitably qualified surveyor or prior written consent of the Charity Commission will be required.
• In any event, the commercial terms will need to involve sufficient cash being paid at completion to repay any outstanding borrowing so that the assets of the school can be sold on an unencumbered basis.
• Joint ventures
• A new development recently seen in the sector is the consideration of innovative structures used as part of the approach to school strategy.One of these has been joint ventures between charities and commercial investors in relation to the ownership and operation of schools. These are still rare – we are only aware of a handful of successful transactions of this nature in the UK – but we have seen partnerships of this nature for many years now in the context of franchise schools operated overseas and, of course, sales of schools by charities to commercial groups were considered unique at the turn of the millennium and are now very common.
• There is flexibility as to how a joint venture arrangement of this nature could be structured (and could potentially involve the school business and/orjust the school property). We would anticipate, however, that the most likely structure would involve:
• 2. An investor capitalising a new company (which is to operate as the joint venture company)
  3. The charity reinvesting a proportion of the price into the joint venture
  4. The charity reinvesting a proportion of the price into the joint ventureThe joint venture company acquiring the school business and assets from the charity in a manner similar to that described above in relation to the sale to a group company, in return for which shares are issued to it
  5. An end result where, for example, shares in the joint venture are held between the charity and the investor on a 50/50 or 49/51 basis.
  6. 1. 3. The advantage to the charity is that it would continue to have some involvement in relation to the operation of the school and, on the assumption the school makes a surplus, it can receive a proportion of any profit as a dividend.In addition to drafting and amending the documents which would be used in relation to a sale to a group, there will also be the need for a shareholders’ agreement to govern the relationship between the charity and investor as shareholders.This will include a number of practical matters, but will also contain minority protection rights for any minority shareholder, which may include veto rights in relation to certain issues.As with any joint venture arrangement, it’s important to consider several issues such as: what each party brings to the arrangement at the outset; what roles and responsibilities each party will have during the lifetime of the arrangement; and how the joint venture arrangement comes to an end – and the consequences of this.This type of arrangement will not be suitable for all schools and probably requires investors with a particular outlook and mindset, but is neverthelessa development that broadens the range of strategic solutions available to schools.ConclusionIt’s clear that governors are now comfortable that discussions with commercial groups and investors are a viable strategic option available to them. This no doubt relates to the fact that those groups do need to operate schools as businesses in order to create a firm financial platform, and create a surplus in order to invest in the fabric of the school and safeguard the school’s position into the future.It has always been the case that strategic decisions should be taken as early as possible, from a position of strength given that the range of options reduces significantly when financial pressures are too great. However, the new challenges and headwinds only reinforce this – good commercial solutions that strengthens a school and puts it in the best possible position to face future challenges head-on should be on top of the agenda of every board of governors.