Go your own way
Courteney Donaldson reveals the secrets to owning your own school: How do you go about it? What are the risks? What are the opportunities?
It may sound a bit of a cliché but, for your school business to succeed,
whether for-profit or not, you’ll need to have a genuine passion for what you’re doing. Successful business owners never underestimate the amount of work they’ll need to put in and the potential impact on their family and friends. It’s not enough to be acquiring or starting your own business because you are fed up with working for someone else, or because you are tempted by the idea of a millionaire lifestyle, albeit rare in education. You won’t get there unless you have the deep enthusiasm and drive which are necessary to succeed.
HOW TO FIND THE RIGHT SCHOOL BUSINESS
For many company directors, school proprietors and trustees, the decision to sell their school can be a difficult one. Typically, they will want to keep the sale highly confidential to mitigate any risks associated with the potential departure of staff and/or pupils, uncertain as to what the implications of a sale may mean to them as employees, or concerns from parents on the implication that a sale may have on their children’s education.
Because of the confidential nature of the independent school sales market, it’s essential that, alongside making web and press-based searches for possible
acquisition opportunities, you work with an agent that specialises in the sale of education businesses. Concisely advise them of your specific requirements:
• What type of school are you looking for?
• What operational profile?
• What capacity and tenure?
• One with an established track record or a turnaround?#
Once the agent understands your strategy, they will be able to determine the opportunities currently available which are best suited to you. They are likely to ask you to sign a non-disclosure agreement prior to any sensitive information, such as management accounts, being released to you.
The agent’s role when acting for the vendor (business owner/trustees) is to introduce suitably vetted and serious prospective purchasers that have the prerequisite experience and financial ability to conclude a transaction successfully.
HOW ARE YOU GOING TO FUND YOUR ACQUISITION?
Ordinarily, most educational establishment acquirers will require bank or investor funding to finance their acquisition. First, speak to a financial broker that specialises in securing commercial mortgages for business acquisitions. This will ensure that your aspirations on the funding front are realistic from the outset.
Post-pandemic, and amid banks’ desire to mitigate risk, providing evidence of your educational experience and business acumen will be essential, and a comprehensive business plan will help to demonstrate this. Presenting both yourself and your business acquisition intentions and ideas in the best possible way to potential lenders is a vital part of securing any funding that you may need to acquire and invest in a business.
OTHER KEY CONSIDERATIONS
The agent’s primary objective is to achieve the best possible price for their client, often the vendor, and then subsequently support the transaction, from headline deal terms and price being agreed, through to completion. Most acquisitions will be subject to financial, operational, property, and legal due diligence and, if a bank or lender is to provide a commercial business mortgage/loan, it’s likely that they will require a formal RICS ‘Red Book’ valuation for secured lending purposes, along with a building survey so that the condition of the asset can be assessed and any defects or requirements for capital expenditure identified.
OTHER THINGS TO THINK ABOUT…
Location: this is of prime importance to the success of a school and dictates the catchment areas from which students will predominantly come from. Think about demographics, competitors, local trading conditions, fee levels, average house prices in the area and so on. If you intend to be a hands-on proprietor, locality will be a matter of personal choice for you and your family. Also, consider the direction of travel for the school. If you’re contemplating growing boarding provision and seeking to serve international pupils, then ease of access to international airports, roads and rail will be key.
Tenure: does the school trade from freehold or leasehold premises? Think about both the long term and the short terms, how much money you can afford, loan serviceability and surplus for reinvestment and any capital investment plans.
Property: consider the condition of the building and any repairs needed. If you are planning to acquire a school which has listed building status, do not underestimate the complexities and costs that ongoing regular maintenance and refurbishment may entail. Does the asset have scope for further development, or does it already benefit from purpose-built facilities which set it apart from other local competitors? Are sporting facilities held on the same legal title as the rest of the school campus, and, if they are leased or held on a licence, how secure are your rights as a buyer to occupy and use them?
FINANCIAL INFORMATION IS FUNDAMENTAL
Many factors determine the value of a school: its location, its buildings, their configuration and condition, the school’s tenure, its assets and liabilities, its fixtures and fittings, and goodwill. But the single most important factor associated with the value of a school when being sold as a going concern is its financial information. This comprises the business’s accounts, management accounts, cash flow forecasts, and profit and loss projections.
To be able to read your prospective school’s accounts, you need to have a good grasp of accounting principles, forecasting and business planning. A concise understanding of how the school is currently performing is essential, but the best way to look at accounts is to take as long a view as possible and to examine accounts from the previous few years.
Good, dependable and accurate termly management information will be vital. You and your accountant will have to decide whether the accounts represent the true situation and, from there, you should be able to determine whether the business is well run, is overpriced given the level of current earnings, and/or if it has potential for a more efficient commercial operation or growth via changes or expansion.
FORMAL VALUATIONS OF INDEPENDENT SCHOOLS
You may be considering buying an independent school, developing a new SEND school or sixth form, selling or transferring ownership of a school, or simply seeking to reflect the worth of your school in your accounts. In fact, any aspect of holding an interest in a property is likely to require a valuation at some stage. So, what aspects of the business form part of the valuation?
The calculations for the value of the school business will be based on the number of students in each year group, additional income, bursaries and so forth, and the valuer’s assessment of the sustainable level of occupancy or roll numbers. This will have regard to historic rolls and factors that might affect future rolls. The level of fees being charged will also be considered, as will the scope for fee increases and other potential revenue- generating activities.
The four main categories for assessment are:
• Direct costs
• Premises costs
• Administration costs.
The end figure, or ‘market value’, includes the property, the fixtures and fittings and any goodwill attributable to the business. To calculate this, the level of operating profit is multiplied by the appropriate multiple, known as a ‘years purchase’ (YP) for that property. The YP is selected by benchmarking against comparable evidence from the sale or acquisition of other broadly comparable independent schools. This YP needs to be evaluated carefully to reflect the security of income streams, potential for growth or diminution in trade, the attributes or shortcomings of the school (and/or its assets), the strength of demand from purchasers/desirability of the business (and assets), location, availability of finance and potential serviceability of loan/mortgage. The valuer will primarily have regard to transactions involving other broadly comparable schools. This evidence of actual sales is then interpreted in relation to the subject property.
UNDERSTAND THE MARKET
Before you formally begin the process of buying an independent school, speak to a specialist business property advisor about the market so you have a good
understanding of pricing, competition etc.
During 2022, the volume of operational independent school transactions was suppressed in comparison to previous years, primarily due to financial performances being largely distorted for the academic years 2021-22 post- pandemic. Across the UK we saw an increase in smaller independent schools making the difficult decision to close and when those properties were presented to the market, a lot of interest came from SEND and specialist education providers.
The UK independent schools market continues to be highly fragmented and, therefore, opportunities for corporate groups and investors to acquire via portfolio buy and build strategies are not as prevalent when compared to the volume of opportunities in other operational real estate sectors. Established schools, with high rolls and a solid track record of stable and established earnings, continue to be highly sought after by buyers, as do smaller schools which may have closed but could be converted to a more specialist education use, or offer potential for alternative use.
Courteney Donaldson is managing director, childcare and education for business property advisor Christie & Co.