Law firm VWV partner Siân Champkin assesses the implications of VAT on fees for merger activity in the independent schools sector

With the confirmation by the chancellor of the removal of the VAT exemption on school fees from January next year, there has been increased vigour in an already active education transactions market with a number of projects being brought forward and requiring to be announced at the start of the new academic year or shortly thereafter.

The VAT announcement being made during the summer holidays, and the earlier than expected introduction, has meant schools have been required to make urgent plans to prepare, but this has not sidetracked them from strategically important projects such as mergers – indeed it appears to have fuelled increased interest in consolidation strategies.

Interestingly, we have also seen a number of previous clients returning to us to advise on further mergers, having seen significant benefits derived from mergers they have undertaken in the past. It is clear that for many, pursuing a ‘group of schools’ strategy to build up economies of scale, as well as increasing expertise and assets on the balance sheet, is working well. Of course, there are exceptions to this, and care should always be taken when considering undertaking a merger or acquisition. The importance of thorough due diligence, beyond legal and financial, should not be underestimated. Commercial due diligence on feasibility, demographic factors, local market nuances and parent profiles should form part of every transaction.

Arun Kanwar and Ali Hinds from Cairneagle, an international strategy consultancy specialising in education, comment as follows. “Schools should continue to focus on financial resilience. It is important to acknowledge that there will be winners and losers in the sector and the surviving schools in any given catchment could end up fuller if competitors close. Furthermore, increasing numbers of schools are finding creative ways to build their income streams, foe example, through doubling down on tailwinds in the nursery (VAT exempt) or SEND sectors, or by unlocking value in other creative ways.

“There is also a resurgence in exploring internationalisation – the recent IPSEF (International and Private Schools Education Forum) conference was well attended by British schools exploring franchising or operating opportunities abroad; there needs to be some thoughtfulness here to avoid schools pursuing the same regional opportunities internationally and saturating local markets.

“There continues to be a place for M&A and strategic partnerships. For a sector that has undeniable headwinds, there appears to be quite a lot of appetite for investment, from for-profit groups, charitable trusts and other investors. Mergers and acquisitions have various rationales, including shoring up local market share (for example, retreating to one site if two schools merge), creating all-through provision, benefiting from a combined balance sheet to weather the storm, and having scale benefits in the back office. There are clearly differences if not-for-profits combine (no money changes hands) versus when a for-profit is involved, either as buyer or seller (because there is likely to be a cash consideration).”

In conclusion, we do not anticipate that the implications of VAT for the M&A market are negative, in fact the opposite appears to be the case. The benefit of having appropriate backing, that is, groups being better able to survive, or charitable mergers to bolster scale, are still contributing to mergers and acquisitions and we do not see this activity reducing.

Siân Champkin