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I'm Dr. Jeannie Gudith, Founder and CEO of JAG Consulting. We help you develop, improve, buy or sell your private school.
There is keen attention now on the sale and purchase of private schools. This indicates an overall interest in the education sector. Private schools appear to be a substantial investment in an uncertain market. This strategy seems to be true for private equity buyers, between schools and charitable and non-charitable organizations. It offers significant opportunities to consolidate, expand, or raise funds for investment elsewhere.
The outcome of a business sale is primarily determined before a market listing. Profitable private school listings are the culmination of a preparation process that began months or even years ahead of time. Everything the Head of School and/or Board implements to increase market share and profitability has an impact on the final price of a private school.
Following are aspects you need to contemplate in the early stages of the process if you are considering acquiring or divesting yourself of all or part of a private school.
First, you need to determine what is being sold and for what price.
Knowing the name, address and reputation of the target school is a start, but not enough. A school is not an identifiable legal asset as such. You need to be able to define precisely what will transfer from seller to buyer, and the first question to ask is whether the sale will be of the operational company (the school) or the assets of which make up the school.
As a broad rule, a company sale is preferable…., particularly for a seller. This type of purchase will take all its historical liabilities with it although the parties can agree to clauses in the sale agreement that deviate from this standard position. However, as a new owner of the company, the buyer will be liable in the first instance for any issues arising after completion of purchase.
There are different legal operating vehicles for private schools. The easiest for buying and selling is as a private company. Sale of a guarantee company is not impossible, but it is with many challenges. As a private company, shares are the neat economic units designed for purchase and transfer.
If possible, it is encouraged that both parties consider a company sale. A company sale offers a secure level of operational continuity for all involved, such as contracts, department of education consents and any other employee or accreditation processes.
This type of sale is where the seller will retain liabilities relating to the period before completion of the transaction, and the buyer will take on the risk from that point.
Either way, the buyer should do due diligence to reveal any hidden or historical issues that may fall onto the buyer post completion of the sale. As well as the liability divide explained above, an asset sale allows both seller and buyer to choose which assets will be included in the transaction. The assumptions are that everything will be sold:
• Supplier contracts
• Teacher contracts
But some assets will not be transferred, particularly if the sale is between two schools. The buyer may already have supplier contracts they want to implement. Equally, a seller may need to retain certain assets for their future use.
The market value of a school will be both a commercial and financial matter. Calculations on the schools turnover or profit will be a reference point. And it would be especially helpful if financial reports demonstrate a multiyear growth trend for potential buyers. However, the parties will most likely consider the value of any property transferred as well.
It’s advisable to employ an external professional valuation in this process. This will provide an assessment of property, high-value assets, and the value of the business as an ongoing concern.
Once the decision has been made on the amount, legal discussions should commence on how the payment will be structured. A price is not truly settled until the payment dates and structure are also agreed upon.
Professional valuations aside, a private sale can’t be entered into without a degree of risk and compromise on both sides. The agreed price will reflect market value but also the relative bargaining power of the parties.
Most sales happen as deferred consideration. Some of the price is paid upfront. The remainder is arranged for a later date – in a delayed lump sum or a series of deferred payments. There is no legal limit on what proportion of the amount is suspended or for how long. It is up to the bargaining and agreement of each side of the acquisition. For a buyer, deferring payment can be useful, allowing them to partially fund the purchase using revenue from the school.
Where it is agreed not to pay the whole purchase price upfront, there is always going to be a degree of risk for the seller. However, subject to individual legal and taxation advice, there are options available which offer protection and will hopefully put some assurance into the sale.
Buying or selling a school is a substantial operational undertaking, and it can be tempting to jump straight into due diligence and practical considerations. However, it is in neither party’s interests to invest too much time, and money in the process before the fundamentals are agreed. Nor is it helpful if critical terms are left for late consideration when one or both parties may be under pressure to ‘get the deal done’.
Hopefully, this briefing has given you an idea of some of the options available to you so that an explicit agreement can be reached on the scope and value of the transaction before more detailed discussions begin.
This information is a general summary of what needs to take place at the beginning of the process of purchasing or selling a private school. It should not replace consultations with brokerage, legal and taxation professionals before deciding, so you acquire advice tailored to your specific circumstances.