Your Guide to Buying and Selling a Private School

The unknowns that come with buying and selling a private school can be overwhelming.

There’s a lot that goes into valuing, purchasing, and maintaining a private school. That’s why JAG Consulting Services is here for you, to help walk you through the process. So you know what to expect, when to expect it, and what to do when challenges and obstacles obstruct the path to becoming the proud owner of a reputable and well-operated school.

To know what to expect, we have broken the process down to:

• Valuation Process/Offer
• Due Diligence
• Financing
• Definitive Purchase and Agreement/Closing

Every sale and purchase of property is different and unique. The steps we listed above will provide you with a framework of how things typically progress during the sale of a private school.

First Things First

In the early stages of buying a private school, the first thing you want to determine is defining what is being transferred from the seller to the buyer. Are you agreeing to the purchase of the entire school or just the assets?

You’ll want to know the difference between a company sale (purchasing the whole school) vs an asset sale.

These are ways to spot the difference between the two:

Company Sale

A company sale is preferred over an asset sale when looking to buy or sell private property. When you enter into a company sale as a buyer, you agree to 100% ownership of the entire property/company, including all historical liabilities.

Company sales also provide more continuity for all that’s involved in running the school, like contracts, Department of Education consents, accreditation, and employees.

Asset Sale

An asset sale is when the seller keeps certain assets/liabilities from the sale of the property/company.

What’s the Price?

Now that you know the difference between a company and an asset sale, the next thing you’ll want to figure out is the price.

Many different factors go into valuing a private school. Some are more obvious than others. For instance, a school in a good neighborhood will value higher than one located in a bad area, but the location isn’t everything. When it comes to private schools, what’s not seen usually drives the value, like a rich history or tradition that comes with the school.

Here a ways to determine the value of a private school:

Reputation

The school’s reputation is more critical to the school’s value than the property’s condition or location.

The reasoning for this is that a school with a positive reputation attracts more students. More students means more tuition.

A positive reputation could mean the school has a certain level of prestige, rich history, or well-known name attached to it.

Location can also have an effect on a school’s reputation. A school located in a good area will have a higher standing than one that is not.

Rankings also play a role in the reputation of a school. For example, a school that’s ranked high in academics at a national or international level will have a better reputation than one that isn’t.

Finances

How financially healthy is the school? Are the profits high? Or are they swimming in debt? These are things you’ll want to find out to value the private school correctly. Income statements from previous years as well as any projected Income statements for future years will come in handy here.

Another important bit of information you’ll want to know to determine the school’s financial health is any restrictions or regulations that affect profit. The government heavily regulates schools, even private schools, so making sure you know everything that affects the school is essential.

Insisting that the seller provides a full disclosure of assets and liabilities, a truthful disclosure opens the door to constructive negotiations down the road, so making sure you have all the financial information to determine value is critical.

Competition

Find out what other schools are nearby. For example, is the school located in an area with 30 other private schools? If so, the value will not be as high as a school with no other competition in town.

Suppose your school is located in a highly competitive area. In that case, you’ll need to consider the cost of scholarships, financial aid, transportation, etc., to offer students a way to drive up attendance.

Keep in mind, though, that a school located in an environment that is too competitive means you’re facing the possibility of accepting anyone who applies, which negatively impacts the school’s reputation.

Here’s the key takeaway:

• Low/no competition = higher value
• High competition= lower value

Enrollment

The size of the school’s student body is one of the most important factors for determining the value of a private school. A school with more students means the school receives more tuition payments from parents.

The school’s amount of money in tuition isn’t the only reason why a larger student population contributes to a school’s value. It also conveys the message that the school has the ability to attract a large volume of students, and this ability alone gives a school value.

You’ll want to find out how many students enroll each year and how many applicants the school receives each year to determine the school’s value correctly.

Staffing

If you’re considering purchasing a fully staffed school, and you intend to keep the staff, then knowing the quality of the team is crucial to determine the value.

The staff is by far the most essential factor to consider when determining a school’s value. A school could check all the boxes for reputation, enrollment, competition, and finances, but if that school has a low-quality staff, the school is doomed to fail. You may be the captain, but the staff is the crew that’s helping you operate the ship.

The quality of the staff isn’t the only factor to consider, the size of the staff is just as important.

Finding out how many full-time teachers and substitute teachers the school has available will tell you if you have enough staff members to operate a school successfully. In addition, learning the average salary for each teacher will tell you how much it will cost to maintain the staff.

Find out if there are positions that need to be filled as well as the qualifications each staff member will be required to meet to maintain their position. Because you’re the employer, you’ll be responsible for making sure they meet these qualifications, which affects cost, so knowing this information will give you a better way to forecast expenses and determine the value of the school.

You can request letters of recommendation from previous/current teachers who have a long history with the school to better understand the school, staff, students, and overall morale.

Recap

Factors that give value to a school

• Good reputation, prestige, high rankings
• High profit, no debt, few government regulations
• Little to no competition
• A high volume of students, ability to attract students
• Great staff that meets all their qualifications

Factors that take value away

• Poor reputation, low rankings
• Low profit, high debt, many government regulations
• Highly competitive
• Low volume of students, unable to attract students
• Poor staff, missing staff members, understaffed, unmet qualifications

Third-Party Professionals

When you enter into a private sale, you’re inadvertently entering into a situation that contains a degree of risk. While you may be competent and capable of properly sifting through documents, graphs, reports, etc., to determine a school’s financial status, it is highly advised that you seek the help of a third-party professional to take on this task for you.

It takes a significant amount of time and concentration to properly go through all the required information to learn more about a school. Therefore, you’ll want someone who is trained and trusted in your corner to explain all their findings to help you better understand the scope and valuation of the private school you are looking to purchase.

Making an Offer

Once you have all the information you need and feel ready to make an offer, a member from our team will walk you through the offering process. The process of making an offer can go smoothly, where the seller takes the offer and agrees to all the terms laid out, or it can be lengthy and filled with compromise and negotiations.

Either way, having a professional who knows what they are doing and understands the business and terminology will make a world of difference and take the stress of purchasing a private school away.

Due Diligence

Due diligence is something that is done by both parties to determine the accuracy of all the facts and information being presented. This may involve an audit, investigation, or review to learn about the school’s history, staff, finances, etc. All to make sure you are getting the deal you think you’re getting, and there are no unforeseen expenditures or obstacles that pop up later on down the road.

While due diligence doesn’t predict every hiccup and bump that the future holds, it does provide a framework to let you know what you’re getting yourself into. Due diligence can reveal anything, like:

• Calculations on school’s turnover or profit
• Financial reports that show multi-year growth trends
• Property value
• etc

The more information you have regarding the property you are considering purchasing, the better. The more you know, the better you can determine the property’s value.

Financing

Anything can happen in the transaction of property between buyer and seller. It mainly comes down to what both parties are willing to agree on and negotiate, determining what occurs in each transaction.

When it comes to purchasing private property, there are typically two ways to make the actual purchase: up-front payment or deferred payments.

Up-front Payment

Payment up-front is exactly what it sounds like. It means the buyer pays for the full amount of the property at the time of purchase. While this is an ideal way to purchase property, it is not the most common way.

Deferred Payment

In most situations, buyers use a method that involves deferred payment. Deferred payment is when the buyer pays a portion of the property value up front, and then pays the rest off in lump sums for a specified duration of time. There is a level of risk involved for the seller when this method is used. However, there are ways the seller can protect himself in this situation.

Definitive Purchase and Agreement/Closing

At this point in the process, all information has been disclosed. The value has been properly determined, and an offer has been made. It’s common for negotiations between each party to pass back and forth before reaching this phase, remember-there is no determined amount of time it takes to purchase the property and receive the keys to the building. It could take days, weeks, months, or even years in extreme cases, so it’s important to remain patient and work with a team that communicates each step of the process truthfully and openly.

This is the part of the process where contracts are signed, finances are taken care of, and the keys are transitioning from the seller’s hands into your hands.

Conclusion

Overall, purchasing a private school is a huge undertaking. It is a very serious financial investment and should be treated just as seriously. Entering into a bad deal, not learning about huge setbacks and liabilities before agreeing to purchase, and not understanding this type of property’s market or market value will all become a hindrance for anyone willing to take on this task.

That’s why JAG Consulting Services is dedicated to walking you through this process and explaining each step of the way, so you know and understand what is happening. It’s impossible to make a good deal when you don’t understand what is going on, that’s why we not only help you through it, but we explain every detail to you, so you know what you are getting yourself into.