2021 was a busy year for mergers and acquisitions in the education space. Our Corporate Finance team were engaged on five education transactions throughout the year and are continuing to advise several school owners preparing for sale this year. We expect the momentum to continue as schools look for greater financial certainty in a group environment.
If you are thinking of selling, merging or acquiring a school, we have put together our top tips for how to avoid the common pitfalls:
1. Have all your information ready – buyers will need to review three years’ worth of historical financial information together with data on your pipeline, debtors, deposits, cash flow, budgets, capex, governance, reporting, safeguarding, contracts and much more. Ensuring you have this information easily to hand, reconciled, complete and accurate will avoid delays and the loss of momentum for any transaction.
2. Forecast accurately – this is essential for maximising outcomes from a sale process as buyers are purchasing the future, not the past. Consider your school’s pupil cascade, as well as your pipeline and past trends so that buyers are comfortable with the likely future results.
3. Be mindful of any change of control provisions in your contracts with parents – buyers may be concerned if the sale of the school gives parents freedom to take their child out without notice.
4. Be honest about the state of your school building – school buildings are often the biggest asset on your balance sheet and buyers will almost always undertake detailed surveys to confirm the state of repair and capex requirements post-acquisition. Ensuring that your planned maintenance pre-sale is adequate and any required remediation works are disclosed upfront will avoid renegotiations later in the process.
5. Have the correct planning permissions – checking your school is registered under the correct planning use class and that planning permission has been obtained for any previous works saves delays later.
6. Don’t forget about deposits and payments in advance – we often see schools with long-term payments for fees in advance and deposits on their balance sheets. While these undoubtedly provided a cash flow benefit at the time they were collected, understanding that these are now a liability is important. If these funds have not been kept ringfenced for future cash flow requirements, buyers will take this into account in any valuation.
7. Stay on top of your costs – we often find that schools are not on top of all their costs as well as they could be, which can damage profitability. Ensuring robust procurement of services is a priority and will also help you maximise pre-sale profitability and valuation.
8. Consider the real benefit of offering the Teachers’ Pension Scheme (TPS) – a number of independent schools continue to offer the TPS to teaching staff. With an employers’ contribution of 23.68% on top of your largest expense of salaries, this is a significant cost to the business which can reduce profitability. Many schools have successfully reduced this cost through consultation with staff for an alternative pension provision arrangement without materially impacting staff retention. For school owners looking to maximise profitability and sale valuation, proper consideration of the actual benefit of the TPS to schools is essential.
9. Bear the Charitable Rates relief in mind – 2021 saw a number of charitable schools struggling and looking for new investors. If you are considering this path, be aware that if a school becomes a ‘For Profit’ organisation when it was previously a charity, the loss of charitable status will result in an increase to your property costs as rates relief is lost.
10. Take advice on contracts for staff who are paid as consultants – ensure such individuals don’t fall to be treated as employees in the eyes of the law. For example, there could be implications for national insurance, holiday pay and maternity pay which a buyer will expect to be indemnified against.
11. Keep an eye on accommodation arrangements for staff – staff may have enduring rights to use school accommodation which could limit a buyer’s options and affect the price offered.
Having completed over 500 transactions, including 57 in 2021, our team of corporate finance experts has successfully navigated even the most complex of situations for our clients.