Before anything else…
A school isn’t your typical commercial business; it doesn’t make products or sell a straightforward service which will be perfectly acceptable to its customers as long as they serve their purpose and come with a good warranty. A school is a fluid organism with a variety of stakeholders – from parents, through employees to the local community – tasked with providing its pupils with the foundations for a future. Reflecting this, a school’s operation will be subject to a high level of public and regulatory scrutiny, and its failure will have consequences going beyond simple insolvency.
With that in mind, any seller’s or buyer’s first step onto the transaction ladder must be to undertake some preliminary due diligence to ensure the school is in a position to be sold and, if a buyer has been identified, that the aspirant next proprietor is able to ensure its future. For instance, a seller should ensure that the school is performing solidly and has strategies in place for continued excellence or improvement, while a buyer will want to look at its historic academic performance and ensure that it has the infrastructure in place to support and nurture the school in the future.
To a certain extent a buyer can undertake their initial consideration from a distance but once high level checks have been completed, a buyer will want to engage more actively with the school’s owners.
Proposing a price
Once the buyer is happy the school is a good target and/or fit for its portfolio, it will want to put forward an offer. There are a variety of different pricing structures to consider. For instance, a school performing well will likely be valued using an EBITDA multiple while a school with substantial property that’s performing less well may be valued on an asset basis.
Both the school’s sellers and its prospective new owner should ensure they take professional advice on how the school should be valued and what an appropriate price would be in the current market.
Agreeing the Heads of Terms
Once key sale terms have been agreed, they should be recorded in a set of heads of terms (also known as a memorandum of understanding). While not an essential step – and noting the commercial terms in the document are generally not legally binding – heads allow both parties to set out any red-lines (for instance, whether key management is to be retained) and will offer a party at least the moral high-ground if the other party decides to vary terms as the transaction continues.
Of course, it should be borne in mind that heads of terms are a good place to include obligations of confidentiality and exclusivity (two of the few legally binding terms usually contained in the document).