An e-mail arrives in your inbox from an investor who is interested in acquiring your school. You have been on their radar for some time and would complement their strategic mission. The message goes on to herald your institution and assures you there are financial resources necessary to get the deal done. At this point, you have mentally transported to a beach on your own exclusive island where time stands still. Then reality sets in and you have no idea what your school is worth, let alone if this a credible investor.
At some point, every institution will undergo a change of ownership. Whether through a sale or gifted to beneficiaries, voluntarily or involuntarily closed, ownership has a finite lifespan. The key is to be aware of this reality and be prepared to decisively control your options. Creating the team, knowing the value, understanding the process and identifying your market is the foundation to controlling your options.
Creating the Team
Once a decision to pursue a sale has been made, the first step is to establish a team. If the buyer has already been identified (family member or employee), then a commercial banker may not be needed. Whether or not a commercial banker is engaged, identifying an accountant/auditor and legal representative who understand the nuances of post-secondary education is wise. At this stage of a possible sale, confidentiality is paramount. Having a team that can navigate the process outside of the school significantly reduces the risk of the sale being disclosed prematurely.
Knowing Your Price
It is critical to have a realistic idea of what your school is worth before pursuing the market. The best way to get this information is to perform a Quality of Earnings (Q of E). Most schools are required to have audits so the prior performance information is available. However, this information does not identify one-time expenses, program development costs, excess compensation or the numerous other adjustments which affect the true earnings. In lieu of a full Q of E report, a projected adjusted EBDITA (Earnings Before Depreciation Interest Taxes and Amortization) is often used to gage value. The value is then a multiple of the adjusted EBDITA. In the post-secondary school market, there are specific metrics which have a direct effect on the multiple.
- Default Rates
- Placement Rates
- Accreditation Status
- Composite Score
- Program Offerings
- SFA Audits
- Program Review Determinations
- Student Complaints
- Industry Reputation
- Experience of Personnel
- On-Line Programs
- Technology (Website, Student Information Systems, etc.)
- Regulatory Changes (Gainful Employment)
- Borrowers Defense
- Capital Expenditures
- State Grants
- WIA Contracts
Ultimately, the school is worth what someone is willing to pay for it.
Understanding the Process
With team and price established, the process of the transaction should be established. A timeline is extremely helpful. Most successful transactions follow a similar five-step process.
- Initial Contact
- Signed Confidentiality Agreement/Non-Disclosure Agreement
- Letter of Intent
- Due Diligence/Pre-Acquisition Application
- Definitive Agreement
Most school transactions require state, accrediting and U.S. department of education approval. Each level requires applications to be filled out. The department of education has a pre-acquisition process that minimally take 45 days. Typical due diligence can by 60 days and 30 days back and forth on the definitive agreement. Unless these are done concurrently, the timeline after an executed letter of intent is at least 100 days. This is after the letter of intent is crafted. Finding a buyer and executing a letter of intent is difficult to put a timeline on.
Identifying the Market
After the team has been defined, a price range is established and the process is understood, the school is ready to go to market. At this point, a decision needs to be made on how best to bring buyers.
With all the federally mandated regulations involved with changes of ownership for schools, it is an advantage to have strategic buyers in position to avoid any education they would need to finalize a transaction. There are also financial buyers and possible industry partners that are looking to expand their scope.
For more information or if you have questions, please contact our Title IV team.