Over the past 18 months we have seen an increase in mergers and acquisitions in the independent schools’ sector. This has partly been driven by Covid-related factors exacerbating existing financial issues for some schools, but Covid itself has caused increased costs and in some cases reduced income, such as from international students. There remain a range of buyers who see education as a strong investment and the sector has also seen some schools expanding to create larger, consolidated groups.
In order to achieve the best outcome, in the most efficient manner, once the decision has been made to sell a school, the owner, Governors and senior management should aim to be as prepared as possible prior to engaging with potential purchasers. This will make the sale process easier to manage, quicker, more cost-efficient, and should ultimately lead to a better outcome and realisation of value for the school.
A sale process will involve a significant investment of time on the part of school management. For example, the school will need to populate and maintain a virtual data room for the benefit of potential purchasers, respond to often extensive questions from the purchaser and the purchaser’s legal and financial advisers, and seek advice throughout the course of the sale from the school’s own advisers on how to obtain the best deal for the school and mitigate risk.
Often the Bursar will have a material role in liaising externally with the school’s advisers and potential purchasers, and liaising internally with the school’s governors and other stakeholders.
In this article we set out a selection of key items of preparation to focus on with the aim of maximising value for the school and minimising management time spent dealing with the sale at the expense of running the school as normal. In most cases, these also reflect good governance of a school aside from a sale.
Good governance: long term practices to increase value
Good governance is important to ensure that schools are ready to deal with a sale and that proposed purchasers can be provided with reassuring answers to their questions in a timely fashion. This should in turn save on time and costs and may also increase the value and attractiveness of the school.
Conversely, a school which lacks these solid foundations is likely to find that proposed purchasers are particularly sensitive to examples of non-compliance or the omission of evidence of good practice. As a result, taking steps in the long term to ensure good governance practices are embedded throughout the school is the best “first step” to preparing for and anticipating a smooth and successful sale.
When looking at a future sale, the key facets of good governance on which to focus include:
- implementing oversight of key regulatory requirements, including in respect of data protection, commercial contracts, charity law (if applicable) and any licences required to run the school;
- ensuring the school’s records are kept up to date and in compliance with relevant legislation and best practice and that all relevant policies are documented and kept up to date; and
- maintaining positive relations with key stakeholder groups, such as parents, staff and the local community.
Good governance practices do, of course, cover a range of other factors, and it is important that schools have good governance in place for a variety of reasons other than for a sale.
Compliance with key regulatory requirements
Focusing on regulatory and legal requirements to which the school is subject is vital to concluding a sale at a good price in an efficient manner. Potential purchasers will focus on adherence to any licencing requirements (for example, immigration licences for boarding schools), safeguarding, data protection rules and educational standards, and any non-compliance will be seen as a potential red flag. Problems in these areas may affect the price that the purchaser is willing to pay, lead to protracted negotiations about contractual protections for the purchaser or, at worst, risk the transaction.
Having considered these requirements over the long-term and diligently documented adherence to them is the best approach a school can take. Bursars who are able to point to evidence that the school is fully compliant, and convincingly explain any issues which may arise, during a purchaser’s due diligence will not only save valuable time on dealing with queries from lawyers but will also demonstrate the strength of the overall governance at the school. This latter point is likely to appeal to a well-advised purchaser.
Keeping up-to-date records
Ensuring records are up-to-date has a similar effect, as purchasers will want to see information on a wide range of topics within the data room. These topics are likely to include information on school staff, pupil numbers, safeguarding, contracts with parents and key suppliers and the school’s properties. Detailed financial and accounting records will also be important.
Having an up-to-date record of these matters will streamline the transaction process from the school’s perspective, and will again provide comfort to a potential purchaser.
In the event that no such record exists (or the records are inadequate) when a sale is first contemplated, schools should carry out a review of key contracts, employee information and their records of pupil data as soon as possible with a view to getting these in order.
Engaging with stakeholder groups
Investors and potential buyers are increasingly looking for businesses, including schools, which have considered how their stakeholders are relevant to their success and have taken actions to build strong relationships with those groups. For schools, these groups are likely to be pupils, parents, staff and the local community, as ensuring positive relations with these groups is likely to support the long-term success of the school. This has been particularly important during Covid.
Evidencing strong relationships with these groups through engagement with school events, providing opportunities for parents and pupils to feedback and keeping records of any complaints and how they were dealt with will ensure that potential purchasers understand the school’s engagement with these stakeholders. Well-advised purchasers are likely to view positive engagement with, and an appreciation of the importance of, relevant stakeholders as an attractive quality in a school, which may in turn drive a higher price.
Ensuring existing contracts work for the future
Once a future sale is contemplated, existing contracts should be reviewed to ensure that they can be easily assigned or transferred to a purchaser. This is especially important for the parent contract. Any potential problems should be identified at this early stage, and schools should take care to resolve any issues which can be addressed before it becomes an issue to a purchaser.
Making changes too close to a proposed sale, or making changes at an abnormal time (eg in the middle of the school year, rather than at the beginning when new contracts are typically entered into) may indicate that a sale is being contemplated. As a result, knowing where these issues are likely to arise and dealing with them in a timely fashion will assist in the smooth (and confidential) running of a sale process.
News of a sale can be unsettling for pupils, staff and parents, especially if a potential sale is raised and then does not go ahead. As a result, keeping the sale confidential is vital for ensuring an orderly sale process.
Bursars, governors and senior management should therefore ensure that all of the necessary parties sign robust non-disclosure agreements, and that the minimum number of people as possible is involved in and aware of the transaction. Deciding who forms this key internal transaction team ahead of time will reduce the likelihood of potentially costly and disruptive leaks of information.
In order to cover the risk that details of the sale are disclosed, consider having press lines and statements to staff, parents and alumni drafted, agreed and ready to be published in the unfortunate event of a leak. The question that all stakeholders will ask is inevitably “how does the sale affect me?”, and so being able to be quick off the mark with clear, effective, consistent and transparent messaging should help prevent a leak from becoming a deal breaker.
Obtaining a valuation: what is the school actually worth?
One of the keys to ensuring that the process runs smoothly is ascertaining, as soon as possible once a sale is being considered, what the value of the school is. This will involve external professional valuers who should be instructed early on to value the business of the school, its property and any other high-value assets.
This also requires consideration of what exactly is going to be sold, for example whether any properties will be included in the sale and whether the sale be structured as an asset sale or a company sale. Schools that are charitable will need to consider charity law parameters in structuring a sale. For more on this issue, see here.
Bursars, governors and other senior school leaders should also be aware that a professional valuation will not be the end of any discussion around price. Factors such as a track record of good governance (as outlined above), any risks noted by the purchaser during their due diligence and the relative negotiating positions of the parties will all also affect the final agreed price.
However, receiving professional valuations early on will ensure that a school is prepared to receive offers from potential purchasers in context and to evaluate those offers accordingly.
The decision to sell a school can be a difficult one and the process itself can be daunting. Taking the steps outlined in this note will alleviate some of the pressure on Bursars throughout the process and should lead to an improved outcome from offer through to completion.
Please note this content was originally published in the Autumn 2021 edition of the Independent Schools’ Bursars Association (ISBA) termly magazine, “The Bursar’s Review”, issued October 2021, and is reproduced with the kind permission of ISBA.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2021