BRCA’s History of Building School Owner Wealth
In the beginning…
Before BRCA was founded in 1994 by Ed Routzong and Dean Bailey, things worked differently for school owners when they were ready to exit their business, and the outcomes for those owners were shocking to Routzong and Bailey. At that time in the industry, school owners selling their business were mostly limited in terms of potential buyers to their employees, other family members, or maybe some individual from their local community, as the larger companies in the school operating industry focused their growth on building new school units only.
Routzong and Bailey had been shocked to learn that the almost universally accepted formula for a business’ value in the school industry was $1,000 per licensed space of the school! In the general marketplace of valuing businesses in all other industries, that value has always been based on a multiple of that business’ earnings, with the multiple depending on the type of business being sold.
In response, Routzong and Bailey’s mission for their business was to assist family owned school operators to get paid for the business they had built in the same manner as all other industries…
a multiple of earnings of the business. However, another hurdle loomed. Even if their client school owners could establish a value based upon a multiple of earnings, the available buyers would have to have an appropriate amount of capital to pay that price or the owner would end up carry a note for too large a percentage of the purchase price to be secure that they would ever receive the full payment for the business.
Routzong and Bailey saw the coming remedy to this barrier in the trend at that time in the industry for the larger companies to go into public ownership. Why? In public ownership, the company’s shareholders will demand that the company grow its revenue and earnings at double digit pace annually. However, the truth about these companies was that the historical method of growth they had used—limited to building new school units—was so long a process from start to finish of a new location that the required double digit growth could not be achieved.
Routzong and Bailey realized there was a coming change in the industry—that the large companies facing the shareholder demand for high growth rates could only achieve those targets if they acquired existing revenue/earnings from currently operating schools as opposed to relying on just building new units. So BRCA began working with the large companies in the industry that already had or were going to public ownership to consider acquiring their clients’ existing schools, and on the valuation basis of a multiple of the client school’s annual earnings versus the prior industry standard of $1,000 per licensed space.
This change created a huge difference for BRCA clients from what they would have previously received for the business at sale.
As an example, a school licensed for 150 children:
- at the historical valuation of $1,000 per licensed space = $150,000 total value
- at a multiple of earnings of a 150 licensed school with industry typical earnings calculates such as $150,000 earnings times 3-5 multiple = $450,000- $750,000 value range
BRCA’s History of Building School Owner Wealth
The next big step…
The significant majority of family owned school business operators also owned the real estate that housed their school operation. Equally shocking to Ed Routzong and Dean Bailey was that when a family owned operator sold their business to the limited pool of available buyers the typical sale agreement included the buyer leasing the real estate from the existing owner in an amount that equaled the owner’s existing mortgage payment.
This of course created the triple- whammy of the school owner receiving an extremely modest value for their business, carrying the note for a substantial portion of the purchase price, and hoping that their new tenant would operate the business effectively so that they would eventually be paid off on that and could pay off their mortgage over time.
Again, Routzong and Bailey found this outcome for their clients to be unacceptable, and their work with the larger companies in the industry to become buyers paid off again relative to the real estate involved in their clients’ exit transaction. Until recent years there was little capital available or interest in the investor marketplace buying school properties as they were considered a “non-conforming” property type relative to office buildings, shopping centers, industrial buildings and other types of primary investment properties recognized in the marketplace.
However, a new trend to that marketplace, being large volumes of capital in the hands of institutional investors in the form of “hedge funds” and Real Estate Investment Trusts(“REITs”) were beginning to create new demand for a wider range of investment type properties including some “non-conforming” properties like schools buildings, if that property was tenanted by a financial creditworthy company.
This new availability of investor capital was the key to BRCA’s finding a key fit for their clients’ school real estate. The large companies that BRCA was selling its clients’ school businesses to virtually always lease the real estate versus buy it, and that structure fit perfectly for the newly found capital sources, as with this new tenant in place on a long term lease , that property suddenly increased in value by 25%-30% on BRCA’s average transaction…….. in short, enhancing the value of the client’s real estate by an average of $500,000 or more versus its value with the family owned business being the operator of the business!
In summary, since the mid 1990s, BRCA has accomplished its average client transaction value for business and real estate going from approximately $1,000,000 to over $2,800,000 per location!
As one of our many clients told us recently, “you guys have really changed people’s lives”!
Building Income for Our Clients After the Sale
The previously ignored step…
Even though the BRCA team has been thankful for its success in meeting its original mission challenge
in behalf of its family owned school business clients, our many years of experience with so many clients and school transactions had revealed to us that we couldn’t consider the mission complete…… we had one more step to accomplish that we had not originally envisioned.
In recent years we had realized from our clients that just maximizing the financial rewards they received from their school business and real estate they had created did not completely satisfy their needs for service. Of course the total $ number that we could create in a transaction for our clients was generally the primary goal of our efforts with those clients, but BRCA finally recognized that the total $ number was not the most critical question the client needed the answer for……… the real bottom line answer they needed was…… “after the sale, what is my spendable(“after-tax”) income going to be to support my desired lifestyle if I am no longer working”?
And that essential question cannot be determined by just a large $ number for a transaction because each client’s situation is case specific as to any additional sources of income they have, their forecast federal and state income tax obligations in the future, financial needs for a satisfactory lifestyle or to fund other activities that they may be planning, and future earnings opportunities to offset the erosion of the investment corpus to inflation. The truth is, unfortunately, that the broker community in the business of marketing schools for sale had never attempted to assist its clients in finding this answer for the most critical question that should be answered as a business owner contemplates their exit from their business…….. “what is my spendable income going to be after the sale”?
Well, BRCA assist its clients in finding that answer, because we don’t just “sell schools”…….. BRCA really cares about our clients will accomplish for the time after the sale! The BRCA system starts with pre-planning with the client before time for the business to be marketed to buyers. Working in tandem with our own professional staff and consultants, and the client’s financial or tax advisors, a plan is created for the intended transaction to maximize the client’s values for a tax-advantaged transaction outcome with the after sale “spendable income” defined.
The BRCA client is also provided , on an exclusive basis for those BRCA clients, information regarding future investment opportunities made available by BRCA that are designed to provide significantly higher investment yields than similar investments in the marketplace. BRCA is committed to providing an enduring relationship with our clients that offers the client ongoing attractive earnings opportunities.