Over the last few years, the largest operating companies in the early education industry have all come under the ownership of private equity group (PEG) sponsored investment funds.
As discussed in a previous blog, these PEGs are also referred to as “financial, single-purpose companies” because they are newly formed entities that operate with the single purpose of acquiring other existing school businesses, doubling the size of those entities, and then “flipping” them to the next-level of PEG funds that will repeat the cycle.
The Truth Behind a Private Equity Group
This is not to say there is anything wrong with these single-purpose companies, entirely. PEGs are owned by investment funds that are looking for strong yields, which is the case with all for-profit businesses across any industry. These entities often hire high-quality staff to serve on the front lines of everyday operations. They are generally well managed and place a strong emphasis on programming and industry accreditation for their schools.
Additionally, these companies are the most frequent buyers of family-owned schools. The need for these PEGs to grow rapidly has even increased the value of real estate for many school owners, allowing for additional pricing leverage.
That being said, when a school owner decides to exit their business, these PEGs do not want to hear that the owner has a school industry expert representing them in that exit process. Why?
Because an expert in the school industry will help the owner avoid a scenario that is full of potential disadvantages.
Why PEGs Pose a Threat to the Sale of a School Business
These PEGs are under pressure from their investors to acquire income streams from existing schools as the fastest way to meet investor requirements. The most effective way these PEGs can do that — while making acquisitions at the most favorable price for their interests — is to contact a school owner directly to negotiate business and legal terms in favor of the PEG.
The PEG makes a purchase offer prior to performing financial due diligence, and if accepted, it does not allow the owner to market their school(s) to or negotiate with any other potential buyers while the agreement is in effect.
Needless to say, restraining the owner from obtaining purchase proposals from other potential buyers limits the owner and provides the PEG buyer a grossly uneven playing field. Imagine someone knocking on your door and making an offer on your home and not permitting you to see what others may pay you for it.
Unfortunately, there are still several owners across the U.S. who unintentionally pigeonhole themselves into this situation resulting in valuable money left on the table.
Even though school industry experts often maintain a constructive relationship with these PEGs, they will ensure that every transaction provides a level and fair playing field for all parties involved, especially the school owner.