If you are presented with a situation that seems too good to be true, chances are it really is.

Lately, many school owners are receiving offers from large private equity groups (PEGs) in the industry. In recent years, the largest operating companies in the early education industry have all come under the ownership of PEG-sponsored investment funds.

These PEGs are also referred to as “financial, single-purpose companies” because they operate with the single purpose of acquiring other existing school businesses, doubling the size of those entities, and then “flipping” those entities to the next-level PEG funds that will repeat the cycle.

While an offer from a PEG may seem enticing at first glance, be warned this scenario is full of potential disadvantages, which a capital advisor specializing in school businesses can help you avoid.

Receive Maximum Value When Selling a School Business

One of the most notable disadvantages of working with a PEG is that you only receive one purchase proposal, which also restricts you from negotiating with other prospective buyers. This makes it difficult to determine if the purchase proposal is relevant to the current marketplace valuation metrics. Usually, this purchase proposal is an arbitrary number, since the PEG has no direct knowledge of the school operation or financial metrics.

This is one of many reasons we recommend working with a school industry expert like Bailey Routzong, not only to ensure you do not fall into this PEG trap but also to ensure that you receive a premium marketplace value for the business and related real estate you have spent your life building. Bailey Routzong has expertise in bringing all-cash, national buyers to the table, as well as strategizing with the school owner to help achieve target spendable income.

Multiple Buyers = Multiple Opportunities for a Sale

In addition to not receiving maximum value when selling a school business, only having one buyer on the table increases the potential for the sale to stall or fall through. In many cases, the prospective buyer backs out of the sale because of information that was uncovered during their due diligence work on the school business.

Prospective buyers can arbitrarily decide not to consummate the transaction for any number of reasons, regardless of how many school inspection tours were conducted, how much proprietary information the owner provided the buyer, or how large of a bill the owner incurred in attorney and accountant fees throughout the process.

Do Not Get Blindsided By Your Business’ Financial Metrics

Because PEGs often do not conduct a thorough analysis of the school’s financial metrics (cost and time investment), the school owner might be blindsided when they realize their financials are not lucrative enough for a final sale.

With Bailey Routzong, owners are informed in advance of a sales agreement whether or not their business’ financial metrics will pass the buyer’s due diligence tests. Additionally, owners (and their attorneys) are well advised on the terms of the envisioned transaction, including monetary and non-monetary issues.

Resisting the Temptation

On the surface, it is flattering to be contacted by a large company with an interest in purchasing your school. Working with these PEGs is also tempting because it appears to offer a streamlined approach for exiting your school business without dealing with a large number of transaction participants.

A school industry expert will protect you from scenarios that are “too good to be true” by ensuring you have a well-informed and level playing field when working with these potential buyers.

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