Before Bailey Routzong was founded in 1994 by Ed Routzong and Dean Bailey, the school industry was significantly different for owners when they were ready to exit their business.
At that time in the industry, school owners were limited in terms of potential buyers for their business, as the larger companies in the school operating industry focused their growth on building new school units as opposed to purchasing an existing successful school business.
Routzong and Bailey were 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 response, their mission was to assist family-owned school operators in getting paid for their business in the same manner as all other industries: a multiple of earnings.
However, another hurdle loomed. Even if the school owner could establish a value based on a multiple of earnings, the available buyers would need an appropriate amount of capital to pay that price. The solution?
Routzong and Bailey realized there was an impending change in the industry; the larger operating companies in the industry, which had converted to public ownership, would begin facing shareholder demand for higher growth rates that could only be achieved by acquiring existing revenue from currently operating schools, and that the conversion to public ownership would provide the necessary capital.
As such, Bailey Routzong began working with these large industry operating companies and started to offer a valuation based on a multiple of the client’s schools annual earnings. This change revolutionized the industry marketplace and created significant financial benefit for our clients versus what they previously received for their school business and related real estate.
Rising Investor Interest
Previously, when owners sold their business to the limited pool of available buyers, the typical sales agreement included the buyer leasing the real estate from the existing owner in an amount that equaled the owners’ existing mortgage payment.
This created the triple-whammy for the school owners: receiving an extremely modest value for their business, carrying the note for a substantial portion of the purchase price, and hoping that the new tenant operated the business effectively so that they could pay off the mortgage over time.
Until recent years, there was little capital available or investor interest in the marketplace for buying school properties, which were considered a “non-conforming” investment property type.
However, a new trend in the marketplace — large volumes of capital in the hands of institutional investors in the form of hedge funds and real estate investment trusts — created demand for a broader range of investment properties, including school buildings. This new availability of investor capital was vital in finding a fit for our clients’ school real estate.
Today, the large companies that pursue our clients’ school businesses almost always lease the real estate versus buying it. Our client can then choose to keep the real estate (and become landlord) or sell the real estate into the investor market with the real estate, enjoying a significant value boost because of the new long-term lease with the larger operating company acquiring the business.
As a result of our efforts, since the mid-1990s, we increased our average client transaction value for their school business and related real estate from approximately $1 million to almost $3 million per location.