If you own a successful family-owned school business, chances are that you have, or will, encounter private equity groups (PEGs) that are interested in acquiring your business.
From marketing letters and emails to direct phone calls, these PEG funds often try to contact school owners with the single purpose of purchasing their business. The industry standard PEG venture business model is to double the size of their business in five years and then “flip it” to a successor PEG investment fund that will repeat the cycle.
These PEGs are attempting to jump ahead of any other potential buyers the family-owned school operator would typically interact with regarding a potential sale of their business and related real estate. For these large operating companies, it is all about cutting out the competition so that the PEG buyer can set the business and real estate value metrics.
PEG companies are not all bad to work with. In fact, these companies are the most frequent buyers of family-owned schools. However, as we have discussed in previous blogs, there are disadvantages of working directly with a PEG that every school owner should keep top of mind.
What to Do When You Get a Call
Since the founding of Bailey Routzong in 1994, we have worked and maintained close relationships with hundreds of family-owned school operators, several of which have shared their interaction experiences with PEGs.
Below are a few recommended ways school owners should respond to these PEG fund operators when contacted:
- Tell the PEG representative that if and when you exit your business — which for nearly all family-owned businesses represents the bulk of their total assets — you will not limit yourself to receiving purchase proposals from a single source.
- Respond that if and when you exit your business, you plan to work with highly knowledgeable and experienced school industry experts who will help you determine the current market value of your business and related real estate assets.
- Finally, inform the PEG representative that when the time comes for your business exit, you will advise your representative firm to contact them to determine if it is a qualified candidate to receive a confidential marketing package.
Navigating the PEG Approach to Free Appraisals
In several instances, PEGs have also tempted some school owners in the industry with a “free appraisal,” even though the owner has no intention of getting involved in a single-buyer scenario.
While this appraisal may seem enticing at first glance, be warned this scenario is also full of potential disadvantages. For example, PEGs will only show their value conclusion of what they are willing to pay. Any real appraisal must measure what the marketplace of buyers will pay, not just a single company.
A school industry expert can provide school owners and operators an accurate value of their business and related real estate based on individual buyer companies’ underwriting information. This is the real “appraisal” that a school owner needs to ensure they receive a premium marketplace value and avoid leaving money on the table.
The bottom line is that you have spent your life building your business…and in our 25 years of assisting family-owned school operators as clients, protecting the legacy of their schools when they exit is a highly important factor. The process goes beyond just finding a buyer, as it requires sourcing the buyer that is the “good match” as your successor owner. Don’t you think you deserve to get the most out of it when the time comes to sell your most valuable assets?