The trend of private equity group (PEG) sponsored investment funds seeking out family-owned school business operators to purchase their school has taken a new turn.
Several previous blogs have focused on this trend in the school business industry where PEG sponsored investment funds directly contact school business operators to purchase their school(s).
Over the last several years, this trend has been fueled by PEGs acquiring the largest operating companies in the industry with the goal of doubling the size of the acquired company within five years. The only way these PEGs can expand at that rate is to acquire other existing school businesses, then “flip” those entities to the next-level of PEG funds that will repeat the cycle.
But now things are shifting.
PEG companies are now attempting to out-maneuver each other to acquire schools. Unfortunately, this latest turn creates a potential disadvantage for family-owned school operators who are approached directly by these PEGs.
The Fundamental Trap of Private Equity Groups
PEGs will often send a purchase proposal to a school business owner, and it may seem like a great deal. However, the fundamental disadvantage in the process is that the owner only has a single proposal to consider, and it requires the owner to remain at a standstill during the term of the sales agreement. This standstill prohibits the owner from negotiating purchase proposals with any other prospective buyer.
The question then remains: Why would an owner sell assets based on only one purchase proposal, especially considering their school business and related real estate are likely the most valuable assets they have ever owned?
Understanding the Multiple of Earnings
When a large, reputable company offers to acquire an owner’s school business, on the surface this proposal seems very flattering. More often than not, owners are under the impression that this proposal could lead to an easier and more streamlined sales process.
In reality, some PEGs are even offering written terms to owners outlining the multiple of earnings that the PEG will pay for a business, even though the PEG has not analyzed or does not understand the financial health of the school.
No buyer can pledge to pay a certain multiple of earnings without analyzing the financial reports first. This is a primary example of why many scenarios between the owner and a PEG buyer seem too good to be true.
What these buyers often fail to explain is that the earnings are based on what the operating expenses would be with the buyer operating the school, and not based on the owner’s historical operating expenses.
The multiple of earnings is therefore only part of the formula. Even more important is what the defined earnings turn out to be with the buyer’s operating expenses, which are typically much higher because of greater employee benefits and corporate overhead.
Maximizing the Value of the School Business
Arriving at the value of the school business and related real estate through conventional methods frequently undervalues an owner’s assets. The related real estate typically represents 60 to 70 percent of the total transaction value, and owners can let significant money slip away by relying on the PEG’s process when establishing value. A school industry expert like Bailey Routzong understands the value of your business and related real estate which provides you the opportunity to receive maximum value for your assets.
School business owners often hang on to their business past the point of enjoyment because of the fear of what to do next. Once they no longer own the school, where will their income come from? A school industry expert is strategically equipped to address this issue. With national resources and tax-advantaged strategies, owners can reap the maximum lifetime value from their school business and real estate assets — and can continue increasing their income post-exit.