Marketplace Update

STOP!!! …DON’T GET TRAPPED!

What has been happening

Over the past 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. These entities are called “financial- single purpose” companies because they are newly formed entities with the single purpose of acquiring other existing school operating companies, doubling the size of their entity over a 5-7 year period, and then “flipping” that entity to the next level of Private Equity Group Funds who will start that same cycle again.

The above is not to imply that anything is wrong with these single-purpose companies per sé……yes, they are owned by investor Funds looking for strong yields on their investment, but that is the case with all for-profit businesses in any industry. These entities hire good quality staff to be on the front lines of the everyday operations and are generally well managed with a strong emphasis on programming and industry accreditation of their schools. Bailey Routzong enjoys positive and constructive business relationships with virtually all of them, as these PEG companies are the most frequent buyers of our family-owned clients’ schools. In fact, these PEG companies’ need to grow rapidly has pushed up values for our clients’ schools in the marketplace and Bailey Routzong and our clients have appreciated the pricing leverage that has allowed us to utilize. That being said, when one of our clients decides it’s time to exit their business, these PEG companies don’t want to hear that the owner has Bailey Routzong representing them in that exit process!

Why PEGs do not want you to be represented by Bailey Routzong

These PEG companies are under pressure from their investors to acquire income streams from existing schools as the fastest way to grow these entities. The most effective way these PEGs can do that, and to make acquisitions at the most favorable price for their interests, is to contact an owner directly to try and negotiate business and legal terms in favor of the PEG with a sales agreement that…here comes the TRAP! … doesn’t allow that owner to offer their school(s) to or negotiate with other potential buyers while the agreement is in effect.

Needless to say, restraining the owner from obtaining purchase proposals from other potential buyers, and from the owners having an experienced advisor like Baily Routzong to represent them in negotiations, traps the owner into circumstances that provide the PEG buyer a grossly “uneven playing field” for such a transaction. So even though we maintain a constructive relationship with these PEG companies, they know that Bailey Routzong will make that transaction playing field more than level for our client owners!

Unfortunately, in our daily work with owners across the U.S., we continue to find cases where owners have unintentionally gotten themselves into this PEG trap and continued the process until they were practically speaking, too far in to get out without major risk and expense. One can only wonder the consequences… the obvious one being… “how much money did that owner leave on the table”?

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