Marketplace Update

The “New Normal” – Risks resulting from Covid-19

As our long-time readers realize, our Baily Routzong Team (BR) has conversations with school owner-operators across the U.S. on a daily basis, and once that information is screened for confidentiality purposes, we provide that information to our readers. As you can imagine, those conversations during the pandemic period have revealed owners with positive attitudes about the future as well as those who seem to still be in shock over what has happened to their business.

A recent caller expressed utter confusion about how owners could be “restarting” their regular school operations and simultaneously working on an exit transaction with us when their school only had 45 children in attendance on that date. This was in response to our blog that discussed how BR was engaging with owners and buyers in trying to structure sale transactions of these owners’ schools for only a modest value reduction from their pre-pandemic financial performance and asset values when that owner’s schools were at only 25% of their pre-pandemic enrollment total.

We explained what BR was doing between our owner-sellers and the buyers, but then our caller friend followed up with a second important question along the lines of… “why would an owner be working on an exit transaction when their school only had 1/4th of its normal enrollment level… why wouldn’t we owners just wait until we get our enrollment back to its former level and then do a sale?”

Well, that’s an excellent question and gets at the real heart of the marketplace factors that our owner contacts/clients are exposed to. As to many situations we encounter in life, it’s about timing #1, and then #2, the “new normal” risks that owners have never had to face before in their tenure in school ownership and operations. And this owner query convinced us that we needed to create and distribute a list of the “new normal” risks that he and every owner must be aware of and understand if they are to protect their school business values over the next few months. Therefore, below is BR’s list of the 5 most significant “new normal” risks that every school owner should seriously consider and that BR prays will not occur… and please remember, “BR’s success can only occur after our clients’ success”!

BR’s 5 Major “New Normal” Risks that Owners Should Seriously Consider Now

  1. state regulatory mandates that decrease the number of children per classroom/total school, thereby limiting owners’ opportunity to replicate recent years’earnings levels
  2. significant likelihood of a second Covid-19 wave in the fall or winter flu season
  3. should owner’s school(s) experience Covid-19 infections with staff or children or their families, such that their school(s) are shut down for 14 days, will current customers who need full-day services have to enroll their children at other schools? (Note: BR has clients where this has already occurred in the past two weeks!)
  4. based on BR research, no state has yet legislated any legal exposure shield for business owners regarding potential Covid-19 infections of employees, children, or family members of those children
  5. U.S. economy is in severe contraction because of business shutdowns and resulting record unemployment numbers-even prominent economists, as well as the Chairman of the Federal Reserve, have no prior evidence base for projecting the status of economy post-pandemic or the number of years necessary for full economic recovery.

What does all this mean in the near term future?

In our 26 years of representing family-owned school businesses, we have survived through chaotic times before (9/11 aftermath and 2008-9 Great Recession and its multi-year aftermath), but those shock periods did not have the all-encompassing existential risks that this pandemic episode has created.

Fortunately, to this point the prospective buyers we are dealing with are at this moment considering the economic collapse caused by the shutdowns as only an “interim event”, and that previously successful schools will over the next year reclaim their prior enrollment levels and earnings. And of course, we encourage that perspective!… but, the critical question that no one knows the answer to…if an owner’s school(s) experience infections of staff or children or their families, and that school is shut down again for 14 days with the public notice and lost revenue as result (again… we have clients where this has already happened), how would a prospective buyer consider the value of that school business and related real estate at that point?

That scenario is what concerns BR the most, as we have never faced the situation in our 26 years where we were not able to help our owner clients and work around marketplace problems to improve their financial situation. This “new normal” over the next few months will be our greatest challenge, as it will be also for our clients.

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