Yes, that decades-old song by Kenny Rogers and several other artists reminds us of the most frequent question we get from our school owner friends in the industry, “When should we sell?”
Currently, that question in the song has become relevant again! As one of our recent blogs detailed, a panel of 300 economists are forecasting by a 72% majority that the U.S. will experience an economic recession in 2020 or 2021. Well, we certainly hope they are wrong!
Our company takes a direct financial hit when recessions occur just like our friends in the school operating business do, so we take that possibility of an economic downturn very seriously.
What History Taught Us
In the last two recessions — 2001 as a result of 9/11 and the aftermath of the 2008 financial system crash — we saw first-hand the damage that was experienced by so many family-owned school businesses, some of which even today have not recaptured their pre-recession financial productivity!
And because of that first-hand experience with so many owners, Bailey Routzong takes that “When should we sell?” question seriously.
Here’s what our 25 years of experience has taught us in response to that question: If an owner already has enough financial resources that he or she could close the business today and walk away because the earnings from their other financial assets will adequately support their desired lifestyle going forward, then that owner has the luxury to choose to “hold ‘em.”
However, if an owner does not have enough financial assets to live off of without his or her business being salable to produce more investment corpus for that owner, choosing to “hold ‘em” becomes a precarious path forward if a recession is on the horizon in the next 12-24 months.
Why We Should Be Attentive Now
The majority of school owner-operators believe their schools (business and related real estate) will always be salable at a reasonable price point even — if the economy isn’t performing well. Unfortunately, that has not been the case historically. Why?
- Almost all school industry buyers simply sat on the sidelines in both the 2001 and 2008 recession periods. There were no buyers in those periods who would offer anywhere near what previous market values had been; therefore, even if a stray buyer could be found, few owners could financially afford to accept the buyer’s terms of purchase.
- During recessionary periods, nearly all schools experience material drops in enrollment due to parents losing jobs. Buyers simply won’t acquire a school while that school’s revenue is in a downward slide because they don’t know where the bottom is. Unfortunately, in the last recessionary periods, many owners found themselves trapped in their businesses for several years longer than intended and unable to move on to retirement or another venture. In many cases, those same owners had been on the front lines for so many years that they no longer had the energy needed to fight all of the varied challenges resulting from the economic downturn.
So yes, we all need to know when we have the luxury to “hold ‘em,” or when we need to realize that it’s in our best interests to “fold ‘em.” Because when the economic downturn begins, that current marketplace exit door closes shut for all practical purposes.