Who are the buyers for schools?
Buyers in the early education space are usually segregated by asset interest. There are buyers that are only interested in acquiring the school business operations while others prefer just the real estate. In some cases, some buyers do prefer to acquire both assets.
This article describes some of the characteristics of each type of buyer, and briefly discusses potential situations in which one might be more appropriate than the other.
Strategic Buyers.
Strategic buyers are companies who are already operating in the early education industry as providers of private early education; where acquiring your school business will be a complementary “add-on” to their existing portfolio. Strategic buyer realize synergies from the integration with its business systems, back-office, controls, and management. The rise of the private equity industry created a new kind of strategic buyer, as concentrations of capital created “platform companies” eager to acquire high performing “mom and pop” schools. Strategic buyers represent about 70 percent of the total preschool market. Generally, a strategic buyer will pay a premium to recognize the synergies.
Institutional “Private Equity” Buyers.
Financial buyers include private equity firms (i.e. “financial sponsors”), venture capital firms, hedge funds, family offices, and high net worth individuals. These buyers include up and coming private equity firms seeking to enter the early education space by establishing a “portfolio company”. SchoolWise Partners has relationships with over 5,000+ financial / institutional buyers invested in the early education market.
Real Estate Investment Trusts (REITS).
Real Estate Investment Trusts (“REITs”) are in the sole business of acquiring high performing, single tenant operational real estate across the United States. REITs focus on strong markets and school brands with proven operational success and high demand factors. Business buyers partner with REITs and / or third-party real estate investors to finance the acquisition of the real estate (via a sale-leaseback whereby the operator enter into a triple net lease). Business buyers aim to realize immediate “arbitrate value” by simultaneously acquiring and selling to take advantage of the market inefficiencies.
1031 Exchange Buyers
Investors choose to do a 1031 exchange where they can defer capital gains taxes by reinvesting in other income-producing real estate. Heightened competition for replacement properties is driving up prices and spurring investors to expand their criteria to include a broader geographic scope and more property types, including education real estate. Adding to that challenge is that there is 45-day window of time to identify replacement properties. With tight timelines and strict rules to follow, you need a partner who provide you with the most investment property options and who can assure flawless execution. SchoolWise Partners maintains a strong buyer network and the expertise needed to help you smoothly execute your 1031 exchange.
Which is Right?
Believe it, or not, the answer to the question “which is right?” is not always as cut and dry as it might seem. Whether a strategic buyer or a financial buyer is right for a specific company depends largely on the seller’s goals in selling the business. Listed below are different scenarios discussing the seller’s goal and the type of buyer most appropriate.
The Seller Wants the Highest Price Possible. If the only goal in the sale is achieving the highest price possible, regardless of what happens to the plant or employees, the open auction process is the best way to drive the price upward. And obviously, with highest price being the only goal, the strategic buyers will most likely be the best fit. That is not to say that financial buyers should not be considered in the process.
The Seller Wants a High Price, but Has Other Concerns. If the seller’s goal is a high price (not to be confused with “highest” price), but the seller wants to protect employees, a strategic buyer is still probably the most appropriate. However, the seller needs to realize that there will need to be concessions made from the highest price in order for the acquisition to work for the buyer.
The Seller Wants to Cash Out, But Would Like to Remain for a Few Years. In this situation, a financial buyer is probably most appropriate. The owner/manager is often times the most readily realizable synergy for a financial buyer. Strategic buyers generally have the expertise necessary to operate the business, and can eliminate the money that is being paid to top level management. While a financial buyer may have the means to purchase a company, they do not necessarily have the expertise to run the business. As such, financial buyers will usually welcome management to stay and manage the business, and often they will require it as a component of the deal. More and more deals are being structured where part of the consideration paid is tied to an “earn-out” where the seller will receive additional money if certain, predetermined goals are achieved in the first few years following the sale.
This brief discussion is in no way intended to try to address all of the circumstances that may need to be considered in the prospective sale of a business. If you are a business owner who is considering the sale of your business please contact us at SchoolWise Partners to confidentially discuss your specific situation.