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October 2013 Archives

October 21, 2013

Start-up or buyout?

One way to get into your own school is to buy an existing one. Given the often-transient nature of school owners, good schools come on the market quite frequently.

When you find one, you’ll need to be sure it will work for you. Could you step in as the owner and the school would not notice, or is the current owner so hands-on that replacing them is a huge risk, and you could expect the students to leave as the owner does?

Ask all the awkward questions, and if you don’t get the answers – walk away.

You’d need to see at least three years’ figures, with actual revenue collected and deposited clearly shown, all receipts for expenses, tax statements and payments and, if the school is a company, the full accounts. These should be viewed by a qualified professional, for a second opinion at the very least. You should then begin true due diligence. Ask all the awkward questions, and if you don’t get the answers – walk away.

If possible it’s a good idea to teach in the school before making an offer to see how things feel on the inside.

When making an offer, be sure to include a clear timetable for handover and be sure any liabilities are disposed of before that handover. Student credit for lessons paid for but not yet taken is an issue here in Japan – and this should be counted as a liability.

Make sure the lease can be transferred easily, without any payment, or deduct this from the offer price. Sellers will often try to claim deposits or ‘key money’ paid as an asset, but in our experience, this can be written off. The only way the seller could reclaim this would be to close the school and move out of the building.

So, is the school making enough money?

Setting pricing is probably the most important decision most businesses make, and yet spend the least time on.

There is an excellent website, www.bizstats.com, that gives statistics from a wide variety of business, including educational services. These may not apply directly to your location, but show the expenses-to-revenue ratios a well set-up school should expect.

From these statistics, rent and salaries combined should be approximately 34% – I’d rather have this closer to 30%, but certainly anything over 40% is way too high. This should help you set your pricing. I’d like to have my staff and rent earning four times their costs, though three times is perhaps more realistic. Set revenue targets for your teachers and monitor their success in hitting them.

The stats show further that other selling and general expenses should add up to approximately 18.5% and costs of sales approximately 11.2%.

The other stats to look at are:

Capacity: How many bums on seats could the school actually get, and what percentage of that is filled? At Modern English we use the term ‘seat’ as a restaurant would use the term ‘cover’ to refer to a customer or potential customer, i.e. a filled or unfilled seat. It’s important to note that a private, or one-to-one class, occupies the same number of seats as a group class does, and this should indicate a much higher price.

We aim to work with a minimum of 75% of capacity filled, though ideally higher. 100% would not give us the room we need to be able to service our students’ needs, and give them make-ups in various classes, nor allow us to do free trial, or demo lessons. Each school will be different.

Churn rate: Calculating your churn rate – the lifetime of your students – will allow you to forecast your revenue and calculate the number of new students you need to recruit to either maintain your size, expand or contract. This can all be planned.

Lifetime Revenue: Number of months expected student lifetime multiplied by your prices will tell you lifetime revenue. You may be surprised how small your cost of acquisition is compared to this. This may make all that advertising seem much cheaper.

Cost of Acquisition: Budget a specific cost of acquisition – how much do you need to spend to get a new student? Calculate the number of seats you require to hit your desired capacity filled (i.e. hit your target revenue).

This is only part of the picture. Apply your churn rate to new and existing students to see how often you will need to replace them to keep growing or stay the same size. You should be able to apply this model over three years to allow financial planning. With a solid business plan, it should be possible to raise finance if you need it.

All of this information should be available, or calculable, for a school on the market. I’d be hesitant to go much further without it. If you are starting from scratch, you’ll have to make some assumptions. Ask around – would three years’ student lifetime be a good place to start, or would 18 months be more realistic? You can adjust your model as you grow.

Going back to the option of buying a school, I’d want it to have monthly revenue of at least $10,000 and, after our staff and systems were put in place, be making at least 30% profit, hopefully more, or it wouldn’t really interest us. (Though there are exceptions so let me know of any you might want to sell.) We’d then make an offer with an initial down payment and further staged payments, preferably based on how much of the student body stayed, encouraging the seller to help ensure the maximum retention.

Your situation may be different and you may be looking to buy out a solo teacher-owner-operator. This is perhaps the easiest and most risky option. The current students may love their current teacher, and in the future, they may just find they don’t love you in quite the same way.

About October 2013

This page contains all entries posted to Schooled In The Trade in October 2013. They are listed from oldest to newest.

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