The recent federal stimulus package provides over $1 billion for training and education. Yet this money is being earmarked to a sector - professional and occupational education - that hardly needs it.
Graduate and professional schools are thriving. Even without stimulus money, record numbers of Americans are returning to the classroom for advanced degrees, diplomas, and job training. This sector is anticipated to grow by over 16% in 2009.
Professional schools as an investment
For the entrepreneur, few businesses promise as much as owning a professional or occupational school. Rarely thought of as an investment option for angel, institutional, or other investors, there are fewer buyers for schools than in more competitive areas of the economy. This phenomenon tends to keep sale prices down, providing excellent value to investors.
Professional schools, when competently administered, are highly profitable. Students pay significant tuition in hopes that the investment in their continuing education or training will pay off in the form of greater future earnings. And since tuition money frequently comes from loans, government grants, or other sources, students are glad to part with significant tuition dollars each semester.
Indeed, most occupational schools qualify to participate in federal assistance. These include student grant and loan programs. Accordingly, thanks to government largess, occupational school often can charge far more for tuition that they could in a free and competitive marketplace.
For owners, professional schools bring in a reliable source of income that is as predictable as it is steady. That is because the school will accept a minimum or set number of students every year. As such, owners can predict rather accurately what return they will receive on their investment. The only real constraint to growth is the campus or real estate needed to support the school. A mature school will act like an annuity. It will provide profits to owners for many years to come.
Purchase price considerations
Expect to pay a purchase price of three or four times annual earnings for a fully-operational occupational school. A two-times earnings purchase price represents a bargain. Do not fear a multi-million sale price so long as it is supported by sufficient numbers of students paying sizeable tuition every semester.
Financing: If you buy an existing school, you can often finance part or most of the sale. Most commercial banks finance 50%, provided the school has some tangible assets to collateralize. Some banks will require cross-collateralization.
New or “shell” schools: If you are entrepreneurial, the best bargains are to be found in the realm of new or shell schools. These institutions are set up and licensed, but have no students. Expect to pay $50,000 or more for a shell assuming it has been properly established and has a valid certificate or state license.
The approval process for occupational schools in many states is long, complicated, and expensive. It can take a year or more for a new school to get through all required state applications, inspections, bonding processes, insurance requirements, curriculum review, and other obstacles. Accordingly, there is often intrinsic value to an institution, even when it has no students or revenue.
What types of schools are best? The most profitable occupational schools are obviously those that can charge the highest tuitions each semester. And students are generally willing to part with more tuition dollars when their post-graduation earning potential will be highest. Accordingly, the most profitable occupational schools are those whose diplomas will enable graduates to work in well-respected and higher-paid professions.
Due diligence
For most professional schools, anticipate that the largest budget items will be, in this order: real estate, human resources, and marketing.
Real estate: Most occupational schools rent their facilities. And the facilities are somewhat specialized. That is because most jurisdictions' building and zoning codes have special rules for educational premises. That is true even where all students are adults.
Accordingly, expect to pay a premium for educational space. In most markets, rates run north of $20.00 per square foot and track the class A space market in your city or town. Whatever the price, you should ask a few basic questions about the school's facility:
How long is the lease? Make sure the school has years - not months - remaining on the lease. The lease is an asset. Unless you are dissatisfied with the school's facility (and planning on vacating it upon the end of the lease), you should ensure that the school has a continuing right to stay put. A five-year or longer lease is generally preferable for a professional school's facility.
Is there adequate parking? Whether the school offers a full-time, part-time, day or night program, you need to ensure that there is adequate parking.
Is the facility presentable? The school's objective is to persuade professionals to return to the classroom and part with significant tuition dollars. They need to be impressed with - and comfortable in - your school's facility. Cramming the highest number of students possible into classrooms can be a fatal mistake.
Is there room for growth? You cannot grow a school if you have no more real estate to grow into. If the school is out of room but growth is part of your plan, you may be able to persuade the landlord to offer you a right of first refusal for additional space if there is any. If not, and you are locked into a long-term lease, you need to factor that into your evaluation of the sale-purchase opportunity.
Human resources and administration: Among the many reasons an occupational school is a good investment is that it often runs itself. And sometimes, the school runs just fine with fewer, rather than more, employees. Your key personnel and departments are as follows: (a) faculty; (b) admissions and financial aid; (c) dean or director. Here are a few tips on what to look at in this area when you engage in due diligence:
Faculty is mission-critical to a professional school. Your faculty is your deliverable product. Students - your only customers - will judge you according to your instructors and professors. Spare no expense. The sum of the faculty is equal to the value of your school's diploma. If individual faculty members fall short, plan on replacing them.
Avoid faculty entanglements: Some schools will have long-term contracts with faculty members, a “self-governed” faculty , unionized faculty, or even tenured faculty. These are major problems for a school and its owners. If the faculty is anything other than “at will” look at the sale-purchase transaction with great skepticism. It will mean you will be at war - or at least in skirmishes - with your faculty for the foreseeable future. In fact, a school that comes with such an arrangement may have it forever if Congress passes the Card-Check Bill (a.k.a. the “Employee Free Choice Act,” H.R. 1409; S.560).
Admissions are for admissions, not rejections: Let's look next at the school's admissions and financial aid personnel. Smaller schools will unify the position, with one person handling both admission and financial aid. In this age, there are in fact professional admissions directors who have masters' degrees, many years of experience on admissions committees, and who strive daily to ensure that the school meets every quota relating to race, religion, geography, and sex. If the school you are looking at employs such a professional, it is not a benefit, but a liability.
In an occupational school, admissions and financial aid is your marketing and sales department. Your admissions requirements for students are far different from four-year universities. Generally, you are going to admit anyone who can pay, borrow, or otherwise qualify for the tuition. While you want to admit the most qualified students possible, your first concern is filling desks with warm bodies.
Thus, the admissions director should not be a bureaucrat. He or she should be a salesperson. His job is to inspire potential students, give them confidence in the school's program, and persuade them of the value of the tuition investment. They should friendly, vivacious, and approachable. Professional “admissions officers” will hurt and not help the school.
Hands-on owners often handle admissions themselves. And in small schools, this important responsibility can been given to the dean. Some schools can be run by a single competent administrator and a faculty.
Debt: Some schools may have debt. Be wary of schools in the hole. This business is highly lucrative when properly run. Debt is often a sign of a school with serious problems.
If you do not have ease in understanding the school's financial statements, hire an accountant to assist you. In addition, these due diligence tips are just the beginning. If you are not experience with buying and selling businesses, consult an attorney who has experience with business sale-purchase transactions.
Long-term goals
Whether you buy a new school or an existing institution, your focus as an investor should be the same: to continue to improve the school's name and reputation. The term “reputation” in the education sector has the same meaning as “branding” in any other industry. As the school's reputation improves, it will permit you to charge higher and higher tuition with only a negligible rise in expenses.
(Written April 22, 2009)