Do you want to buy a school and you want to know how much it cost? If YES, here are factors that determine the cost of buying a school.
The cost and value of a school will indeed be a commercial and financial matter. It might be calculated by reference to the school’s turnover or annual surplus (or profit), or take into account the value of any property transferring. The treatment of parent deposits and school fees will need to be agreed.
Also note there may be a formal process to select the buyer and to determine who can pay the best price, or offer the best all-round option as a purchaser.
For instance, a buyer with the ability to continue to run the school, and also develop and expand it in a sympathetic way, may be a concrete factor in deciding the identity of the buyer. Buyers may also be international, including from China and the United States.
Howbeit, once the value has been decided, there are options around how payment will be structured. Have it in mind that it does not have to be one full upfront payment on the date the sale completes. A price is not settled until the payment dates and structure are also agreed so it is very imperative to note down all the details at the heads of terms stage.
Note that the school’s owner or its governors (for charitable schools) will indeed want to make sure that ‘fair value’ is paid or received for the target school.
External professional valuations can also be very crucial in this process. This is more or less the case for any property included within a sale but also applies to other high value assets transferring and, of course, to the value of the business as a going concern.
Professional valuations notwithstanding, a private sale cannot be entered into without a degree of risk and compromise on both sides. Have it in mind that the agreed price will reflect market value but also the relative bargaining power of the parties.
To a certain extent, governors will be expected to understand and accept the commercial reality of the situation. Nonetheless, they cannot be expected to do so without a clear demonstration that all options have been considered and the commercial and financial risks mitigated as far as possible.
Estimated Cost of Buying a School
In 2020, the median elementary school in the United States costs $242.55 per square foot to build. Median spending was $52,017 per pupil and the median elementary school provided 188 square feet for each student. A median elementary school reportedly designed for 624 students and encompasses 84,700 square feet will cost around $16,269,543.
The median cost of a middle school is $261.96 per square foot. Median spending per pupil was $54,635 and the median middle school provides 173.4 square feet per student. The median number of students in middle schools built in 2020 is 612 and the building size is 118,500 square feet. The cost is $26.5 million.
The median high school cost $45 million and provided 173,727 square feet. It was designed to accommodate 1,000 students. The median high school provides 180 square feet per student at $58,000 for each student. The cost per square foot was $311.29.
4 Factors to Consider When Buying a School
The current situation caused by Covid-19 has proven to be extremely challenging for schools and if this has led to, or exacerbated financial difficulties, a sale may be one of the options that a school will need to consider. However, before getting too far in the process, here are factors to consider;
Consider a merger
An alternative to the sale (particularly for charitable schools) is a merger with another charity (which may be a single school or a foundation operating a number of schools). Note that a merger will share many features with an asset sale except for the fact that money does not usually change hands on a merger.
Here there is no purchase; instead, the transaction is essentially a gift from one party to another, with terms and conditions attached. The continuing school more or less assumes all the liabilities of the charitable school, handing over its assets and its undertaking, which makes due diligence by the continuing school very necessary.
However, the disadvantage of a merger is that it can take longer to arrange than a sale. Nonetheless, where a suitable charity can be identified as a merger partner, a merger will result in a charitable school continuing to be operated by a charity.
Have it in mind that sale can be a very unsettling time for staff, parents, and pupils – and it is, without doubt, worse where a transaction is proposed but does not proceed. It is therefore advisable that every process is extensively managed to ensure that even the fact that a sale is being considered is kept confidential to a small group of people.
All parties will want to ensure that all interested persons are aware of the importance of confidentiality and that they sign up for robust non-disclosure agreements. One very common challenge is that as part of the process the buyer might intend to carry out due diligence and this will more or less involve the preparation of a data room containing information about all aspects of the school.
Note that it can be hard to collate all this information without involving key employees to provide it, but those involved should be as limited as possible. In the current circumstances due diligence is likely to take a bit longer than usual and this should be factored into the timing.
What is being sold
Always remember that a school is not in itself an identifiable legal asset. You will be expected to define exactly what will transfer from seller to buyer and the first question to ask is whether the sale will be of the company out of which the school is operated or of the assets which make up the school.
The sale of a charitable school to a commercial company cannot be carried out as a company sale and generally occurs as an asset sale. Note that membership rights in a charity (just like shares in a commercial company) do not confer any proprietary rights on the holder and the assets within the charity must be used exclusively for charitable purposes.
As a result, a charitable company limited by guarantee cannot be sold outright, although its assets can be sold. The sale of a school run by a charity must therefore proceed as an asset sale. Where the asset is sold to a commercial company, the market price must be paid.
An asset sale allows both seller and buyer to decide which assets will be added within the transaction. It is a common assumption that everything will be sold – the property out of which the school is operated; all staff, parent, and supplier contracts; all equipment, and so on.
However, some assets may not transfer, particularly in a transaction between two schools. An asset sale will generally be more complicated than a company sale but is unavoidable if the seller is a charitable company.
The employees of the school will transfer automatically (under the Transfer of Undertakings (Protection of Employment) Regulations but there will need to be notifications and consultations with employees as part of the sale process.
There will also be the need to obtain regulatory consent (from the Department for Education) and possibly consents from third parties to the transfer of assets.
Generally, a company sale is preferable for a seller, where this is possible. Note that this is because a company takes with it all of its historic liabilities (although mergers of two charitable schools usually involve the recipient school taking on all historical liabilities of the other).
The parties can of course agree to carve outs from this standard position in the sale agreement, for example through warranties and indemnities.
However, as the new owner of the company, the buyer will be liable in the first instance (financially and practically) for any issues arising after completion. This is in contrast to an asset sale where a seller will usually retain liabilities relating to the period prior to completion and the buyer will take on the risk from that point.
Warranties and Indemnities
The seller and the buyer will also want to agree, at a high level, what warranties and indemnities will be on provided from the seller and the level to which they will be subject to agreed limitations on time and value. The use of warranty & indemnity insurance (and who will pay for it) should also be considered as this is one way in which a seller and a buyer can mitigate the risk on a sale.
Buying or selling a school is a material undertaking and it can be tempting to dive straight into due diligence and practical considerations.
Howbeit, it is not in either party’s interest to invest too much time and money in the process before the fundamentals are agreed upon. Nor is it advisable (including in conversations with governors) if key terms are left for consideration late in the day when one or both parties may be under pressure to ‘get the deal done’.
Hopefully, the information presented above has given you an insight into some of the options available to you so that a clear agreement can be reached on the scope and value of the transaction before more detailed discussions begin.