Corporations Eye Independent Schools

By Mark Anderson

There's a new, growing market for Montessori schools that could make an important contribution to a retirement - or a final career move - for many owners who lovingly built and tended their schools over the last few decades, but forgot to plan their own exit strategy.

The market for those mature, successful schools is developing among national and large regional chains of preschools and elementary programs. Those corporate school operators are in the midst of a long period of growth, and they have turned now to acquisitions and consolidation as key tools in continuing that expansion.

Many of those school enterprises are publicly traded companies now, which adds urgency to their efforts to grow.

"These companies might like to continue to grow by building schools from the ground up, but Wall Street expects to see 15 to 18 percent growth each year," says Dean Bailey, a broker and advisor to private schools entering the seller market. "When they're operating 200, maybe 500 schools it's very hard to start enough schools to meet those goals, so they're turning to existing schools with facilities and enrollment that are up and running."

That trend has been underway for a number of years, finding considerable opportunities among the cohort of preschools that grew up in the 1970s and '80s to meet the needs of American households that were sending both parents to work for the first time.

But those buyers avoided Montessori schools - until recently.

"They didn't understand Montessori. They didn't know how to manage Montessori programs" and combine them with their conventional preschool operations and make that work, according to Ed Routzong, who is Bailey's partner at Bailey-Routzong & Associates, headquartered in Houston, Texas.

That's changing, however, as those national operators increasingly recognize that Montessori programs bring business benefits, derived from educational and cultural advantages that Montessorians understand very well.

"What they've learned is that there's not much turnover in Montessori schools, among both families and teachers," Routzong said. "Parents are very loyal to their Montessori schools. They've generally had very positive experiences; their children are happy in Montessori."

And teachers are committed to the curriculum, to their schools and to a group of families that they get to know over several years. At the same time, because of their special training and background, Montessori teachers often don't have many employment alternatives in their community either.

That consistency is an important component in a successful learning environment, and it's invaluable to a corporate school model that searches for steady revenue streams, with minimal marketing expenses required to keep classrooms full.

On the other side of that emerging Montessori school marketplace, owners who are ready to sell are finding financial rewards that often exceed what has been available up till now.

That pricing advantage is a product of the classical rules of supply and demand.

Until recently, the small number of Montessori schools operating in most communities meant that few buyers were available when an owner decided to retire or move. The market might have included another local school owner-operator, or a veteran teacher in the owner's school.

"Those transactions often looked more like partnerships than sales," Bailey says, with the price calculated as a percentage of the new owner's future earnings. That limited the seller's financial choices, and it staked the former owner's future to the success of the school's new operator.

Many owners will continue to choose those kinds of arrangements. But for many owners who want a clear exit from the business, the new marketplace can deliver a cash buyer and, often, a higher price than they'd obtain locally.

That's partly because of the important role that the acquisition of a successful school plays in many corporate buyers' growth plans. It also reflects the buyer's belief that it can maintain or improve the school's cash flow levels through added efficiencies and scale, and through the favorable financing sources a larger buyer can obtain.

There's another untapped value that can boost the total proceeds from a school sale, Bailey says, and that's the value of its building and grounds. Real estate has been the fastest-growing financial market in the last decade, as every large investor - from retirement plans to stock companies and wealthy individuals - has sought to diversify investments into what is now regarded as the durable value of property.

Specialty markets have grown up around single-use properties, including schools. When a creditworthy tenant, such as one of the national preschool chains, holds the lease, the value of the property grows even higher.

Bailey-Routzong, working through an affiliated real estate brokerage, usually markets the school and its property separately, utilizing the principals' long experience in both school management and real estate.

"The average sale we've worked on has been about $1.7 million, and 70 percent of that value came from the real estate," Bailey says. "That's a big positive change. There was virtually no focus on that before."

Getting Ready

Entering that expanded market takes some preparation.

Most school owners are educators first, who've learned considerable business skills along the way. But the final step - planning to leave and recovering enough value from their life's business to support retirement - is one they probably haven't thought through, Bailey says.

That process can move quickly, but it often takes two years or more from Bailey-Routzong's first meeting with a school until a sale is completed.

It starts with a review of both the school's data and the buyer's criteria, which produces an estimate of the school's market value, Bailey says. "When we've done that, if it looks like a sale won't accomplish what they need financially, we suggest a multiyear plan to help improve its value."

That strategy generally focuses on strengthening cash flow, the key measure for most buyers, once they've become convinced of a school's quality and enrollment strength.

Those cash flow improvements can come in many ways, sometimes by the owners assuming expenses that their corporation had paid before, sometimes by boosting tuition and reinvesting to strengthen operations.

Another factor that's important to buyers is evidence that the school that can make a smooth transition to new leadership. "The buyer wants to be able to take over without mishap and losses," Routzong said. A succession plan naming an experienced local leader who has the confidence of families and staff is a valuable step towards that goal. Relationships with training centers that ensure a good teacher pipeline is another.

The market is open to large and small school operators. In about half of Bailey-Routzong's transactions they represented owners of single preschools, but they've also represented owners of up to 20 schools. Buyers look for schools with enrollments of 125 to 175 students.

The market is also expanding in a new direction now, adding elementary Montessori schools that are affiliated with successful preschools, Routzong says. "Families who've had good preschool experiences want to keep their children in Montessori if they can," and if an operator can provide primary grades on the same campus that gives the family continuity and also the chance to keep multiple children on one campus.

In the Corporate World?

Routzong, who spent many years managing traditional child care programs for a national operator before teaming up with Bailey in the mid-1990s, said that the Montessori community impressed him with its dedication and intense pursuit of quality Montessori operations.

And he acknowledged that that zeal has produced apprehensions about turning over a school to a corporate buyer.

Routzong offered an assurance, however, about the goals that bring most corporate buyers into the Montessori market, and the outcomes those produce.

"These companies are smart, and they're buying schools because they're high quality and they're valuable to families. The buyers want to keep those qualities intact. They really don't want to buy a school if they think they're going to have to come in and make changes."