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Selling a school or eikaiwa business

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The biggest difficulties for people looking to sell their small business are defining “What is it worth?” and “where do I market it?” Valuing a small business is a combination of art and science with a bit of common and sometimes not so common sense. You should obviously read as much material as you can on selling a small business, as the knowledge will help you create a more provocative offering that is structured well for the buyer.

Over the last seven years, I have purchased outright three separate language school businesses. This is why I was asked to write this short article with the aim of helping others looking to sell or thinking about acquiring a small school business. I hope that most of the advice in this article can be applied not just to schools but also to selling any small business.

Start with due diligence

The first step in selling your small business or acquiring a small business is due diligence. As a seller, this involves setting a value to your business and then knowing who are the prospective buyers are. Once you have contact with potential serious buyers, I recommend allowing them into the business to do some teaching and, of course, having them actively participating in events.

Keeping certain things back, such as liabilities on the books, will decrease trust, lower the chance of a serious offer being made, and likely lower the final buy price if a deal is done at all. Trust will help the buyer picture themselves owning the business. Remember that trust is very important as most small single school buyers are individuals and are not trained VC valuation experts.

A good seller will absolutely bend over backwards to help potential buyers get the information and experience in their school or business that allows them to do first hand due diligence and achieve strong buy-in. The deeper the buy-in of the purchaser, the better the sale price for the seller. A smart buyer will always want to get some firsthand experience teaching in the school before making a purchase, as this is the most important form of due diligence in acquiring a small school business.

For me, as an active acquirer of education businesses, who regularly receives inquiries from school owners interested in selling or valuing their business, I have a short check-list and a simple formula I go through before even considering discussions about an acquisition.

Simple Formula: Owner’s asking price / Owner’s income & profit = How many months it will take the buyer to recover their initial investment. (This is in a perfect world where the handover is hassle free and has no complications). Most small school buyers would not consider a payback period of more than 12 months and a reasonable buy price is more likely to be 3 to 6 months of owner’s income and company profit.

Deposits and prepaid rent can be lightly factored in, but are largely valueless as the cost of tearing down the school and the need to replace aged inventory of goods (sofas, computers, chairs, etc.) makes the value of these goods and deposits mostly negligible.

Due diligence for buyers of school businesses

  1. Location, Location, Location (the first, second, and third rules of real estate are quite applicable to both small school business sales or acquisitions). Does the location work for us and does it make sense for us.

  2. Can we get in and teach in the classroom or is this a fire sale and the owner has to leave all of a sudden? In the case of a short sell, I will usually walk away or lowball the valuation to near zero as there are too many potential risks and the lower offer is my hedge against having to turn the business around and the inability to do proper due diligence.

  3. Number of locations and accessibility of those locations.

  4. Management already in place? Is the owner a one-man show? Has the owner developed an effective management team that runs the business? A higher valuation can be achieved if there is a good management team already in place and they run the business day to day because the school can be truly valued as a business.

  5. Student contract structure – i.e. monthly payment vs. prepaid contracts, installment payments vs. cash paid when the student comes to take a lesson. In the case of excessive large prepaid contracts in a small business, there can be too much liability for the average individual non-corporate buyer. I prefer to buy small schools that use mostly or all monthly contract systems (like a gym). If the packages are 3-6 months in length, it can be factored into the liabilities for the buyer but remains manageable.

  6. Overall size of the business. If you have 1-100 students and less than 10 million yen in revenue, you are selling “a job” and possibly “an income” but not an “asset.” It may be a viable “company” but the value is in the income not the asset. Selling a job/income restricts the selling price to a relatively low level (3-6 months owners income + monthly profit in most cases), depending on the profitability and stability of the student base. (12 months is the maximum you could achieve)

  7. Assessing the stability of the student base once new ownership takes over (a difficult part of due diligence). The more time you spend in the school meeting the students, teaching them, getting involved, the better your guess will be here. Make no mistake—your assessment is a guess, and that guess needs to be as accurate as you can make it within reason.

  8. IP – Intellectual Property. Has the school developed any quality and repeatable materials or methodologies that are easily passed on to the new owner? Hummingbird was an IP acquisition for us, as we shut down completely the schools that were already in existence. Any really valuable IP (published books and materials) will likely go with the old owner but, if sold with the business, could add significant value to the sale.

  9. Ability to increase prices over time. Most small schools are underpriced for the hands on service they provide.

#1 mistake made by sellers of small schools

In general, the most common mistake I see is that the owner has built the business 100% around themselves. Prospective sellers looking to sell me their school often tell me how good a teacher they are, and that the students really love their lessons, thus implying to me that the business is not easily transferred.

Is your method of teaching easily transferable and are the students coming because of the school brand, system/method, or because of you? If it is because of you, then your business is worthless to me or anyone else looking for a turnkey transition (everyone is looking for a low-risk turnkey transition by the way). I strongly recommend anyone looking to buy a school like this to just simply walk away because a significant number of the student base (and your income) will disappear like clouds on a hot sunny day the moment their favorite teacher hands the keys over to you.

My experiences as a short case study

The first school business I acquired was our SALA Eikaiwa business in 2006 in Osaka. I purchased the two-school SALA in 2006. I found the opportunity when I was developing a small software program for education and met the owner who was interested in heading back to North America. I spent months in the business posing “as a regular teacher” assessing staff and opportunities before pulling the trigger and finalizing the offer, which for us at that stage was a huge acquisition, more than doubling the size of our small but growing schools business.

I was able to do this as I had established a good management team back at our Tokyo school. By spending time in the business at SALA teaching before I was the owner, I was helping the current owner lower his costs (I was working for free). When it came time to buy, I knew reasonably well who and what I was buying in the form of the employees, and what the opportunities as well as the liabilities were that I was buying into. I had time to develop a clear plan of action moving forward once the business had been acquired, and had developed a solid relationship with the previous owner as well as the key stakeholders in the business (students and teachers). This acquisition has been a great success due to that due diligence. SALA has grown to more than four times the size at the time of the acquisition over the last 5 years.

The second acquisition was of the rights to our Hummingbird business, which I was introduced to through a business partner in late 2008. He met the head teacher of a five-school chain (Hummingbird) whose parent company was shutting them down, bankrupting the business, and properly refunding all of the students their tuition due to excessive losses (Hummingbird is now our most profitable division by the way). The Hummingbird schools had incredible IP (Intellectual Property) and some great people who just needed direction and a greatly improved business model.

The third and final was a small two-school business located in the Kansai area and was found through Gaijinpot.com by some of our Osaka staff, who are always on the lookout for viable growth opportunities. The due diligence phase of this was conducted by our Osaka team. It was a small school with less than 100 students. One of our Osaka school managers started teaching regularly in the schools and did the due diligence on the acquisition. Even with the due diligence done well and a reasonable buy price established, we lost more than 50% of the students within the first six weeks.

Those two schools now have great leadership and are driving growth, structure and prosperity, but it took around 12 months to turn things around after the first exodus. It has taken a full 18 months now to get them really going. The owners did their best to help, but the small school sale can be tough for the buyer if the students are really attached to the previous owner (as was the case). Our team underestimated that loyalty to previous owners, and overestimated their loyalty to the brand and location and it cost us a lot of time, money and resources to get things turned around.

You need to work hard to make the deal happen

You will more than likely need to work really hard together (buyer and seller) to make the deal happen. Deal structures such as “flexible payments” or “payout-over-time” may need to be discussed to get the right buyer. For many small school owners, “the right buyer” is not just someone with money, but someone who has the passion to be a great teacher and take proper care of “their” students. There are more than a few bumps along the way to selling or buying a small school business. For sellers, you need to look far and wide at potential buyers for your business. For buyers, you will likely still be working a regular job, and doing your due diligence may require a lot of weekends and evenings sacrificed. Who knows, maybe the current owner will be nice enough to pay you or factor your work hours into the deal. Get creative in the deal structure as well as who you engage as a potential buyer because you never know who might be interested in making a career shift into teaching (I came out of the software industry).

If you are single school with close to or fewer than 100 students, then you will be marketing your business in trade journals, local English advertising mediums, JALT, LTJ, and in local classified ads. I strongly recommend you advertise the business sale in both English and Japanese as there are quite a few Japanese who dream of owning their own English school business. A significant number of small school owners are Japanese and there are a lot more Japanese people out there who don’t know where to start. Your small school business might just be the perfect spring board for their new career as a school owner.

Helpful general information from the SBA (Small Business Administration)

Dean R Rogers is happy to respond to appropriate questions from readers and will post answers on the discussion board following this article.

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13 Comments
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Excellent article, Dean. Very well written and easy to follow. Couldn't agree more about the points you raise. It's important for all school owners to remove themselves as the main attraction as early as possible if they hope to build transferable value in their school(s).

Hope to catch up soon, Steve (Nishida)

1 ( +2 / -1 )

Putting money ahead of morals and ethics? I would say yes.

-1 ( +0 / -1 )

The good news is there are many good teachers. Bad news: far too many cheap owners seeking only profit over employee happiness and loyalty. Profit is not the only way to your goal. If you run a school, a small one at that, I would look at it like a job - obviously - where you have to work hard no matter the day or excuse. You got into it, you're doing it. Selling your brand should be an expansion of your ideals. Don't settle, but don't be a jerk about not settling. The article is well written, but fails to touch on the employee aspect of running a business. I think most companies miss this part of the "business" angle. You run a business and you need to be responsible for your employees. Keep them happy and keep them loyal by not jumping through loopholes of working hours just to not have to pay for certain types of insurance. If you are looking to the profit only you'll sadly end up dissatisfied with the whole experience and then "someone" will sweep in and buy your business.

0 ( +0 / -0 )

Especially in these recessionary times it is doubly important to retain students by focusing on the customer first and profit second.

-1 ( +0 / -1 )

Very well written, informative and helpful article. Honestly speaking, not talking much about employees their condition is not good in my experience. Some schools are not following Japanese Labor Laws.

0 ( +0 / -0 )

I've never understood the attraction of this kind of business

-4 ( +2 / -6 )

Steven, thanks.

KobeGrandad, not sure what you are stating or asking to be honest. It is unclear in relation to the contents of the article.

jforce, Agreed there are many good teachers, and yes there are some cheap owners. To be honest most small school owners (which is who this article is targeted to) do not fit your description. I would say that many are just trying to survive as a small school and small business owner. Many former "good teachers" especially foreign teachers who are now small school owners would like to own their own school not just for an income, but to create an asset that is transferable to a new highly motivated teacher owner who is looking for independence and benefit from their hard work and dedication. As for the employee aspect of running a business, this article was not focused on that part of the business as I am asked to keep the text length between 1000-1500 words (any longer and people scan and don't read). I have written other articles that touch on teachers a lot more. Please feel free to read through those. I 100% agree that if you are only looking for profit you will end up dissatisfied with the whole experience.

Kurisupisu: Could not agree more with you. Student retention has always been the golden chalice to success.

Ari94: Thank you. Again as written above, I have written articles on employees in the language school industry. This particular article was requested on this specific topic by owners of small schools who are looking for advice and perspective on how to sell their small schools.

AmericanForeigner: I have no answer for that to be honest. You either love teaching or you don't. Some teachers want to take it as far as owning their own schools so that they set their own standards, work for themselves, and even make a good living doing it. For me it is a few things all coming together. I really do love teaching and studying languages myself (I have degree in Japanese). I also have a lot of passion for business, leadership, and organization. Running a school business in Japan is a chance to just maybe (without sounding arrogant) have a chance to have a positive impact on an industry that desperately needs it, have a positive impact on other foreigners and Japanese lives, while doing a bunch of things I personally love to do.

Thank you all for your commentary be it good or bad, and for taking the time to read the article.

Cheers, Dean R. Rogers

0 ( +2 / -2 )

I have to say that my English has improved ten fold after taking these practical steps into consideration. It's always a good idea to practice on a daily basis... even if it means learning/reading only 10 minutes a day. I'm now confident to apply for my http://www.onlinedegrees-benedictine.com/mba/online-mba-degree.asp which is fully English spoken. Hope I'm going to do fine.

-1 ( +0 / -1 )

Aiza Sensei here, Thanks D.R. for taking the time to write this article. I am in the position of soon putting my school in Kyoto on the market. I really want to have the potential new buyer be right there with me getting comfortable with the students, so that when I pass the school on, there is not a student loss for the new owner. Anyone interested in this opportunity feel free to inquire. My school is now on the edge of some major growth, but I now have family matters to deal with back home. Meanwhile it's full speed ahead and keep teaching and bulding. Good Luck to all interested. Aloha

1 ( +1 / -0 )

Nice article. Especially, about avoiding large prepaid legacy students.

0 ( +0 / -0 )

Aiza Aloha English's.

I will be moving to Kyoto next year and if your school is still for sale, I would be very interested in more details. Please post me a reply.

Thanks.

1 ( +1 / -0 )

@Priest Sorry for the big delay in answering this, gomene. I don't come to this site often enough. Will check more regularly in the future. Hit me up: aizabiza@gmail.com

1 ( +1 / -0 )

Hi Dean, I am looking for a school to buy can you suggest any places I can start looking?

0 ( +0 / -0 )

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