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.