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Editor’s Note: DETC invited well known school investment advisor Ed Meehan to prepare a list of tips of the trade for institutions that are considering a fund raise or considering selling their school. Mr. Meehan is a Partner with Arcady Bay Partners, an investment banking firm with a focus on the education sector and serving as what is called “an active angel investor.”
Today, with the growing interest in for-profit education, there are many parties looking for investment and acquisition opportunities. Unfortunately with the growing politicalization of regulation, tuition costs and online learning, investors and buyers are spending more and more time evaluating and investigating the investments and acquisitions they make. This “Due Diligence” process is complex, time-consuming, tedious, and many times a distraction from managing your business. If you expect to proceed down either path, you need to be prepared and well-informed.
1. Speak to owners, advisors and investor/buyers to get their insights and suggestions on how to best pursue financing and or sale processes.
- Best way to get current market insight
- Many owners views change after they go through a financing or sales process
2. Make sure your lawyers, accountants and advisors have the appropriate experience to guide you through the process.
- Transactions often do not close due to bad advice or a lack of knowledge on typical transaction structure
3. Consider hiring an investment banker with relevant expertise to represent you.
- Not everyone needs an investment banker
- A banker can create value through managing a tight process, getting a management team prepared and reducing the time that management has to divert away from running the business
4. Establish if a full auction process makes sense vs. a limited auction or just pursuing targeted investors/buyers.
- Depends upon goals and management expectations
5. Find out how investors and buyers value schools and understand what drives strategic (premium) values.
- This can provide insights into why investors/buyers valuation methodologies and transaction structures can vary dramatically
- A good understanding of such concepts can also assist you in assessing when may be a good time to raise equity or sell your school
6. Make sure your management team understands what investors/buyers will be asking and is prepared to lay out your company strategy in a concise manner.
- Preparation of concise company information in an offering memo and management slide presentation is critical
- Investor/buyer valuation levels are typically influenced by whether management will be staying with the company and if they invest their own capital in the business
7. Play up your company strengths and know your potential weaknesses (whether actual or perceived).
- During due diligence investors/buyers will confirm strengths and typically uncover weaknesses, it is better to address any weaknesses up front and explain plan to improve
- Accreditation is a key area that should be highlighted—DETC accreditation and requirements are a valuable asset to highlight
- For schools with Title IV, this is another key area in which to stress your expertise
8. Be prepared to discuss and analyze historic and projected financial results in great detail.
- It is very surprising how many schools do a bad job here
- Historic results are a key indication of potential future success
9. Do not lead with valuation expectations.
- Very often a successful investor/buyer of a school would never have spent time on a potential transaction if the price they ultimately paid was presented in initial discussions
- Investors will many times increase valuations levels if due diligence progresses well
10. Run your business as if a financing or sale will not take place.
- The best negotiation tool is the reality that you have a profitable business that you do not have to sell
Remember: Strategic valuations generally are driven by well-run companies with strong management, profitable operations and a differentiated vision for consistent future growth.
Where are the Online Schools Trading?
Below is a brief summary of valuation metrics as of Friday January 29th for online focused colleges and Strayer Education, which is one of the higher quality schools with approximately 61% of its students online. These are key valuation metrics that you need to understand before starting any fundraising or sale process for your school.
Sales, EBITDA and Enterprise Value in millions.
Valuation Drivers
- Revenues and profitability
- Growth prospects
- Management
- Competitive advantage
- Institutional Accreditation
- Premium Programmatic Accreditation
- Systems/scalability
- Online penetration/capabilities
- Student population
- Overall Market
- Fit with buyers
Common Mistakes
- Focusing on value before you engage the buyer
- Unrealistic valuation expectations
- Sloppy support and documentation of business strategy and projections
- Not being prepared for due diligence
- Missing your numbers during due diligence
- Lack of understanding of the buyer’s perspective
- Negotiating with buyers one at a time
- Not helping the buyer make the case they need to sell to their board/investors
- Inability to explain your value proposition
- Weak projections
- Thinking unique systems or programs will solely drive the deal
- Making a bad first impression
Mr. Ed Meehan is a Partner with Arcady Bay Partners, an investment banking firm with a focus on the education sector and an active angel investor, recently making investments in JTC Education Holdings and Straighterline. Ed advised MedTech College in its recent sale to JTC Education Holdings, in December 2009.
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