Selling Private Schools
In the 2023 school year, about 13% of all students in Florida attended private schools. There ar 2326 private schools in Florida compared to 4229 public schools. Private schools serve all students (K-12) with an average annual tuition of about $10,000 in Florida. The majority of private schools are religiously oriented and some are not-for-profit. There is a thriving marketplace in South Florida for the sale of for-profit private schools, including pre-K, elementary through high schools, and technical colleges (especially nursing schools). A private school is valued by separately determining the value of its intangible assets (or goodwill) and its real estate value (unless the school rents space). The license, enrollment, and staff comprise the primary components of a private school’s intangible assets.
Licenses of Private Schools
The Florida Department of Education stipulates that all private schools in Florida must be registered. Interestingly, neither the Florida Department of Education nor local public school districts license, regulate, or approve private schools in Florida. Rather, a private school (once established) must simply register the private school by sending their school survey to the Florida Department of Education and sending annual school surveys thereafter. Private schools may of course obtain further accreditations with public or private agencies, which will enhance the value of the school. A private school must obtain a local business license and is subject to local health and zoning requirements.
Enrollment of Private Schools
The enrollment of a private school is the main determinant of its intangible assets. A growing enrollment over time signifies that the local community’s students and parents are more trusting of the school’s brand and ability to provide a strong education and valuable learning environment. A private school’s enrollment fluctuates each school year, so the enrollment trend will be carefully scrutinized by potential buyers. Additionally, buyers of private schools will carefully monitor how many students did not complete the school year. The number of ‘drop outs’ during the course of a school year should be kept to an absolute minimum. A strong and growing enrollment trend is vital to a private school’s intangible assets.
Tuition of Private Schools
The annual tuition of a private school should be competitive with other similarly situated private schools in the local community. A tuition that is too high may result in declining enrollment or a disproportionate amount of student drop-outs. Many private schools accept payments over time from parents, so the accounts receivables of any private school should be disclosed to potential buyers.
Staff of Private Schools
A loyal and dedicated staff is an extremely important component of a private school’s intangible assets. The teachers of any school are ultimately what drives the value of the school, since the purpose of a school is educating its students. Private schools must properly recruit and train a competent and professional staff in order to attract students. A key indicator that buyers of private schools use is the longevity and performance of its staff.
Non-Compete Clauses for Staff of Private Schools
Some private schools require their staff to sign a non-compete agreement with the school. This means that the staff member is prohibited from working for a competing school within a specific geographic area. Generally, courts will only enforce such contractual provisions when the limits are reasonable and when it serves a legitimate business interest. A private school with a staff that is working under governing and enforceable non-compete agreements has enhanced value because the buyer will be assured that the staff will remain with the school after the sale occurs.
Owner Benefit of Private Schools
The seller’s discretionary earnings (or owner benefit) of a private school is another way of referring to the actual economic profit of the school derived by the owner. The owner benefit is assigned a multiple (usually between 2-5 times) in order to derive the value of the school’s intangible assets. The ‘multiple’ of owner benefit is a function of the various factors previously described which may decrease or increase the multiple. For example, a private school with a growing student enrollment, loyal staff, and strong accreditation will be assigned a premium multiple.
Calculating Owner Benefit of Private Schools
First, the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) from the financial statement (such as a tax return or profit and loss statement) must be calculated. Then the actual owner benefit must be determined by ‘adding back’ any unrecorded cash, the owner’s salary, the owner’s personal expenses that flow through the financial statement, and any other adjustments which reflect the ‘normalized’ earnings of the school. This is a process that takes time and should be conducted with the assistance of a professional business broker.
Valuing Real Estate of Private Schools Separately
- The value of a private school’s owned real estate (including the school and land) may greatly exceed the value of a private school’s intangible assets.
- When valuing real estate attached to a private school, it is important to factor recent comparable sales, the condition of the real estate, and the capitalization rate of the property.
- Recent comparable sales must be researched thoroughly and should take into account the use, size, specific location, and zoning status of the compared properties.
- The condition of the private school should be closely analyzed, and any construction or improvements made to the property should be quantified and disclosed to buyers.
- The capitalization rate (cap rate) method is another way of determining the possible real estate value of a private school.
- The cap rate of a commercial real estate property equals the net operating income divided by the real estate value.
- Using simple algebra, this means that the property value of a private school (using the cap rate method) equals the net operating income of the school divided by the cap rate.
- Typically buyers will require at least a 5-10% cap rate for a commercial real estate investment depending on market conditions.
- If a private school’s net operating income is $250k, then a 5% expected cap rate computes to a property value of $5M ($250K/.05).
The sale of private schools are thriving in the South Florida market, and frequently make attractive targets of acquisition for private equity investors as well as private entrepreneurs. Sellers of private schools should consult with a professional business broker to ensure they receive maximum value for their business with or without real estate attached.
Give Martin at Five Star Business Brokers of Palm Beach County a call today at 561-827-1181 for a FREE evaluation of your business.