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Setting Up an English School: Start-up or Buyout?

One way to get into your own school is to buy an existing one. Given the often-transient nature of school owners, schools come on the market quite frequently. Whether they are good or not, only close inspection will reveal.

 

When you find a school for sale, you’ll need to be sure it will work for you. Could you step in as the owner and the school would not notice, or is the current owner so hands-on that replacing them is a huge risk, and you could expect the students to leave as soon as the owner does?

 

You need to see at least three years’ figures, with actual revenue collected and deposited clearly shown, all receipts for all expenses, tax statements and payments and, if the school is a company, the full accounts. These should be viewed by a qualified professional, for a second opinion at the very least. You should then begin true due diligence. Ask all the awkward questions, and if you don’t get the answers – walk away.

 

If possible, it’s a good idea to teach in the school to see how things feel on the inside, before making any offer.

 

When making an offer, be sure to include a clear timetable for handover, what is included in the sale and be sure any liabilities are disposed of before that handover. Student credit for lessons paid for but not yet taken can be an issue here in Japan – and this should be counted as a liability.

 

Make sure the lease can be transferred easily, without any payment, or deduct this from the offer price. Sellers will often try to claim deposits or ‘key money’ paid as an asset, but in our experience, this can be written off. The only way the seller could reclaim this would be to close the school and move out of the building.

 

So, is the school making enough money?

 

There is an excellent website, www.bizstats.com, that gives statistics from a wide variety of business, including educational services. These may not apply directly to your location, but they show the expenses-to-revenue ratios by industry.

 

From these statistics, rent and salaries combined should be approximately 34% – I’d rather have this closer to 30%, but certainly anything over 40% is too high. This should help you set your pricing, or gauge if the existing prices are right.

 

Setting pricing is probably the most important decision most businesses make, and yet spend the least time on. Many schools in Japan far undervalue their worth, and charge too little. (We will look at pricing in more detail in the future.)

 

I’d like to have my staff and rent earning four times their costs, though three times is perhaps more realistic. Set revenue targets for your teachers and monitor their success in hitting them.

 

The stats show further that other selling and general expenses should add up to approximately 18.5% and costs of sales is approximately 11.2%.

 

The definition of costs of sales (CoS) is: The accumulated total of all costs used to create a product or service, which has been sold.

 

You can include anything you like, and public companies change the way they categorize.

 

Normally, teachers’ salaries are CoS, though some schools may include other expenses such as travel costs, textbooks, etc.

 

For a simple budget (and most private language schools are very simple, cash businesses) it’s perhaps better not to think in terms of CoS, but rather revenue vs. expenses. (We’ll be looking in detail at budgeting in future articles.)

 

The numbers should work the same way whether you are buying or starting from scratch. The major differences are cost to break-even point, then profitability for a start-up, and using equity vs. sweat equity.

 

There are other numbers to consider, too, and we’ll look at those next time.

 

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One Response to Setting Up an English School: Start-up or Buyout?

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