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Starting or Buying an English School: Number Crunching

Last week we mentioned income, salary, rent and pricing. The other stats to look at are:

 

Capacity: How many bums on seats could the school actually get, and what percentage of that is filled? At Modern English we use the term ‘seat’ as a restaurant would use the term ‘cover’, to refer to a customer or potential customer, i.e. a filled or unfilled seat. It’s important to note that a private, or one-to-one class, occupies the same number of seats as a group class does, and this should indicate a much higher price.

 

We aim to work with a minimum of 75% of capacity filled, though ideally higher. 100% would not give us the room we need to be able to service our students’ needs and give them make-ups in various classes, nor allow us to do free trials or demo lessons. Each school will be different.

 

Churn Rate: Calculating your churn rate – the lifetime of your students – will allow you to forecast your revenue and calculate the number of new students you need to recruit to either maintain your size, expand or contract. This can all be planned.

 

Lifetime Revenue: The number of months of expected-student-lifetime multiplied by your prices will tell you lifetime revenue. You may be surprised how small your cost of acquisition is compared to this. This may make all that advertising seem much cheaper.

 

Cost of Acquisition: Budget a specific cost of acquisition – how much do you need to spend to get a new student? Calculate the number of seats you require to hit your desired capacity filled (i.e. hit your target revenue).

 

This is only part of the picture. Apply your churn rate to new and existing students to see how often you will need to replace them to keep growing or stay the same size. You should be able to apply this model over three years to allow financial planning. With a solid business plan, it should be possible to raise finance if you need it.

 

All of this information should be available, or calculable, for a school on the market. I’d be hesitant to go much further without it. If you are starting from scratch, you’ll have to make some assumptions. Ask around – would three years’ student lifetime be a good place to start, or would 18 months be more realistic? You can adjust your model as you grow.

 

Going back to the option of buying a school, for us to buy one and add it to our chain, I’d want it to have monthly revenue of at least ¥1,000,000 (approx. $8,865 and, after our staff and systems were put in place, be making at least 30% profit, hopefully more (our head school is currently running at 47% on the budget), or it wouldn’t really interest us. (Though there are exceptions, and we do broker sales, so let me know if anyone wants to sell.)

 

We’d then likely make an offer with an initial down-payment and further staged payments, based on how much of the student body stayed, encouraging the seller to help ensure the maximum retention.

 

Your situation may be different and you may be looking to buy out a solo teacher-owner-operator or a couple. This is perhaps the easiest yet most risky option. The current students may love their current teacher (and/or assistant), and in the future, they may just find they don’t love you in quite the same way.

 

It might be safest of all to buy a chain where none of the customers know the owner. Next would be a multi-teacher school with a non-teaching manager; then a single-teacher that had already changed several times. The more external support there is, the less dependent on the current teacher the business is.

 

And if you hear this from a seller, smile, shrug and walk away: “What I do is unique. I’m irreplaceable. I’m the best.”

 

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