Investment in Private Professional and Occupational Schools

The recent federal stimulus package provides over $1 billion for training and education. Yet this money is being earmarked to a sector – professional and occupational education – that hardly needs it.

Graduate and professional schools are thriving. Even without stimulus money, record numbers of Americans are returning to the classroom for advanced degrees and job training. This sector is anticipated to grow by about 8% in 2009.

Professional schools as an investment

For the entrepreneur, few businesses promise as much as owning a professional or occupational school. These educational institutions offer professional or career training. Common examples include schools that provide diplomas and training in aviation, accounting, broadcasting, nursing, cooking, insurance, information technology, cosmetology, law, business, real estate, and any number of other vocations or professions.

Occupational schools are rarely thought of as an investment option for angel, institutional, or other investors. Yet when competently run, they are highly profitable and can represent an excellent value for owners.

Students pay significant tuition in hopes that the investment in their continuing education or training will pay off in the form of greater future earnings. And since tuition money frequently comes from loans, government grants, or other sources, students are glad to part with significant tuition dollars each semester.  Professions schools, which are accredited and regulated by state departments of education, are also difficult to start.  This barrier to entry also keeps competition down.

Most occupational schools also qualify to participate in federal assistance. These include the many federal student grant and student loan programs. See http://studentaid.ed.gov/students/publications/student_guide/2009-2010/english/glance.htm. Accordingly, thanks to government largess, occupational schools often can charge far more for tuition that they could in a free and competitive marketplace.

For owners, professional schools bring in a reliable source of income that is as predictable as it is steady. That is because the school will accept a minimum or set number of students every year. As such, owners can predict rather accurately what return they will receive on their investment. The only real constraint to growth is the campus or real estate needed to support the school. A mature school will act like an annuity. It will provide profits to owners for many years to come.

Purchase price considerations

Expect to pay a purchase price of about three-time annual earnings for a fully-operational and duly-licensed occupational school. A one or two-times earnings purchase price represents a good value. Do not fear a multi-million sale price so long as it is supported by a history of sufficient numbers of students paying sizeable tuition every semester.

Financing: If you buy an existing school, you can often finance part or most of the sale. Most commercial banks finance 50%, provided the school has some tangible assets to collateralize. Some banks will require cross-collateralization.

New or “shell” schools: If you are entrepreneurial, the best bargains are to be found in the realm of new or shell schools. These institutions are set up and licensed. They may be dormant. While they might have at one time had student, they do not have any at the time of the sale. Expect to pay $30,000 or more for a shell assuming it has been properly established and has a valid certificate or state license.

The approval process for occupational schools in many states is long, complicated, and expensive. It can take a year or more for a new school to get through all required state applications, inspections, bonding processes, insurance requirements, curriculum reviews, and other obstacles. Accordingly, there is often intrinsic value to an institution’s certificate, if it is in good standing.

What types of schools are best? The most profitable occupational schools are obviously those that can charge the highest tuitions each semester. And students are generally willing to part with more tuition dollars when their post-graduation earning potential will be highest. Accordingly, the most profitable occupational schools are those whose diplomas will enable graduates to work in well-respected and higher-paid professions.

Due diligence

For most professional schools, anticipate that the largest budget items will be, in this order: real estate, human resources, and marketing.

Real estate: Most occupational schools rent their facilities. And the facilities are somewhat specialized. That is because most jurisdictions’ building and zoning codes have special rules for educational premises. That is true even where all students are adults. Typical requirements for educational space include: water sprinklers in every space and corridor; a unified fire or smoke detection system (it communicates automatically with the local fire department); fire-resistant walls; fire-resistant corridors; multiple means of ingress and egress; emergency battery-backup lighting; strobes and horns; and much more.

Accordingly, expect to pay a premium for educational space. In most markets, rates run north of $20.00 per square foot and track the class A space market in your city or town. Whatever the price, you should ask a few basic questions about the school’s facility:

How long is the lease? Make sure the school has years – not months – remaining on the lease. The lease is an asset. Unless you are dissatisfied with the school’s facility (and planning on vacating it upon the end of the lease), you should ensure that the school has a continuing right to stay put. A five-year or longer lease is generally preferable for a professional school’s facility.

Is there adequate parking? Whether the school offers a full-time, part-time, day or night program, you need to ensure that there is adequate parking.

Is the facility presentable? The school’s objective is to persuade professionals to return to the classroom and part with significant tuition dollars. They need to be impressed with – and comfortable in – your school’s facility. Cramming the highest number of students possible into classrooms can be a fatal mistake.

Is there room for growth? You cannot grow a school if you have no more real estate to grow into. If the school is out of room but growth is part of your plan, you may be able to persuade the landlord to offer you a right of first refusal for additional space if there is any. If not, and you are locked into a long-term lease, you need to factor that into your evaluation of the sale-purchase opportunity.

Human resources and administration: Among the many reasons an occupational school is a good investment is that it often runs itself. And sometimes, the school runs just fine with fewer, rather than more, employees. Your key personnel and departments are as follows: (a) faculty; (b) admissions and financial aid; (c) dean or director. Here are a few tips on what to look at in this area when you engage in due diligence:

Faculty is mission-critical to a professional school. Your faculty is your deliverable product. Students – your only customers – will judge you according to your instructors and professors. Spare no expense. The sum of the faculty is equal to the value of your school’s diploma. If individual faculty members fall short, plan on replacing them.

Avoid faculty entanglements. Some schools will have long-term contracts with faculty members, a “self-governed” faculty, unionized faculty, or a faculty tenure program. These are major problems for a school and its owners.

A self-governing faculty has, pursuant to a written contract with individual faculty members or their union, policy-making authority. Moreover, faculty members are often not subject to oversight or discipline by the school’s own owners. In the event of a failure in performance by a faculty member or misconduct by a faculty member, the school owner will often have to submit the issue to the faculty governing body itself, a third-party arbitrator, or a union grievance committee. Unilateral action by the owner may be a breach of contract.  Needless to say, these are not good attributes.

If the faculty is anything other than “at will” look at the sale-purchase transaction with great skepticism. It will mean you will often be at odds with your faculty for the foreseeable future. In fact, a school that comes with such an arrangement may have it forever if Congress passes the Card-Check Bill (a.k.a. the “Employee Free Choice Act,” H.R. 1409; S.560).

Admissions are for admissions, not rejections. Let’s look next at the school’s admissions and financial aid personnel. Smaller schools will unify the position, with one person handling both admission and financial aid. In this age, there are in fact professional admissions directors who have masters’ degrees, many years of experience on admissions committees, and who strive daily to ensure that the school meets every quota relating to race, religion, geography, and sex. If the school you are looking at employs such a professional, it is not a benefit, but a liability.

In an occupational school, admissions and financial aid is your marketing and sales department. Your admissions requirements for students are far different from four-year universities. Generally, you are going to admit anyone who can pay, borrow, or otherwise qualify for the tuition. While you want to admit the most qualified students possible, your first concern is filling desks with warm bodies.

Thus, the admissions director should not be a bureaucrat. He or she should be a salesperson. His job is to inspire potential students, give them confidence in the school’s program, and persuade them of the value of the tuition investment. They should friendly, vivacious, and approachable. Professional “admissions officers” will hurt and not help the school.

Hands-on owners often handle admissions themselves. And in small schools, this important responsibility can been given to the dean. Some schools can be run by a single competent administrator and a faculty.

Debt: Some schools may have debt. Be wary of schools in the hole. This business is highly lucrative when properly run. Debt is often a sign of a school with serious problems.

If you do not have ease in understanding the school’s financial statements, hire an accountant to assist you. In addition, these due diligence tips are just the beginning. If you are not experience with buying and selling businesses, consult an attorney who has experience with business sale-purchase transactions.

Long-term goals

Whether you buy a new school or an existing institution, your focus as an investor should be the same: to continue to improve the school’s name and reputation. The term “reputation” in the education sector has the same meaning as “branding” in any other industry. As the school’s reputation improves, it will permit you to charge higher and higher tuition with only a negligible rise in expenses.