Over the last few years the sector has seen an increasing number of mergers of schools, particularly prep schools merging with senior schools. In addition, there has been a number of charitable schools acquired by privately owned groups of schools leaving the charity with a sum of money that can be used to make grants, in line with its charitable objectives, in the form of bursaries to further the education of children at the now privately owned school or other local schools. The primary reason for a school being merged or acquired has predominantly been as a result of financial stress at the point of merger or sale, in other words there has been no other option for that school but to accept a merger or sale.
The most common merger or acquisition has been within the prep school sector. The prep school market has changed significantly over the last 25 years. Over that period, boarding prep schools have seen the number of boarders drop or disappear completely, meaning they have had to adapt to become day prep schools to help maintain pupil numbers. More recently day numbers have dropped leaving the prep school with a boarding infrastructure and a falling pupil role of only day pupils. This is no longer sustainable; hence these schools have been merged into senior schools or taken over by private groups, all at a time when at the point of merger or acquisition the prep school is in financial difficulty with no other option.
The COVID 19 pandemic clearly has had significant impact on the sector; some schools seeing pupil numbers increasing, others suffering irreversible losses. However, during the pandemic, and particularly at the beginning, schools had to adapt financial modelling to understand various scenarios, devise possible restructuring options, plan for longer periods, change capital plans and understand funding needs. This approach helped governing bodies to be agile and make the right decisions at the right time and survive. As we emerge from the pandemic and return to the new normal schools must not return to relying on annual budgets to plan for the future.
Governing bodies must plan longer term, understand different scenarios, for example
This approach to strategic planning must also include an understanding of who any potential merger schools or private investors may be. Planning like this will enable any merger to be a merger of equals rather than one of necessity at a point of weakness for the merger target.
What is certain, is that mergers and acquisitions are continuing and can create an opportunity for some schools.
What is clear is that better financial planning makes any merger or acquisition stronger. A senior school merging with a prep school that is financially viable at the point of merger is a stronger merger that will drive better charitable outcomes. In the past all too often senior schools were having to invest significant sums into a newly merged prep school waiting years before seeing any return on that investment. Clearly strong financial due diligence is essential before any merger or acquisition for both parties, but in most cases significant investment has been required to return the newly merged school to making an operating surplus.
Schools that include merger or acquisition as a strategic option, be they a senior school or prep school, can therefore gain an understanding of any potential schools they could merge with, understand any acquiring groups and carry out soft due diligence. This sort of planning will highlight those schools with a similar ethos, identify those that will result in income generation or sustainability of pipeline and allow a full and collaborated strategic understanding of the future together. Understanding what options could be available puts governing bodies in a far stronger position for the future and if the future includes a merger or being acquired, that merger or acquisition can be planned at a time when both parties are financially stronger which in turn ensures the long term fulfilment of the governing body’s charitable objects.
If you require any further advice on any of the above, please contact Guy Biggin, or your usual Crowe contact.