Rizal Philippines
August 21, 2016.
Everything is so sudden. While I do not have the formal mandate yet that I would be an executive director of a holding company, a thick folder was sent to me to study the viability of buying a school. (Elem to Senior High School) There was a communication that contains a letter of intent to sell and the suggested closing is end of the month.
I reviewed the documents and found out that most of the information are for a loan transaction: appraisal of the real property and FS (which I think looked funny) If ever there is a valuation report, it has to be valuation of the business based on the FS? They do not add up. Well the FS shows a school that is losing money.
If the purpose of the exercise is to buy the business, a lot more data is needed. It is like a strama paper. The objectives have to be defined and the strategy of how to make the school profitable, how to achieve ROI has to be defined. A due diligence study has to be made before cogent decision can be made.
I did not realize that I am comfortable and at home in this kind of work.
These are the excerpts of my thoughts/communication to the Chairman of the Holding company:
Allow me to say some of my humble thoughts/comments on the paper which I read:
1. The bulk of the information is for a loan transaction ie, the collateral and financials
2. I could see a lot of discrepancy in the financial statements: eg. the income statement, the expenses (vs the worksheet)
Have they made 100% correct representation on the data presented po
Why are they selling? Maybe they are not making money or enough
However, I understand the plan is to buy the business and more information is needed to determine the viability of the business to be purchased:
Internal Analysis:
1. The main value proposition of the school, Primary Target Market
2 The competitive advantage
3. Does the school possess the critical factors for success of the school
4. Quality of management. Shall the top management remain in case of sale, who shall remain, who shall resign/be retired? Is this well managed
5. Quality of the teaching staff/efficiency (the current ratio of staff vs students population is 1:10. Is this an ideal ratio
External analysis:
1. Competitive analysis
of facilities
of teaching staff
of tuition fee. Is the fee of P51,000 a reasonable tuition for a Las Pinas School (malapit na sa exclusive school fees)
enrollment
2. Why is their enrollment only 500?
3. Where is their growth area? Can the enrollment be increased?
Strategy:
Price
1. How much is the just purchase price?
2. Manner of payment
Purpose
1. What is the goal for the school?
Enrollment, revenue, , expenses, Net income
2. What is the strategy to achieve # 1.
Operating the school:
1. Who will run the school? Shall we install a new dean (do we have a candidate now? Or shall there be a transition period until the purchase price is completed
2. What changes must be made to make it generate cash flow for the holding company? .
My hypothesis is that:
If the enrollment can reach 1,000 ,reduce tuition to 35,000, there would be additional P11 million, and peg expenses to only say 12 to P15 m, then we can generate additional income of
P14 million for added revenues
10 million from cost reduction
the N.I can be 24 million or 40% ROI. vs purchase price of 50 million
However, may I suggest that a due diligence be made. I talked to a school Dean CPA and I conclude that to properly know what to do with the acquisition and to validate this hypothesis
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