Negotiating/evaluating a school for sale

Every generation needs a revolution - an entrepreneurial revolution

Rizal Philippines
August 26, 2016

I was on a meeting Tuesday afternoon with the representative of a primary and secondary (with Senior High) in a MM city.  In the meeting were:  the President of the Company, a lawyer, a banker, and two representatives of the seller

Some issues:

1. The price is P50 million.  The appraised value of the property is P70 million.  So this is a good asset buy.  However, the school does not make money.

From a net income approach valuation, the price of the school is zero.

The audited financial statement says it makes a revenue of P24 million a year, or P2 million a month (misleading because the tuition payment is quarterly).  The direct cost is P21 million a year, and GA expenses is P4 million.   We learned from additional information given that part of the monthly expenses is interest payments made to dozens of the creditors of the School Director who amassed some P74 million in private debt (as no banks would lend to a school asset - they could not foreclose)  Without the debt service, the school could be profitable earning some P12 million  a year.


2.  Manner of payment:




   The proposed MoA calls for a P15 million Dp by 2 pm of August 30, 2016.  This will be used to pay of the debt to a certain personality who purportedly bought it gave only P8 million and failed to pay the balance, for SSS and HDMF payables (they could be jailed)

  P15 million on September 30, and P10 million by March 2017.  The President said the manner of payment is not possible.  He countered that once the P15 million is paid, the company takes over, see if it is profitable, and after which he will bring to the bank a loan application for the P27, million balance after setting aside P13 million for the retirement.

  From where I am, I could see that the seller would balk because she is selling to cover her P73 million debt. There is no way she could cover the 73 million with P37 million net she would receive and after a year. She would have no source too to service her interest payments

3. Legal/ownership issue.

The land consisting of 11 parcels is the personal property of the School Director.  The non stock corporation is another entity.  Thus if there is a to be sale, there would be two transactions:  one of the land, and the other of the non stock corporation which does not own the land where the land stands.  I presume too that the improvements are in the name of the director

(How could Decs have allowed that?)

Thus the property where the school is could be at risk:  like selling this a third party, like what the director has done before (the land now is under legal dispute) and from her clean unsecured creditors who may attach her properties.

This transaction is at risk unless the land is registered and shielded by corporate mantle if transferred to the school corporation

4.  Operations

   1.  The enrollment is on the decline for the past 5 years.  From over 500 5 years ago to 400+ this SY. Explanation by
the representative:  

1.  The govt put up more rooms at the public schools elementary and high school

  2.  There were no cap ex to improve school facilities

  3.   The tuition is from P40 to P50,000+ a year which is almost an exclusive school tuition.  There are 16 other private schools in the vicinity

That is the next challenge:  if the legal and purchase price issue are solved, how DO YOU TURN AROUND THE SCHOOL OPERATIONS?

A due diligence is thus necessary

5.  To meet the deadline a loan shall be processed for the seller by a bank owned by the buyer.  In the meantime a due diligence may be done to find out if the numbers are right, and if the school van be turned around and be made profitable, to generate say 20% roi,  or 3 years return of funds employed.