Buying a bushiban

Work Teaching English in Taiwan
1

Dear Readers…

Help! Anyone got any ideas about how to value a school purchase?

Basic Facts
110 students paying around 2400 per month (don’t count materials)
rent is fairly high, but located next to elem. school
franchise fees are payable.
legal school in Panchiao

My best guess is that the school is marginally profitable as best scenario, though I will do some spreadsheets tomorrow based on data that I don’t have to hand, and edit this post later to reflect this!

I have thought of three valuation methods

  1. multiple of year’s net profit (say 10?)
  2. sale of hardware + portion to cover ‘goodwill’?
  3. % of annual turnover.

Anyway, I know it’s a never-ending question: how to value a business? But does anyone have any opinions? or experiences to share? I have seen schools for sale on and off, but never seen a valuation of one that I could understand!

Do you think there are any ‘icebergs’ on such a deal?

Thanks,
Kenneth

2

Excellent question. I have also wondered the same thing, and seem to have gotten many different answers…

How does one value a buxiban?

3

Normally a good estimate for a business is the equivalent of 10 years profits. There are a lot of variables however.

This is how I would value a school and just represents one opinion.

Basic:
Add all the expenses throughout the year up + 12 monthly payments for a 10 year loan for the purchase of the business + 10-15% of the first two numbers(x). The 10-15% represents the extraordinary expenses that come with doing anything. My motto is, “Don’t make plans, plan for contingencies.” It’s not what you planned that will mess you up, but what you didn’t plan for.

Compare this number to how much cash the school will generate in a year(y). If y>x and comes with a non-competition with the former owner for the area that the school is in, then think about it and look at the advanced part of this post.

If x>y, negotiate down till y>x or walk away. I would advise the same if it comes without a non-competition agreement. They can easily sell the business to you, then take the cash and purchase a new building and keep all the students, you thought would come with the business. Fraud must be taken into account and the reasons for selling the business. Under no circumstances should purchase if x=y. Also make sure your students aren’t being sold(redirected) to another buxiban.

Advanced:
You must know about all of your competition, where they are, how they teach, what materials they use, who they are and why they are doing what they are doing. Joining the buxiban association is a must.

You should PM Durin’s Bane. He’s a fountain of information about everything involved and should definitely get a “dude chop” for sharing the info with us. I think he would advise you to purchase your building or space.

Do not invest in a business that will not generate a return greater than what you would get in risk free gov’t bonds in your home country. An example, US treasuries are currently generating 4.4% interest risk free. Therefore I will not invest in something unless I feel that I would be making more than 4.4% interest at an acceptable level of risk versus reward. A lot of otherwise smart people fail at this one more often than not

Make sure you draw a salary. Small business owners have made this mistake before. They work for free for themselves, yet strangely refuse to do it for other people :shock: :stuck_out_tongue: :blush: .

Check out www.sba.org for tips, ideas, and info. They’re in business to make sure small businesses succeed and prosper. I’m not sure of your citizenship, but the US has a lot of info for small businesses and a lot of it is about everyday problems that you’ll face anywhere you have a business.

Make friends with the elementary school teachers as they can direct business your way and let you know what they are teaching and testing. It will probably pay off for you to tutor them for free or at reduced rates.

Make sure your closest elementary school isn’t going to run its own in house anchingban program.

Questions:
Is the elementary school called Haishan?

Why are they selling?

How many other similiar franchises like yours? Say your thinking of buying a Kid Castle franchise, so how many of them are in your area.

Why do they have their students? Important question when you realize everything here is done with personal connections.

Good luck,
Okami

4

Why buy a bushiban? There are basically no significant barriers to entry in the business that I can think of, just start your own. I am guessing that your operating losses until you become profitable will be much less than the cost of buying a school. Only reason to buy a bushiban would be to buy the brand of a big chain, I would say.

5

Neo, stick to the topic at hand, “How to value a buxiban.”

There’s a very good reasons to buy an already established business. I’m starting one and can tell you that even if you do it without gov’t sanction, there are a lot of problems in getting everything up and running. Starting a business in Taiwan can take up to 6 months just to get the legal paperwork. Is buying an already established one with preexisting clients not worth anything. Think about the permits and construction costs alone.

There are barriers to entry. Think of all the contacts and schmoozing it took to get 110 students. In my area of Yung Ho, there is a school every block. How is a parent going to pick one school from another? Most schools in my area would kill for 110 students.

CYA
Okami

6

Ok, I’ll contribute a little on valuation. Without knowing what kind of margins you can get in the cram school business, we can look at revenue for a ballpark idea of the value of the business. At 110 students and 2400 each per month, we’re talking NT$3.2 million per year in revenue. If we use a 1.0x revenue multiple, then the business is worth about NT$3.2 million. This is just rough ballpark to see what types of numbers we’re talking about potentially.

From my perspective, buy vs build is still crucial. If you had $3.2 million, could you hire enough salespeople to schmooze, cover a year’s rent/utilities, and pay teacher salaries?

Also, keep in mind that you’re just buying the expected remaining student life of those 110 students. Unless you retain students for a long time (3-6 years), you’re not really buying 110 students. If they are all high school seniors, for example, you just got suckered out of $3.2 mm. If they’re all kindergarten students and you have a K-12 program, then the 110 would be worth a lot more.

7

Since I know they have been hemorrhaging students in the last six months, the following things are likely:

The business, due to costs, is most likely not profitable as things stand.

Most students will be only 1-2 years there max, and most will be Grade 4 or 5.

Since one doesn’t buy a business based on the income, but the projected profitability, I can assume that 3.2 mill might be quite a rich valuation.

It is a franchise, and a legal business to boot.

I suspect most of the ‘value’ lies in the license, the existing base of students, the team of teachers that could be introduced. What I would need to introduce is a way to return to profitability, through restructuring costs; but that is something the current boss seems not to have achieved.

A little extra for the discussion.

Kenneth

8

HI Ken,

Just a thougt. I’d consider ability to pay. At 2400 NT/month if those kids are coming 4 hours a week then thay are only paying 150/hour.

My kids pay 210 to 300 NT per hour in classes up to 15. I’d try to find an area where the parents can afford to pay more.

9

Good question,

A few random thoughts…

I would be very careful about buying a school, especially one that is losing students. I have had numerous offers from people wanting to sell their kindys, but they too were losing students and that scared me. Once a school starts losing students, it is tough to reverse the trend. You might want to nail down why exactly the students are leaving. Then you would be able to decide if it is something you have the power to change (i.e quality of instruction, tuition, etc.).

If you are an experienced teacher, then there is no reason to buy into a franchise. Most schools teach pretty much the same thing and if you have experience then you can set up a program that fits your needs. DIY will save you that franchise money, and you want to keep costs down. Why give some chain school a portion of your profits selling you books and such that you can buy at any bookstore? Find a niche and go from there.

You aren’t “buying” those 110 students, you are buying a chance at keeping 110 students. Every time there are major changes at a school, students leave. You should count on some of those students leaving when ownership changes hands. If you want to put a dollar amount on the school, leave the students out of the equation. As a rule of thumb, expect 10% of your students to leave at the end of every semester. Good schools keep that under 10% while getting more students at the same time.

We invested $4,000,000 NT in our first school. I personally believe it looks very nice. Okami has seen it and so you may want to ask him what it looks like as my opinion is a bit biased! :slight_smile: Let’s say that you have 3.2 million, then you should be able to start up a nice school on your own.

As for placing a value on a school. I would say that the 3.2 million number that has been thrown around is too high. The folks that came to that number did it in the right way but remember, there is always a reason why someone is selling something. I bet the current owner is looking at his/her declining student enrollment and is trying to get out while the gettin’s good. Try a lowball figure, and see if he/she bites. Place a value on the internal hardware and lease and go from there. Before you buy, make sure you understand what the problems are and be prepared to act quickly on solving those problems after you purchase.

If you do buy the school, then I would suggest that you have a parents meeting and explain to them what your plans for the school are. Very, very important to communicate with the parents.

A lot depends on location, number of classrooms, reputation, rent, overall quality, overall condition of the school (has it been well maintained), etc. Please keep in mind that I don’t have all the information to make a qualified buying price, but I would start the negociations at about 1.5 million and set your ceiling at about 2 miilion and change. I am guessing the the current owner wants out badly :smiling_imp:

Best of luck,

DB

10

You can only assess the future income on what the students have actually paid in advance. In other words, if ten students just re-registered and they have each paid for one-year of tuition in advance, then that appears to represent an income stream.

However, the mistake is to think that 100 students with tuition bills of NT$ 6000 each (covering three months of upcoming tuition) represents ACCOUNTS DUE of 100 x $6000. That is ridiculous. The students don’t belong to the bushiban. A new school opens down the street with better facilities, they may all leave tomorrow.

The value of used desks, chairs, table, carpeting, etc. is nearly zero.

Most importantly, I doubt that the legal title can be transferred to a new owner. This is what you have to confirm. If you can’t transfer the title, then you have to re-register the bushiban under the new owner’s name.

However, (surprisingly) in many cases this will be impossible, because in the last few years the regulations governing such registrations have changed dramatically. The “original” bushiban may be fully able to continue legal operations at this address, however a “new” bushiban at this address may find it legally impossible to complete registration procedures!!! I have seen this type of scenario many times.

11

I know that the original poster asked about placing a monetary value on a school, but a lot of the responses are questioning whether to buy an established school at all…and I think that question also needs to be addressed.

I would vote “No” to buying an established school… but there are always exceptions that would change that to a “Yes”.

12

[quote=“Hartzell”]You can only assess the future income on what the students have actually paid in advance. In other words, if ten students just re-registered and they have each paid for one-year of tuition in advance, then that appears to represent an income stream.

However, the mistake is to think that 100 students with tuition bills of NT$ 6000 each (covering three months of upcoming tuition) represents ACCOUNTS DUE of 100 x $6000. That is ridiculous. The students don’t belong to the bushiban. A new school opens down the street with better facilities, they may all leave tomorrow.[/quote]

Indeed the students don’t belong to the school, but then neither do I belong to Starbucks or McD’s or any of another thousand brands. The issue you mention isn’t income stream, it’s guaranteed income. In business there is no such thing as guaranteed income. Almost all future earnings analysis are best guesses only, if you don’t believe, just ask the airlines this year!

Indeed, true. Hence the term ‘goodwill’ in accounting used to cover non-tangible assets amongst others!

[quote=“Hartzell”]Most importantly, I doubt that the legal title can be transferred to a new owner. This is what you have to confirm. If you can’t transfer the title, then you have to re-register the bushiban under the new owner’s name.

However, (surprisingly) in many cases this will be impossible, because in the last few years the regulations governing such registrations have changed dramatically. The “original” bushiban may be fully able to continue legal operations at this address, however a “new” bushiban at this address may find it legally impossible to complete registration procedures!!! I have seen this type of scenario many times.[/quote]

This would be a significant setback since an inabiltiy to transfer the ownership of the school would mean that the school may only have limited worth, as a liquidation sale! How would I check this?

Kenneth

13

Few things to chew on:

 Holding existing students is extremely difficult. Especially if the current owner has made it known they want out.

I agree with Duris, 2 million is the max. I have bought two licensed schools here (relicensed them subsequently) and have never paid more than that.

  Some numbers to bear in mind. License will cost you minimum half a million as you must put down a bond to get your license. There is usually a bit of payoff/renovation that needs to be done before you'll pass as well.  AC's can get quite expensive (20ish a hit) so if they're already present they are a significant value. 

Wouldn't even consider a school if it wasn't a) fully licensed b)at least 4 classrooms and c) I had the current owner sticking around/ fading gracefully. 

    Lastly, be very careful of the chains. Your niche is the foreign ownership angle. What makes you special if your selling the same ol shit as everyone else? Some of the franchises can be VERY restrictive about their curriculum. If you can't pitch people that you can do it better, it's gonna take some luck.
14

If the business is hemorrhaging, this is a totally different ballgame. There are plenty of bad businesses out there that are considering closing shop rather than continue to lose money. If you are interested in buying a distressed company, then the key is to have a coherent analysis for why it is doing badly. The reason must be something that is temporary and fixable and non-endemic to the business. At the same time, you want a coherent analysis for the strong underlying fundamentals of the business. I would hope you, or someone you are hiring, has a lot of experience in the business and can see what is going on from their experienced vantage point and knows how to fix it.

Having said this, this could turn out to be a good deal IFFFF you do it right. That’s because you can probably get it for a great price. If the seller is having trouble making loan payments, rent is due, salaries have to be paid, and the seller has no cash to do these things, then what choice does the seller have? Try to pick up the business at a firesale price. Hell, they may even pay you to assume their liabilities. There is always an oversupply of bad businesses, so you have the power to cherry pick at a good price.

You should question why this business is losing money. Are there real fundamental problems related to pricing (as Fox mentioned)? I think an easy ballpark calculation would be to estimate the costs of a single classroom. Assume the classroom gets average usage (2-3 classes/day?) Based on the price per ping that they are renting at, what is the rent for the classroom? Figure out the teacher salaries + benefits. Utilities expense. Apply some overhead for secretaries and management salaries. Then figure the income from students. If the income on a per classroom basis isn’t covering the expenses, that’s a sign the price point for the bushiban is simply too low.

To DB’s point, I’m also not a fan of becoming a franchisee. We were franchisees for many years and as one of the successful franchises had to pay boku bucks every years to our parent which itself was losing money. The successful franchisees eventually sued to buy out our contracts. Franchises make their money off of people too insecure to go it on their own.

110 students does not impress me that much. A solid investment in marketing and schmoozing personnel could garner that many students in a decent amount of time, I would say. I imagine there is a viral component to this as well. “Oh, my neighbor’s kid is going there and likes it, so we’ll send our kid too” I am not in the cram school business but this is my gut instinct.

On buy vs build, consider this alternative. What would be the cost of building a new, brightly lit, flashy cram school with the best teachers right next to the crappy one with 110 students and then getting registered? Chances are, you’d have a good chance at grabbing most of the other school’s students, if it turns out they have alienated the parents for some reason or have bad instruction or something. Classic example of this is the movie theater business. Chains have been building stadium tiered seating, surround sound, large multiplexes right next door to the old crappy ones for the last ten years. Half of the big chains with legacy theaters have undergone bankruptcy reorganizations. Why buy something shitty when you can build a new beautiful one next door with better amenities and take away all the customers for free?

15

There are alot of good advice given above that should be taken into consideration and used as part of your negotiation tactic.

Now a bit on valuation:

Prefered business models include:

1- DCF - Discount Cash Flow Model
2- Comparables - what did other similar schools sell for

1- DCF - this approach is the best way to value any business as long as the projected cash flows (you want free cash flow) are realistic. Given a business with history, you should be able to project future cash flows with certain accuracy. The value of a business today is thus the value of the business’s future cash flow discounted by a required rate of return to present time. Basically sum up all the Present Value of all future cash flows discounted by your required rate of return and that is the value of the investment. Let alone Continuing value, CAPM. Without going into further detail, you should do a google search on DCF and CAPM and you should get some good valuation guides, or at least formulas on how to use DCF which will require some financial expertise. 4% risk free alone is not a good enough return. Use CAPM.

2- Comparables - if there were similar sales of bushibans before, then you can use actual past acquisitions as the basis of your negotiation. But you need make sure you are comparing apples to apples. i.e. school in different districts, size of student body, etc.

With more info, if you have the acquisition value of past comparable bushibans and know their sales revenue, then you could guestimate the value of your bushiban given its sales revenue.

That’s how we do it in the biz world. hope it helps out.

16

What is considered a big school in Taipei? How many classrooms and students?

jssst21 mentioned that one of the considerations is that the school have at least 4 classrooms. Is that the average size of a school in Taipei?

17

A friend of ours is selling her school for 600,000. It is located near several public schools but has a chain school and An Jing Ban on the same street.
I guess with the public schools offering native speakers now competition for the few remaining students will be fever pitch.
Any suggestions?

18

[quote=“Boomer”]I guess with the public schools offering native speakers now competition for the few remaining students will be fever pitch.
Any suggestions?[/quote]

No need to worry about public schools offering native speakers. If and when it does happen it is going to be a Gong Show.

19

It already is a gong show. I did the summer program at Wen Hua High School in Taichung.
Here are some of the unique methods used for EFl teaching in public schools.

  1. Photo copy well known and copy write protected books and give them to the students as textbooks.
  2. Hire unlicensed and illegal foreign teachers through a third party(Wegor).
  3. Refuse to submit tax deductions from the teachers pay as they are illegal anyway.
  4. When any of the teachers complains fire them and replace them with another illegal English teacher, telling the students the teacher quit.
    Seems to be working quit well in Taichung, unless you are the teacher or student of course.
20

I went to a seminar a while back that was promoting an RPG ESL game (total f@@king joke). Anyways, the guy who was promoting this software said that because the public schools are starting to hire foreign teachers, the kids will have plenty to chances to master English conversation skills at the public schools. Because of this he reasoned, language schools won’t have to hire foreign teachers and one could just spend $17,000NT on this RPG game, and let the kids master English from it.

It was at this point when I walked out…