Private education sector M&As The legal considerations

The independent school sector is tightly controlled and regulated, notably by the Department for Education (the DfE). Any sale, merger, or acquisition of a private educational institution will involve change of control notification to the DfE. Buyers, particularly commercial investors, should prepare to undergo rigorous checks of key personnel before DfE approval is obtained.

The Independent Schools Inspectorate (ISI) and, in some circumstances, Ofsted, will also require notification ahead of completion of any deal. In addition, where the school in question has charitable status, the Charity Commission may become involved to ensure compliance with relevant charity laws. Note, however, Commission approval is not always a pre-requisite for the sale or restructure to proceed.

For buyers, understanding the regulatory regime set out in the DfE’s Independent Schools Standards framework is essential. It covers a wide range of areas – from education quality and pupil welfare to health and safety, staff suitability and adequacy of school premises. These regulations will bind the buyers post-completion. A detailed analysis of the internal operations, standards, and processes in place at the target entity will be a key element in due diligence.

Past inspection reports, records of any enforcement actions, and complaint histories should be carefully reviewed by the buyer. Identifying shortfalls and assessing the cost and time involved in rectifying these may well be a crucial factor underpinning the eventual sale price.

Before agreeing to any merger or acquisition of a private school, a detailed assessment should be carried out by the buyer into existing child safeguarding procedures. This should include examining current provision for staff training, compliance with the DfE’s Keeping Children Safe in Education, latest guidelines and all safeguarding record keeping processes.

Key to the latest guidance is the obligation placed on governing bodies and proprietors to ensure that those involved with the recruitment and employment of staff have received appropriate safer recruitment training. They must understand the need for appropriate vetoing and DBS checks when recruiting teaching and other staff.

Sellers should be prepared to disclose this information readily, and to deal with any concerns raised by the buyer about any weaknesses identified in the safeguarding culture across the target institution.

A significant number of independent schools and other private sector educational establishments are structured as charitable institutions. Careful attention must be paid to the impact this status may have on the transaction.

In particular, if the governing body of the school is composed of charitable trustees, they will have additional duties to comply with that go beyond the obligations imposed on the sellers of mainstream commercial enterprises. For example:

• The impact any restructuring or sale will have on the beneficiaries of the relevant charity (usually the student body) is a primary concern. Whether or not the transaction will be of benefit will usually be the determining factor in any decision to sell or merge the institution
• Where two organisations are merging and one (or both) is a charity it is essential to check the objects and governing documents to ensure the proposed deal is compatible with the aims and objectives of the charity. Mergers must strengthen, not weaken, any stated charitable purpose

Perhaps more than in any other sector, the success or failure of private education M&As will be determined by the effort both sides put into post- completion integration planning.

Finding common cultural values and aligning these with commercial objectives is the key to a successful transition. In our experience, deals in this sector are frustrated not just because of legal or financial complexities. In fact, transactions are often aborted because one side does not fully understand at the outset the core values and educational ethos of the other.

The impact the merger will have on the student body, parents, staff, volunteer workers, and trustees must be considered carefully at each point. Buyers will also want to ensure that a coherent communication strategy regarding the target entity’s future stability is in place.

Buyers and sellers of private education institutions must always consider the unique sensitivity that surrounds institutions in the sector. Any change in ownership of a school will directly impact significant numbers of young people at a critical stage of their lives. Large numbers of teaching, and other staff, will also be affected.

Discussions about a sale or merger should therefore be carried out in strict confidence. This should prevent any adverse publicity arising from details of the deal entering the public domain before parties are ready to proceed.

If necessary, a confidentiality agreement or NDA covering negotiations should be drawn up and signed by trustees, governors, proprietors, and other relevant parties to the transaction.

Sadly, we have seen a number of education providers leaving decisions too late, whether secondary providers or pre-university provision.  The sequencing and cashflow projections of student contracts against property and staffing commitments is critical. Most education providers have relatively high fixed costs and annual, or semi-annual, student contracts. For those taking overseas students, tighter immigration and travel rules internationally are also impacting. Discretely going to market early enough, or adopting cost reductions early, can both protect directors.

At DMH Stallard our Sales, Acquisitions and Mergers team acts for diverse buyers and sellers in the private education sector. Clients range from private equity backers and institutional or international investors to independent school owners, educational charitable trusts and non-profit organisations.

We understand that client approaches to growth strategy, risk, school governance and educational philosophy will differ markedly. These competing motivations that we see in private education M&As add layers of legal complexity and call for bespoke, expert guidance.

Whether you are selling or acquiring a private education school or institution, we will deal effectively with all the legal and commercial challenges you may face.

To ensure your acquisition or disposal runs smoothly, extensive forward planning is essential. The interest in the sector shown by private equity investors in recent years means there is often a careful balance to be found during negotiations – between purely commercial interests and the more education-focussed, traditional priorities of existing school leaders.

We have highlighted a selection of the legal issues proprietors, acquirers and investors in the private education sector should be aware of. There are a wide range of additional matters to consider. These include existing contractual arrangements with third parties, the legal implications of schools having affiliated international campuses, tax considerations, legal structuring of the transaction and, commercial conveyancing issues, and the employment of staff in regulated roles.  

At DMH Stallard our solicitors in all commercial practice areas work together as a team support your M&A transaction, drawing on expertise from across the firm when necessary.

We are ready to help. For an initial conversation please get in touch.