Financial Independence and Wealth Generation Starts with Due Diligence
By: Stanford Silverman
If you want to find a real prince you need to kiss a lot of frogs! The problem that most wanna-be entrepreneurs experience is that they have to go through a lot of failures and disappointments before they find what they are looking for, but finding something valuable always requires persistence, patience, and the willingness to learn from your mistakes and they don’t have the balls, brains or guts to achieve the success that they aspire to achieve.
An entrepreneur needs to take risks and make mistakes along the way, and failure is a necessary part of the journey on the road to success for anyone hell bent on victory. My advice to would be dreamers is Never, Never ever surrender your reverie of finding a pot of gold at the end of the rainbow, no matter how difficult the path may seem, believe in yourself, work hard and smart and never be afraid to fall flat on your face, for it is only through the gate of failure that you discover, mature and achieve the greatest triumphs.
I have spent decades involved in the higher for- profit vocational education sector and I want to share with you the foundation of finding, evaluating, buying, fixing and building for profit vocational schools and then exercising an exit strategy after 3-5 years with 30-40 times returns on your leveraged investment. Starting with a $1 million investment and with 8-times leverage your ROI will be $240 to $320 million in 3-5 years if you play your cards right. I do not know anywhere else that these returns are possible and the best part is that it is accomplished with infinite attention to compliance, student centricity, staff harmony and a professional team that serves students no matter what their level of academic performance was when they started at a vocational school of higher education.
The best chance for success in the higher education sector necessitates that you have a minimum of 5-10 years boots on the ground experience and can assemble a AAA class team to work with you. The game starts with your “skin in the game” so be prepared to have 10% of the purchase price in the bank before you deal yourself in to being an entrepreneur in the higher education sector.
Every investor that you approach will want to see your Benjamin’s and access the strength of your team! The project vocational institution that you want to acquire is important, but the most carefully thought-out plans can fail due to unforeseen circumstances or events beyond our control and an investor, your investor wants to minimize his risk and increase his ROI, so your team needs to be flexible and adaptable in the face of change.
During your working career it is important for you to network with smart and contrarian people that you can learn from and I cannot think of a better organization for you to bond with than the Financial Policy Council (https://financialpolicycouncil.org/). Here you will meet entrepreneurial men and women who have made it or are making it now and they can help guide you when you have problems and introduce you to investors for your project.
You have the skin in the game, the team, and advisors so it is time for you to select your target acquisition. Higher Education Vocational education is a small vertical market. In 2019-2020 there were approximately 900 for-profit vocational schools in the United States. If you have spent your networking years well you should know at least one hundred people in the industry that can advise you if a school they now work at of have friends working at may be for sale. Listen to them closely and research the schools that they have provided to you. It is also in your best interest to purchase an entity that is not currently on the market for sale. You will establish the market where one did not exist by your interactions and reputation. This will lead to a shorter time to complete an acquisition, cut out the brokers, advisers and banks and increase your student outcomes, their retention rates, student and employee satisfaction, impact on society as a whole and your exit ROI. I have also found that owners who have not put their vocational schools up for sale are usually more involved, better operators with less to hide in the due diligence process.
In future blogs I will explain how to target a school, meet its owner, and establish a rapport, estimate a purchase price and an enterprise value and start the process of negotiation to purchase the entity. While my directives are targeted for vocational for-profit institutions of higher learning, the principles are basically the same for whatever silo your acquisition falls into.
I am jumping ahead to the guts of this blog which is a synopsis of the due diligence process which every acquisition requires. Every prince or princess has pimples so don’t fall in love with your acquisition/seller and maintain a composed and rational demeanor, not putting too much trust or faith in what you are told by a seller. “Accept but Verify” to strike a balance between being too skeptical and too trusting. Being overly skeptical and suspicious can lead to missed opportunities, misunderstandings, and strained relationships. On the other hand, being too trusting and gullible will lead to being taken advantage of, making poor decisions and have a direct relationship to your exit strategy.
Due diligence is an essential process for anyone considering investing in or partnering with a for-profit vocational higher education institution. It involves a comprehensive review of the institution’s financial, academic, and operational performance to identify any potential risks, red flags, or areas of concern.
The due diligence process helps to identify potential risks associated with buying, investing in or partnering with a higher for-profit education institution. I use a list of 150+ touch points in my due diligence process which covers the essential information that I need to understand the institutions culture, potential for growth, the path to an exit strategy and the anticipated ROI. (I will cover these touch points in future blogs.)
The extensive due diligence process that I employ identifies financial threats, regulatory perils, legal threats, and reputational hazards to name just a few of the touch points on my list. It is the sine qua non imperative to evaluate the financial performance of an institution, including its revenue, profitability, and cash flow. This provides insight into the institution’s financial health and its ability to generate returns on investment.
The due diligence process also evaluates the quality of academic programs offered by the institution. This includes reviewing the institution’s accreditation status, faculty qualifications, student outcomes, and other relevant factors. Parenthetically, it is most important to evaluate the competitive landscape of the institution, including the strength of its brand, reputation, and market position.
Last but not in any way least is the evaluation of an institution’s compliance with regulatory requirements, legal obligations, and ethical standards.
Compliance is extremely important in the for-profit education sector, as it is in any industry that is heavily regulated. For-profit education institutions must adhere to a complex set of laws and regulations governing their operations, including regulations related to accreditation, financial aid, student outcomes, marketing, and more.
Non-compliance with these regulations can result in significant legal and financial consequences, including fines, loss of accreditation, loss of eligibility for federal financial aid, and reputational damage. These consequences can be particularly severe in the for-profit education sector, where institutions are often heavily reliant on federal Title IV financial aid to fund their operations.
In addition to the legal and financial risks associated with non-compliance, failing to adhere to regulations can also lead to poor student outcomes, such as low graduation rates and poor job placement rates. This can harm students and damage the reputation of the institution, making it more difficult to attract new students and remain competitive in the market.
For these reasons, compliance is always my top priority in purchasing and running for-profit education institutions. It requires a dedicated and ongoing effort by an astute team to monitor and ensure that all aspects of the institution’s operations are in compliance with the relevant laws and regulations. This often involves significant investments in staff, systems, and processes to manage compliance and mitigate risks.
The results of due diligence will impact the selling multiples based on EBITDA (earnings before interest, taxes, depreciation, and amortization) in several ways. If the due diligence process reveals positive results, such as strong financial performance, high-quality academic programs, and a positive institutional culture, the selling multiple based on EBITDA may be but will not necessarily be higher. On the other hand, if the due diligence process reveals negative results, such as poor financial performance, low-quality academic programs, and compliance issues, the selling multiple based on EBITDA will be appreciable lower. I always look for schools with some compliance issues as that lowers the EBITDA multiple for a purchase and I know from experience that most compliance issues can be corrected with an astute team of managers.
In summary, due diligence is important in higher for-profit education to evaluate the institution’s financial, academic, and operational performance and identify potential risks and opportunities. The results of due diligence can impact the selling multiple based on EBITDA, depending on the strength of the institution’s performance and compliance with relevant standards. The objective of my due diligence is to get the information that I need to find the untapped potential of an acquisition, estimate its intrinsic value, purchase it at a low EBITDA multiple, have my team do their magic through branching, new program introduction, better marketing, reduced student turnover and the sell the entity in 3-5 years at a 30-40 time returns on my investment. In my next blog I will address the issue of finding the best entity to purchase and convincing an owner to sell his school to you.