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Expanding your school abroad: FAQs

01/12/2020

Locations

Africa, China, India, Japan, Middle East, United Kingdom

Opening international franchises can be lucrative ventures for independent schools. Fieldfisher franchising experts David Bond and Gordon Drakes address some common queries from education clients seeking to expand abroad.

 
1. What is the best way to structure an international education business?
 
This depends on what you as a school want to achieve.

Most British independent schools are established as charities, meaning they are limited in what they can do commercially.

To overcome these limitations, schools can adopt one of a number of structures to increase their commercial capability.

Below, we outline the traditional/most common trading company structure schools set up to handle their commercial activities, along with three alternative structures schools may choose to adopt.

When deciding which structure to use, schools should ask themselves the following questions:
 
  • What resources do we have?
  • What is our target market?
  • Who is our ideal partner?
  • Is there enough of a margin for us and the partner?
  • What financial model do we want to use (initial fees/school opening fees; and/or ongoing support fees)?
The answers to these questions will influence the type of structure you adopt.

The traditional trading company structure

Most schools incorporate trading companies, which are 100% owned by the school. This ringfences liability, protecting the school from the consequences of any issues that may arise in its international network, while acting as a conduit between the school and its local partners.

The school needs to award the trading company a licence to allow it to use its IP, brand and other assets. The trading company can then licence this material to local partners through a local licence agreement.

A key part of the structure is the intergroup service agreement. These are set up when a supplier and a recipient of services are part of the same group, and allows the trading company to share facilities, staff and other resources with the parent school.

Intergroup service agreements are sometimes omitted, because the school believes the trading company's activities are simply an extension to the school. However from a legal perspective, the trading company is a separate entity to the parent school and its finances and other aspects of the business should be kept separate.

Full equity joint ventures (50/50 ownership)

Some schools may choose to adopt a full equity joint venture agreement between the school trading company (licensor) and a local partner in a JV company (licensee).

In these structures, both the school trading company and the local partner own a 50% equity stake in the international school.

The benefits of 50/50 JVs include:
 
  • They are high reward (as the school will receive both equity interest and fees);
  • They give the parent school management involvement/control over how the JV is operated; and
  • The risks and rewards are shared equally between the school trading company and the local partner.
However, these structures also:
 
  • Require large capital investment (either new cash or waiving the initial fee) – to buy into JV company and provide ongoing support;
  • Are high-risk in terms of conflicts of interest, because the school trading company is both licensor and licensee; and
  • May be limited by investment restrictions in the local partner's jurisdiction, reducing the school's control/ability to operate this model.
Strategic joint venture (minority interest)

This is a variation of the JV model where the school owns a minority interest in the JV company that is licensed to set up the international school.

These structures involve a shareholders agreement between the school trading company (licensor) and the local partner to set up the JV company (licensee), in which both the school and the local partner have a percentage shareholding.

These structures have the benefit of:
 
  • Preserving whatever level of control the school wants to exert over the JV company/international school through the agreement, but with lower investment risk;
  • Can serve strategic purposes, such as:
    • (a) Making market entry easier by giving a school trading company an initial foothold in a jurisdiction with scope to increase its shareholding up to full ownership; and
    • (b) Facilitating a higher exit value for the school trading company.

However:
 
  • These structures are not attractive to all local partners as some will want a solid long-term relationship, rather than one that is dialled down over time;
  • They are expensive to set up properly, as they involve significant investment and management costs;
  • They may be hampered by direct investment restrictions in the target jurisdiction; and
  • Are high-risk in terms of conflicts of interest, because the school trading company is both licensor and licensee, meaning it is crucial to have two separate agreements (a shareholder agreement and licence agreement).
School management structure

These structures are similar to those commonly adopted by hotel brands expanding into new territories.

In these structures, the school trading company enters licence agreement with a local partner (which may be a school owner, a property company or a licensor), which then enters a school management agreement with a manager-operator (which may be the British school trading company or a third party).

The manager-operator then pays fees directly back to the British school trading company.

The benefits of this structure include:
 
  • It allows school trading companies to recruit different kinds of local partner, such as investors or asset managers, rather than a pure educational operator;
  • It creates an additional or supplemented income stream via the payment of management fees; and
  • It increases control over operations as it allows the school trading company to operate the international school itself.
However, these structures:
 
  • Require schools to have significant resources in terms of capital, expertise and personnel; and
  • Increase risk/liability – if the international school underperforms, the trading company is liable to the local partner under the terms of their management agreement (although this risk may be mitigated by having more control over how the school is run).
 
2. Who owns the IP?

When setting up a trading company, schools must identify their intellectual property (IP).

This covers the school's brand (including their established name and any logos) that they want to protect in overseas markets, as well as any know-how and information recorded in various manuals and policies of the school.

New IP also needs to be considered: if the trading company develops new IP, perhaps in conjunction with a local partner, ideally this IP will be assigned back to the parent school as it keeps all the IP within one entity.

Once identified, the IP is then licensed to the trading company, which can then licence it to the local partner.
 
3. Is it necessary to bring outside commercial expertise into the trading company board?

This is not essential, but may be desirable.

Although the two boards will share a common agenda, the school will have different priorities to the trading company.

In the early stages of the trading company, it is common for the board to be appointed from among the school's existing board of governors/charity trustees.

Some schools already have large governing bodies combining a range of commercial experience and may find they can expand their trading company boards with internal appointments from their main trustee body.

However, just because your board of governors has commercial expertise, this does not mean their approach to the trading company will be commercially driven.

One of the main issues schools face is around timing of decision-making. Commercial decision-making has to be both flexible and timely, and this can conflict with the rigidity of the academic timetable.

With these factors in mind, it helps to have a separate chair and some independent members on the trading company board.

However, the authenticity of the international brand and its connection to the parent school is absolutely fundamental to the success of a school's expansion, so it is helpful for the school to maintain some influence over the trading company.
 
4. When entering one territory with more than once licensee, should schools set up different subsidiaries for each territory under the limited trading company?

The main reason for creating multiple subsidiaries would be to limit the liability in each territory.

This may be desirable depending on the circumstances, but schools need to bear in mind that splitting liability among different parties will sacrifice simplicity of the business model, so they need to be sufficiently resourced to deal with additional complexity and cost (for example, addition audit fees, company secretarial duties, etc.)
 
5. How does a school find the right international partner?

Schools tend to find international partners through inbound enquiries or by proactively searching, or a combination of both.

Inbound enquires can come through a school's existing network, such as alumni or parents of pupils, or come entirely out of the blue.

If a school has a high profile, it is more likely to get inbound enquiries from prospective partners and usually means the school has a stronger bargaining position.

Once a first international school is open, this may trigger further enquiries.

For some schools, their early international growth phase may be largely opportunistic, but as schools grow their international networks, many find they need to be more strategic about their choice of territory and partners, which may involve taking a more proactive approach.

When evaluating potential partners, schools should be conscious that some territories may have reputational issues, so schools need to think how this might reflect on their brand.

The education sector is generally more open to sharing experiences and information than some other sectors, so it can be helpful to speak to peers about their views on/experience of expanding into certain territories.

The Department for International Trade can also offer helpful advice.

Having a pre-agreed blacklist can save schools time and schools shouldn't be afraid to turn down prospective partners if they are uncomfortable with the fit.
 
6. How should a school proceed once it has identified a potential partner?

School trustees tend to be very conservative and cautious in their due diligence of prospective partners, so trading company boards should be prepared for international partnerships to take some time to come to fruition.

There are different categories of partner: some are global specialist educational operators; others may be single school operators; and some may be primarily real estate developers looking to attract an educational operator for a particular premises.

Once you have identified a partner, there are some key steps schools should take in the pre-contractual phase to structure the relationship with that partner.

Partner due diligence

This is an obvious point but one which is not always addressed properly, as it can be an awkward conversation.
Thorough due diligence involves finding answers to the following questions about the partner:
 
  • What is their business structure and do you understand it?
  • How do they plan to operate the franchise of your school?
  • Are they going to be running the school themselves or using third parties/affiliated companies?
  • What is their financing situation?
  • Do they have any competing interests?
All these points have an influence on how you structure the relationship with a partner. Schools are advised to have these conversations at an early stage in a constructive way that helps build trust and move the deal forward.

Schools also need to bear in mind that partners may want to do thorough due diligence on you as a school, so be prepared to cooperate with their enquiries.  

In some jurisdictions, there may be requirements under local law that need to be complied with – for example, the government may regulate franchising and/or require the school to issue a disclosure document giving details about the school/its finances.

Having a standard disclosure document that you can share with partners at an early stage will help streamline this process.

Risks and sharing confidentiality

Before proceeding with a long-form agreement, the school trading company should have a robust confidentiality agreement in place to protect any sensitive information it is exchanging with the local partner.

The school trading company may want to ask for a deposit from the partner and agree a timeline for advancing to the contract.

Taking local law advice at an early stage is also wise, to see whether there are any local pre-sale laws to be complied with and any requirements to register the trading company as a domestic operator in that jurisdiction.

Exclusivity

Some partners, particularly if you are dealing with a specialist global education provider, may want exclusivity across an entire country or region. This is something that can be given away too easily by schools and needs to be discussed before moving to the long-form contract.

As part of the due diligence exercise, schools should ascertain whether they have the ability to deliver on the entire geographical area they want exclusivity over. 

Rather than granting exclusivity, schools could discuss giving the partner performance targets that would then trigger the grant of further rights of exclusivity, or offer them the right of first refusal.

It is generally better to start small and give yourself the flexibility to expand.

Local law issues

Before moving to the long-form agreement, it is sensible to take advice to ensure you understand how the school is going to operate under a licence in that territory.

As discussed above, some jurisdictions require pre-contractual disclosure document and/or require a school trading company to register with a local authority as a licensor. The trade mark may also have to be registered before the school trading company can licence it to a third party.

Some jurisdictions (for example, Malaysia) also have cooling off rules regarding payments, giving partners the right to step back from the deal within a set period after the agreement has been signed and first money has been paid.

There may also be specific educational aspects of local law that dictate the type of curriculum a school can offer and what language(s) it can be taught in.
 
7. What if we need to terminate our agreement with a local partner due to a breach?

Schools often find it difficult to deal with a local partner that is no longer following the contract.

Generally, they cannot just close down a school due to a breach, so it is sensible to provide for some kind of sunset period in the contract through which that school can continue to trade while the venture is wound up.

Non-compete issues also commonly flow through termination, however these may be unenforceable in an educational context as it is likely to be difficult to use the international school's premises for another purpose.

Schools need to think through carefully what termination will involve when drawing up contracts to ensure such circumstances are provided for. The reality of closing a school is very complex and most schools will try to avoid this situation at all costs.
 
8. How do we make changes to our agreement?

Agreements can be very long-term – running to decades. Terms in the agreement that were relevant when the contract was signed may become obsolete over time, or in some cases quite suddenly – as we have seen with the arrival of Covid-19.

But introducing changes to the relationship in a legally binding way can be challenging, so it is necessary to have some flexibility and it helps if the human relationships behind the contract are strong.

Any changes should meet the shared objectives of the parent school and the international school, but it is still important to have a well-drafted contract in the background that supports you to be able to make changes that are absolute requirements and/or to protect the brand.

It is also important to think ahead as far as possible to anticipate changes and ensure impacts are clearly understood to give partners time to prepare.

Annual conferences between British schools and their international partners can be a good way of sharing ideas and best practice and should make implementing changes easier.
 
9. What role do waivers play in agreements?

When schools expand internationally, there may be situations where certain rights are not enforced under the contract.

Waivers can be through conduct or verbal agreements, which establish understandings about the way the local partner will operate.

While waiving some rights may help things run smoothly, it risks giving an operator the impression that they can ignore aspects of the contract.

This can become an issue further down the line, especially if the franchisor wants to pull arrangement back to what is in the contract.
 
For more information on expanding your school abroad, please see our Guide to International Expansion in the Education Sector – Part 1 and Part 2, which covers these issues in more depth.

This article was written by David Bond, Co-Head of Franchising and Commercial and Head of Advertising at Fieldfisher and Gordon Drakes, Co-Head of Franchising and Commercial at Fieldfisher.
 

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