A Guide to International Expansion in the Education Sector – Part 1

Have you thought about expanding your school globally? Gordon Drakes and David Bond explore the reasons why many UK independent schools are going international and how to do it. The education sector in the UK is undoubtedly facing a number of headwinds, but from the outside looking in, this sector is in fact a real success story for "UK plc".

A British education is widely regarded abroad as the gold standard. This is reflected in the dominance of British international schools – there are over 4,300 British international schools (i.e. schools located outside of the UK which teach a curriculum which would be wholly or in part recognised in the UK and that have a British ethos) and they make up over 45% of the international school market[1]. 

There are a number of factors driving this growth, including the emergence of a wealthy middle class in developing countries, the slow response of those countries to provide their own high calibre education to meet this demand, and an increasingly globalised workforce.

This article will look at some of the key issues for a school to consider when planning to expand overseas. For schools which are already operating abroad, this guide should hopefully stimulate some new ideas on how the existing international strategy can be fine-tuned.

 

1. Why go international? How best to do it?

Of course, one option for international growth is to enter a new market and establish a new school using a school's human and capital resources. However, the reality is that almost all private schools choose not to do this, and instead appoint a local partner. This approach allows for faster expansion and the generation of new income streams and relationships with new students without the need for significant capital investment and an extensive management infrastructure.

Done in the right way, the execution of a school's international franchising strategy can become a core asset of the school, helping to secure the long term future of the school as a global education brand and hedging the impact of economic and regulatory risks back home. Indeed, a number of UK private schools rely increasingly on their international income to fund capital investments in the UK, as well as increasing the availability of bursaries to support social mobility.

Appointing a well-resourced, suitably qualified and highly motivated local partner to make the school a success in their own country removes the otherwise intensive capital requirements and associated risk profile on the licensor school. Such partners often have a strong understanding of the local educational market and have good ideas on how a school's curriculum and other systems may have to be adapted to local needs.

However, these types of relationships are complex, high value, long-term and subject to changing regulations. A licensor school should only countenance this type of venture with a full understanding of the risks and commitments involved. 
 

2. Setting yourself up for success – brand, ethos, model and structure

It is important that, having taken the decision to consider international expansion, a school empowers a select number of governors and senior management at an early stage to investigate opportunities and develop and put in place robust procedures. Here are some of key issues to explore during this planning phase:
 
Protecting the brand
The international strategy must be underpinned by strong intellectual property rights. A school should carry out a "brand audit" and ensure that its brand is fully and appropriately protected by way of trade mark registrations and that those marks are held in the most tax effective manner. This is a costly exercise, but the cost (financial and loss of opportunity) of dealing with pirates and cyber squatters (yes, even in the education sector) far outweighs the upfront protection costs.

Identifying the school's ethos
Schools should also invest in documenting that most valuable yet intangible of their assets – their "ethos". In addition to a brand and a curriculum, a franchisee will also expect to benefit from a school's R&D in issues such as teaching techniques, governance, pastoral care, the provision of extra circular activities and the development of physical infrastructure. In the context of franchising, these "operational" aspects are often documented in a "manual" which sits alongside and is referenced heavily in the principal franchise agreement.

Developing the commercial model
In an ideal world, a school will give some serious consideration to what it is prepared to offer and deliver to a prospective partner before it embarks on its first deal. A licence to operate could take the following forms:

1. Licensing aspects of the school's curriculum, or developing an online curriculum for an international audience. This is often referred to as "Edtech".
2. Leveraging off the school's ethos to partner with other schools in different countries and mentor them. This is could be characterised as a "white label" licence or service.
3. "Cloning" the school in an international market. This is by far the most common type of activity.

Each variation will have a different risk and reward profile and a school will need to have a understanding of its appetite for that and ability to resource an expansion plan, both in terms of financials and human resources. This article will focus on the third option.
 

3. Finding a suitable partner

Nowadays, a good number of schools are approached regularly by would be partners offering to establish the school abroad. Finding a potential partner is rarely a problem. The problem is finding one with resources, a proven track record and empathy for the school's values. If a school fails overseas it is most probably going to be due to the recruitment of an unsuitable partner. Schools therefore need to spend some time, not only preparing their "prospectus" to attract potential foreign partners, but also  profiling their ideal partner and putting in place an appropriate recruitment/screening process rather than jumping into bed with the first individual with a cheque in his or her hand.
 

4. Choosing the most appropriate market

Not all countries have the same potential for all schools. A country that allows one school to thrive, say due to its heavy focus on academic achievement in examinations, may be extremely challenging for a school that is more focused on sport, or offering a more rounded educational experience. Educational establishments need to be contextualised into the educational, cultural, economic and religious norms of each potential target market. 
A good partner will be able to help work with the school to overcome at least some of these challenges and help localise the curriculum and other systems in an appropriate manner, but at the end of the day some schools will find it extremely difficult to succeed in some countries and common sense dictates that a school should focus on the easy win markets before tackling the more challenging ones.
 

5. Structuring the Deal

Generally speaking, it is highly likely that a school will license a partner to open a single campus, or a possibly a few campuses in any particular jurisdiction. Multi-level structures such as master franchising, which are common in the retail, food & beverage and services sectors, are rarely appropriate for international schools.

A "development" licence is therefore likely to be required. However, each market and each partner is likely to require an adaptation to this basic structure. For example, joint ventures are possible, and they can be structured to allow the school to hold an equity stake in the operating company without the corporate governance burden imposed by a typical joint venture.  The more sophisticated a structure, the higher the cost of implementation in terms of both professional fees and infrastructure so the school needs to carefully weigh up the potential return on investment it will receive through each possible structure.


Whatever structure is adopted, it is essential to ensure that the legal documentation re-enforces the  values of the school and the economic drivers of its business model as well as minimising any inherent risks to the school.

Here are some key considerations for the licence agreement:

1. Governance: In order to ensure that the school can "call the shots" on curriculum, facilities and so on, it will be necessary to ensure that it is represented on the franchisee school's board of governors.

 

1. Appointments: A school should have the final say and veto rights over key appointments, such as the head teacher and bursar.

 

1. Targets: There needs to be clear commercial targets for promoting the school and growing the number of students. The consequences of failing to meet targets need to be carefully considered and a simple termination right is rarely appropriate.

 

1. Income: A school needs to carefully plan its differing income streams from the deal spreading commercial risk, ensuring effective tax planning and allowing easy access auditing throughout the term of the agreement. Personal guarantees from the main shareholders of the partner should be sought.  The school should also ensure that it complies with the restrictions placed on it by its charitable status.

 

1. Exit: A school should never enter into a deal without being certain that it has a viable exit if problems are encountered.  Careful thought needs to be given to this and to the post termination non-competes placed on a terminated partner. The high capital investment demanded of the partner means that it will not accept a total restriction on it using the school facilities as a school once the licence has ended.  On the other hand, the school must not simply allow the partner to continue trading without any restriction. A number of solutions are available to this problem and careful thought needs to be given as to which one is most appropriate

 

1. Technology: Finally, and perhaps most importantly, given the rapid pace of change in the workforce and technological developments, schools should consider how they can optimise their IT to deepen the interaction between each international school, the principal school and the global website. Some schools are developing cloud based sharing of resources and assessments, and it is important to consider how universal aspects of the school's curriculum can be taught consistently and simultaneously across multiple markets. If, for example, a school engages with a corporate partner for the provision of education to families of employees working overseas, there should be a seamless transition between one campus to the next campus to avoid a situation where a student is having to sit through the same lessons because the family moved from Shanghai to Seoul.

These aspects all need to be caught in the manual and the licence agreement, or a separate "Edtech" agreement which sits alongside the franchise agreement.
 

6. Conclusion

There is no “one size fits all” solution to international expansion. Such ventures need to be carefully structured to reflect the needs of the school, the target market and the partner. The most appropriate structure needs to be determined at the outset, as restructuring an international licence is a complex, costly and time-consuming exercise.

At its core, the legal relationship between the school and the local partner is that of a licensor and licensee. It is therefore imperative to choose to work with experienced legal counsel who are specialists in licensing (as opposed to specialists in corporate or regulatory law, for example), who know the international landscape and who have walked down this path before.

In part 2, we will look at some of the legal challenges which schools face when expanding abroad.