Franchising in Private Education
This article first featured in Independent Education Today on 1 November 2011
Over the last year or so there has been a substantial increase in the interest of UK private schools in establishing themselves overseas.
For example, Harrow School, Wellington College and North London Collegiate have established themselves in Thailand, China and Korea respectively and we are now seeing a host of other schools entering into discussions with potential foreign “partners” to establish them in the likes of India and Saudi Arabia. Competition is "hotting up" and schools should consider the opportunity to secure a new source of income and add to the academic experience before the market becomes saturated.
Franchising offers a number of advantages to schools looking at internationalisation. It removes the need for Governors to invest the school's capital and other substantial resource in the venture and attracts high quality local "operators" who are well resourced, suitably qualified and motivated to make the school a success in their own country. However, these advantages are not a “given” and will only be enjoyed by schools with a good quality partner, strike a decent commercial deal and structure it commercially, financially and legally so that it secures the school's academic and pastoral integrity. Failure to do this can lead to the school being trapped in a contractual relationship which takes up a disproportionate amount of its time and resources.
A Suitable Franchisee
A good number of schools are nowadays being regularly approached by would be franchisees offering to establish the school abroad. Schools need to spend time, not only preparing their "prospectus" to attract potential foreign partners, but also profiling their ideal franchisee and establishing an appropriate recruitment/screening process rather than jumping into bed with the first individual with a cheque in their hand.
Choosing the Most Appropriate Market
Not all countries have the same potential for all schools. Educational establishments need to be contextualised into the educational, cultural, economic and religious norms of each potential target market. A good franchisee will help work with the school to overcome challenges and localise the curriculum and other systems. However some schools will find it extremely difficult to succeed in some countries and a school should focus on the easy win markets before tackling the more challenging ones.
Structuring the Deal
An inappropriately structured deal can mean that the most promising commercial and educational arrangements fail. Schools need to ensure that their brand is fully protected by trade mark registrations and are held in the most tax effective/intellectual property friendly manner.
Next, the school must consider whether the franchisee will operate a single campus or a number of schools at different campuses in a number of different regions or cities. Allowing a partner to sub-franchise the operation of the school to a third party in some regions is sometimes proposed. This is generally problematic as different markets may mean that a school operates different structures in each market. Each structure will require different types of franchisee and different types of franchise agreement.
More sophisticated structures should also be considered. Joint venture franchises are possible, whilst Subordinated Equity Franchises allow the school to hold a piece of the equity in the franchisee without the burden imposed by a joint venture. However the more sophisticated a structure, the higher the cost of implementation.
Whatever structure is adopted, it is essential 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. The agreement must ensure the schools educational and pastoral integrity alongside control of the curriculum, facilities etc. (whilst ensuring the financial risk of the venture is borne solely by the franchisee). It must also ensure that the franchisee will promote the school's reputation in the territory.
The school also 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 franchisee should be sought. The school should also ensure that it complies with the restrictions placed on it by its charitable status.
Before entering a franchise schools should ensure they have an easy exit if problems occur and have thought about a post termination non competes placed on a terminated franchisee.
In a number of markets such as Vietnam and China franchising is specifically regulated. These laws include not only mandatory provisions that need to be included in the franchise agreement, but also often require mandatory set form pre-contractual disclosure by the franchisor to the franchisee.
Franchising offers exciting opportunities for the private education sector to expand internationally with minimal capital investment, but demands that they take expert professional advice to ensure that success.