How To Finance Your New Private School Start-Up

I've never been able to say this in my entire life living in Vancouver, but for the moment I can...our Vancouver Canuck's Hockey team is in first place in the entire NHL after 60 games. We're not planning a parade yet, but it certainly feels good. How time flies; it's hard to believe that Vancouver hosted the Winter Olympics here a year ago!  

February has been a busy month for our firm with our team evaluating the largest private school system in the UAE, a market study and business plan for a new private international school in Texas, a strategic plan for a Catholic Junior in Vancouver, a wrapping up a market study and business plan for a new private Canadian international school in the GCC. 

As you may know, HEG specializes in starting, improving, and buying/selling private school globally.  We're representing the sale of a tremendous private high school in the western USA and a beauty school in Ontario. Please contact me if you'd like further details on either school. If you're thinking of selling your K-12 private school or post secondary school, please connect. We have many buyers interesting in acquiring schools. 

One element that we deal with as part of our school formation services is financing the development of a new school. There are multiple strategies to finance the formation of a school: fund raising, traditional mortgages, debentures, bonds, loans via investors, or a combination of all of these. In today's article I'm going to share more about a specific financing model that may work for your group. Please note that this may be of value to an established school that is thinking of expanding their current school and is determining how to finance it.    

To your success, (and go Canucks go!) 

Doug Halladay


President
Halladay Education Group

P.S. Don't forget to go to our secure Online Store to invest in our Strategic Planning or Start-A-School Toolkits

How To Finance Your New Private School

If you're thinking of starting a new private school or want to expand your established private school, you're going to have to raise capital. There are multiple strategies to finance the formation of your school: fund raising, traditional mortgages, debentures, bonds, loans via investors, or a combination of all of these. In today's article I'm going to share more about a specific financing model that may work for your group and useful information on the use of bonds or debentures by schools to finance their startups or expansion. Hopefully this information will be able to assist you in determining a suitable financing option for school. 1. Bonds Vs. Debentures - What Is The Difference? Debentures or bonds are different debt instruments with different types of exposure to investors. Both instruments enable a private school to borrow money from the public on a long-term basis without going to traditional financing sources such as banks for their startup funding. A bond or debenture is really a long term promissory note issued by a borrower with a promise to pay the loan back on a later date. This later date is usually termed the maturity date. Although the terms debentures and bonds are often interchangeable in today's business language, there is one distinctive difference between the two financing instruments. The distinction lies in the fact that bonds are usually secured with the underlying assets of the issuing school, such as a pledge of the land and building for which the long term debt will be used to finance its acquisition and subsequent construction. Debentures on the other hand are usually unsecured (or naked as some business people would prefer to call it) and are merely backed by the general creditworthiness or the perceived reputation in the business community of the issuer. 2. Why Would Schools Issue Bonds Or Debentures? Banks often stay away from lending to new startups for fear of bad publicity associated with possible foreclosures on schools when they fail. Banks have no problem lending money to established schools with good track records to fund their expansion but the banks' policy on lending to new school startups has always been a different matter. Accordingly, many schools resort to raising funds from within their own community, usually from the families whose children will be attending the schools. In addition, bond issuance is popular among private or public schools as a financing vehicle because bonds are attractive to investors for its tax advantages in many jurisdictions in the United States. 3. Factors To Be Considered When Deciding If Debentures Should Be Used To Finance A New School? Whether a new school startup can succeed in raising funds through debentures depends on many factors. There have been many scandals in the past in which schools raised money from the parents and subsequently became insolvent due to bad management or overly optimistic projected enrolment. As a result, many parents are careful in their decision to enroll their children in schools that require debentures. The factors that determine if debentures can be used instead of the traditional financing methods include:  There must be a large demand for enrollment in the local private schools. Typical examples of significant demand for international school spaces can be found in Hong Kong and Singapore where parents of the expat communities cannot send their kids to local schools and yet the local private and international schools are full, often with long waiting lists.  The issuers must be able to instil confidence in the parent. Another factor that would help alleviate parental concerns would be having the school campus constructed and significantly furnished in advance of the school opening. A completed school campus is always the best marketing tool for the school to instil confidence among new school families. A comprehensive prospectus and information package on the school operations and its future plans would also be helpful in addressing parental concerns. Needless to say, a professional marketing campaign must be planned and executed at least one and half years before the school opens.  It must be legally possible for the school to issue the debentures in your region and the legal requirements and procedures under your local laws concerning the issuance of such debentures must not be cost prohibitive. There are usually significant legal fees to be incurred on drafting the debenture. Thus, legal opinions should be sought prior to taking the debenture option. 4. What Conditions Are Usually Stipulated In A Debenture? The terms and conditions of a debenture should be set and determined by the issuing schools within legal limitations. The debenture may pay interest or it may not. It may have a limited term or it may be a mandatory condition of enrolment for each family as long as their children are in the school. For example, Mulgrave School of North Vancouver, Canada floated a debenture to finance its new campus construction in 2001, which provides an example of the typical terms of a school debenture. The following description of the debenture is reproduced from their website: Mulgrave Family Deposit (K-12 Requirement): Mulgrave School requires a family deposit for the purposes of acquiring the land and construction of the school at the Cypress campus, as well as for the enrichment of educational opportunities for our students. All new families joining the School are required to deposit $20,000 per family in the form of a non-interest bearing loan to Mulgrave School. Deposits are required by July 2, 2010 or immediately upon acceptance. The Mulgrave School in Vancouver, BC has a debenture that is a non-interest bearing instrument, which means the school will not pay any interest whatsoever during the term of the debenture. The debenture was initially intended to fund the construction of a new campus but the Board of Mulgrave School has upheld this condition of enrolment to this day, ten years after the new campus was built. In order to facilitate the administration of the borrowing, most schools will have an arrangement with a bank whereby each family will have a line of credit set up for up to the debenture amount. School families will have to make interest only payments on the debenture balance as long as the line of credit is outstanding with the bank. Each family will have to go through regular credit check as they would need to do when they apply for a consumer loan. Using this method, the financial burden of the entire loan is effectively transferred from the school to the parents who will share the burden equally on a per family or per student basis. 5. Types Of Debentures Offered By International Schools There are many types of debentures offered by schools around the world and there is no better place for one to find such a wide range of debentures than Hong Kong. Furthermore, Hong Kong schools also demonstrate how they can transfer a larger part of the financial burden to corporate members of the school community when local international school spaces are bursting at the seams. Quite often, international corporations will pay in advance for a number of debentures at various international schools in the city just to reserve a fixed number of spaces for their employees. There are various types of debentures offered in Hong Kong. Corporate Debenture Bought by a registered Hong Kong company that is funding the education of an employee's child. When the employee's child leaves the school, it can be reassigned to the child of another member of staff in the same company Personal Debenture Purchased by parents seeking priority in admissions for their child. Such a debenture is much cheaper than a corporate debenture. Capital Debenture A debenture that does not confer priority in admission and can be bought by both corporations and individuals at one price. It is not redeemable but is transferable. Holders of such a debenture are exempt from paying the school's annual capital levy. Depreciating Debenture Depreciates annually in value by a given percentage over a set period, with a refund being reduced accordingly. Fast-Track Levy A non-refundable, one-off payment that is normally set at a lower price than debentures and can often help a child gain a higher spot on a waiting list. While some schools justify the purchase of a debenture as necessary investments for expansion, parents claim that debentures prevent able students from attaining school places and undermine Hong Kong's attraction for expats. 6. Debenture As A Strategy For Your School Assuming your school is not be able to contribute the financing required to fund school formation, the burden of this financing for the school can be shifted to the families individually on a per student. By using the debenture method, the school will have sufficient cash flow. Furthermore, parents really do not have to put it all up in cash. They only have to pay the interest on the line of credit at the prevailing interest rate charged by the bank. Banks will love this funding scheme because their risk is minimized by having it spread from one borrower, the school, to multiple. If the parent company can contribute a portion of the funding requirement, then the total debenture amount required will be reduced, making it more favorable to school families. 7. Prerequisites Required For The Debenture Option There are at least two significant criteria to be met before the school can consider the debenture option: The school must be able to source seed capitals from an investor or a group of investors who will build the school. That is you have to satisfy a bank or a group of investors who will be comfortable in lending the school funding for up to 18 months to build and furnish the school before the school can sign up the projected students for its first year. As I had described earlier, we will also need a strong marketing campaign along with a significantly completed school building to demonstrate to the parents that this school will be a permanent establishment and that the facilities will be state-of-the art for their children to learn and enjoy in the future. The school must be formed much earlier than planned (9 months to a year early) so that it will become a legal entity capable of issuing debentures and collecting tuition fees from school families. The sooner the school can collect the debenture proceeds and the fees from the school families, the sooner the risks to the school and the providers of the seed capitals can be minimized. In summary, using debentures as a vehicle to finance a new school start up is just one of many ways of financing schools. There are also other methods of financing as well as other structures Halladay Education Group can use to motivate banks to lend support for your financing needs. Working with a well established school management group such as HEG can alleviate the banks' concern of your group's lack of experience in the education business. Whichever options and strategies your group should choose; HEG has the expertise and resources to help you achieve your goal. NEXT STEP If you'd like to learn more about our school formation services, please email HEG or call  our direct line at +1-604-868-0002 to find out more.