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You may be considering purchasing an independent school, developing a new SEND school or sixth form, selling or transferring ownership of a school or simply seeking to reflect the worth of your school in your accounts.
In fact, any aspect of holding an interest in property is likely to require a valuation at some stage.
Freeholds and leaseholds both have a value, and the intention of this article is to remove some of the mystery from the valuation process.
Valuers interpret the market; they do not set it. Nearly all calculations of worth for commercial properties have regard to evidence of transactions of similar properties in the market in the same way that two similar, adjoining houses will usually have a similar value.
“Valuers interpret the market; they don’t set it.”
Independent schools, specialist SEND schools and indeed children’s day nurseries, however, are a little more complicated. As with other similar asset classes where a specific, definable business is operated from the property, its value is derived from an assessment of that business.
The critical issue for the valuer is the assessment of the operating profit, or surplus earnings, for the school before the deduction of Interest, Tax, Depreciation and Amortisation (EBITDA).
All businesses have a different approach to finance, some will use more equity than others, some will have better rates of interest, and so on. A valuer is not in a position to assess all of these factors and therefore the analysis of the business as a trading entity is made on matters common to properties within the asset class; for example, occupancy levels, fee rates, staffing levels, staff costs, etc.
“All businesses have a different approach to finance.”
In analysing the business, be it operated on a for-profit, or not-for-profit basis, actual trading performance is compared to historic, projected, sustainable performance, the latter providing the basis for the valuation.
For example, a new school in the build-up phase would be valued having regard not only to its current trade but its trading potential. Similarly, a valuation of a long-established school would reflect, where appropriate, extensive investment into new state-of-the-art facilities at nearby schools which could be deemed as close competitors. It would consider the potential impact upon future trade of the school subject to the valuation, which may have seen a lack of investment over recent years.
In a similar way, the assessment of the projected trade which forms the basis of the valuation would reflect other circumstances which might not be occurring in practice. For example, a school that was consistently achieving very high roll numbers might only be valued assuming an occupancy level of 95 per cent to allow for fluctuations that would affect turnover. Similarly, a school with relatively low student numbers, where it could be demonstrated that there were reasonable grounds for an improvement in the short term, might be valued assuming a higher occupancy level.
So, what aspects of the operation of the business are tested in practice as part of the valuation exercise?
Income
The calculations will be based on the number of students in each year group, additional income, bursaries, etc. with the valuer assessing the sustainable level of occupancy or roll numbers. This will have regard to historic occupancy and factors that might affect future occupancy. The level of fees being charged will also be considered as will the scope for fee increases and other potential revenue-generating activities.
Expenditure
The four main assessment categories of expenditure to be assessed are:
- Staffing
- Direct costs
- Premises costs
- Administration costs
Staff costs are the single highest level of expenditure. In the valuation exercise the aim here is to calculate a sustainable level of staff costs having regard to the roles, responsibilities, rates of pay, plus ancillary and management expenditure for that school. Again, simply by multiplying the figures, the wage bill can be calculated and by adding on ERNI, holiday pay, sick pay and so on, the anticipated yearly expenditure can be determined.
“The level of fees being charged will also be considered.”
Direct costs will include provisions, equipment etc, premises costs will include heat and light, rates, etc and administration costs will include professional fees, printing, postage, and stationery, etc. The historic level of these costs will be determined from audited and management accounts although the valuer, from the general experience of the sector, will be able to spot any abnormalities and adjust the projections accordingly.
The level of surplus or operating profit deemed by the valuer to be sustainable is calculated simply by deducting total costs from total income. As mentioned above this calculation of operating profit is before the deduction of EBITDA since each operator will have their own means of financing the business that is not a common factor across the sector.
Valuation: The end figure
The end figure – the “Market Value” – includes the property, the fixtures and fittings and any goodwill attributable to the business. To reach this, the level of operating profit is multiplied by the appropriate multiple, known as a Years Purchase (YP) for that property. The valuer will primarily have regard to transactions involving other broadly comparable schools. This evidence of actual sales is then interpreted in relation to the subject property.
When a valuer is appraising a school held on freehold title, they will have due regard to the “Bricks and Mortar” value, again drawn from comparable market evidence of similar properties, which have the benefit of permitted educational use from a planning perspective but were sold with vacant possession. The valuer will also consider underlying property value and have due regard to comparable property and land transactions in the surrounding locality.
Conclusion
Finally, the reasons for requiring a valuation can be many and varied. It is common for company accounts, purchases, sales, raising finance, or re-financing but can also be used for development appraisals for new build units and sensitivity analysis for examining extensions or reconfigurations.
Whilst it may appear a complex area, like all professional areas it has developed its own language. Once translated, it is hopefully an easier subject to comprehend.
For a confidential chat regarding your education business valuation, contact Richard Green: richard.green@christie.com / 07717 335 613