Legal

Altogether now?

Mergers and closures continue to feature in the sector. Emma-Jane Burnell examines the options

The independent schools sector has experienced increased numbers of closures and mergers of over the last few years. This has been exacerbated by the current economic climate and, in some areas, changes in demographics. But for many schools that are looking for a new strategic direction, this is not the only alternative.

Alternatives
For many governing bodies, "merger" has been synonymous with the closure of at least one of the schools involved, but this need not be the case. Merger can simply be a means of achieving economies of scale, access to shared resources and the financial protection that a larger group structure affords. In many cases, a group's "critical mass" means it can provide new facilities that the schools alone simply could not afford to do. Equally, looser types of collaboration arrangements, such as sharing speciality teaching staff, can benefit the schools involved.

There has also recently been an increase in the number of schools that are leaving the charitable sector. The added pressure of public benefit requirements has also been a driver for this with much talk of schools "opting out" of charitable status.

It simply isn’t possible to "opt out" of charitable status, but it is possible for a school business to be bought from a charity for fair value. Many commercial consolidators have taken advantage of this. Of course, running a school in the commercial sector has tax consequences, but there are many advantages, including greater flexibility, no public benefit requirements and the availability of equity finance, which can bring greater stability to a school's balance sheet, to name a few.

Management buy-outs
It is not only commercial consolidators that are entering into transactions of this type. Over the last few months there have been different types of "management buy outs" of schools ranging from a head buying a school business from governors, to governors themselves buying a school out of the charitable sector. Recent education policy debates calling for teachers and parents to be more involved in the management of schools (in a similar way to Swedish Free Schools) might well lead to an increase in this sort of activity, particularly as there may be more freedom and commercial advantages in the independent sector.

Clearly, these sorts of arrangements will only occur where governors are satisfied that it is in the best interest of the school and its stakeholders, but there may be real advantages for a school where it is operated by an ambitious and entrepreneurial head with a real stake in the business. Owner-operators are much closer to the business detail, can have a greater connection with parents and can make important decisions more quickly and decisively than a large group of individuals who are only able to meet on a termly basis. However, schools of this type tend to be personality-driven and much can rest on the drive of the individual head/proprietor.

Legal structures
There are a number of ways of structuring these types of sales, which will depend on the individual circumstances of the school and the buyer, but in many cases the seller (usually a charity) will retain the property and sell only the school business. Where the seller is a charity, the school business should be independently valued, but is often sold for a modest sum. The buyer will then enter into a lease with the seller for the school site. Again, where the seller is a charity, a qualified surveyor will need to value the lease to ensure that the charity gets good value.

Any project of this kind will require an appropriate due diligence exercise and a carefully thought through timetable. Any transaction with a party connected to a charitable school will require consideration of conflicts of interest, and governors will also need to carefully consider charity law issues and their trustee duties. The TUPE regulations will also apply and this process will need to be managed delicately.

Conclusion
There is a range of strategic options open for independent schools: from co-education and collaboration to merger and sale and these should not be underestimated. Governors may see many advantages to considering all of their options, even if that simply reaffirms the benefits of their current business model.

Emma-Jane Burnell is a solicitor at Veale Wasbrough Vizards. Emma can be contacted on eburnell@vwv.co.uk or on 0117 314 5465.

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