mergers & acquisitions in the for-profit college space today: … · 2018. 4. 4. · mergers,...

Presented at the Annual Administrator Conference of theFlorida Association of Postsecondary Schools and Colleges

“Pioneering Trails for Student Success”

July 25, 2013

Mergers & Acquisitions in the For-Profit College Space Today:

What You Need to Know

1

Disclaimers

The views expressed in this presentation are those of the speaker(s) and do not necessarily reflect the policy or position of FAPSC.

The content of this presentation does not constitute legal or regulatory advice. No one should act or refrain from acting on the basis of this presentation without seeking individualized, professional counsel as appropriate.

Ritzert & Leyton, P.C. 2

Current landscape (last 12 months)

Sales of (relatively) healthy institutions occurring in the range of 5-6x EBITDA, but very rarely

90/10 ratios, CDRs within acceptable ranges

Annual Gross RevenueRealistic target for some smaller school sales

Fire sales (“as is”) of some schoolsIn some cases, Seller pays Buyer

Closure issues: closure of some locations pre or post saleCost of teach out


Current landscape (last 12 months)

Targeted Non-Title IV acquisitions (90/10)

Targeted program acquisitions – regional brand strength, e.g.

Higher rate of failed negotiations (due diligence findings, valuation disagreement, e.g.)


Initial Considerations

Valuation

Type of Sale

Auction vs. NegotiatedStock vs. Asset Sale

Tax Considerations

Terms of SaleCash, note, deposit, escrow, hold-back, earn-out, rescission, employment agreement, lease-backs, non-compete, etc.


Valuation – common approaches

Multiple of Adjusted EBITDA

Projected revenueMultiple of Gross Revenue

Recent comparable sales


Valuation – common approaches

None of the above: parties agree on what buyer is willing to pay and seller is willing to accept based on unique factors of deal.

Fire sales/as is – Seller can pay buyer in some cases.

More than ever, creativity and willingness to accept valuation uncertainty is needed to strike deal.


EBITDA

Earnings Before –

InterestTaxesDepreciationAmortization


EBITDA - AdjustedPre-tax net income, PLUS:

Depreciation/amortizationNet interest paidOwner and family member salaries and perksNon-operating expensesNon-recurring expensesSalary adjustments (plus or minus)Rent adjustments (plus or minus)


Factors Affecting ValueMarket

GeographyLocation and Number of Locations

ProfitabilityTypes of Programs

Ability to ExpandAccreditation

RevenueGrowth potential or potential impairments to growth


Factors Affecting Value (continued)

Title IV EligibilityCompliance status and history (last 3 years)Due Diligence findingsDefault rates90/10 Enrollment historyGraduation ratesDrop/withdrawal ratesPlacement rates and verification integrity



LocationQuality of program(s)Brand strength in key market(s)Facilities and equipmentOther



Open investigations or reviews of any type

Negotiated RulemakingGE II (but we see much less impact than GE I on deal flow)


Other issues we have seen complicate deals --

Incorrect or dated information on ECARDoes not look good when pre-acquisition review application includes or is delayed by need to make ECAR changes

Properly reporting:additional locations to EDpast ownership changesNew programs


Currently Attractive Targets

Quality programs

Brand strength in market

Distance learning

Non-Title IV revenue


Due Diligence: Sample issues

90/10Composition of the 10%

Credit balances; VA funds; state funds; foreign studentsTrends

Cohort Default RatesHistoryTrends

Financial Scores



Financial Aid AwardingInstitutional ApprovalsBranch/Additional Location ApprovalsProgram ApprovalsState AuthorizationInstitutional AccreditationProgrammatic Accreditation



Compliance and financial audit findingsOpen program reviewsEmployment contract obligationsVendor contract obligationsPrivate student loansMarketing/advertisingStudent/faculty complaints



Department of Veterans Affairs/Post-9/11 GI Bill FundsDepartment of Defense/Tuition AssistanceDHS/Student Exchange Visitor ProgramState education grant programsWorkforce funding programsOwnership tree accuracy


Preparing for Sale: 2 Years Out

2 years out:Cohort Default Rate90/10Open program reviewsFinancial/compliance audit issuesEmployee issuesBoard of Director issues/Governance

Buyer: educational experience represented on BODProgram changes: level or type


Preparing for Sale: 1 Year Out

Research market for buyers/sellers

Prepare narrative of facts underlying financial and compliance health

Enrollment history

Market research


Preparing for Sale: 6 months out

Valuation determined – market-drivenLetter of Intent signedNegotiation of Stock Purchase/Asset Purchase AgreementDue Diligence begins: 1-3 months on averageClosing Date chosenNegotiations proceed to closing


Negotiations on Agreement Terms

Cash payment at closing

Hold-back and earn-out options

Stock ownership roll-over

Employee hiring issues

Transition of vendor servicesRitzert & Leyton, P.C. 23

Initial Considerations: Structure

Stock PurchaseAsset PurchaseMergerRecapitalizationPreferred Stock and WarrantsManagement Agreements


Impact of Structure Decisions

Will Buyer need to post Letter of Credit?Will Buyer be subject to Growth Restrictions?

Tax ConsiderationsTransactions that do not trigger change of control or ownershipAllocation of liabilities


Impact of Structure Decisions

Opportunity to perform due diligence from inside the operation, e.g. under a Management Agreement

Conversion from Non-profit to for-profit; or for-profit to non-profit


Stages of a Sale: Negotiated Sale

Initial discussion/solicitationConfidentiality AgreementInformation sharing (financials and other)School visitLetter of intent/exclusivity periodBuyer Due DiligenceDefinitive Purchase AgreementClosing


Stages of a Sale: AuctionIdentify biddersConfidentiality AgreementsMarketing/Sales BookExpressions of InterestSchool visitsBidder Due Diligence/Markup of ContractFinal Bids/SelectionLetter of Intent/ExclusivityDefinitive Purchase AgreementClosing


Elements of Letter of Intent

Identify Structure (stock or asset)Purchase Price and TermsExclusivity Period Due Diligence Period DefinedNon-compete TermsConfidentiality TermsTimeframe to Consummate (target)Non-Binding except as to confidentiality, exclusivity, each party bearing own costs under LOI, and access to records needed for due diligence.


Elements of Definitive Purchase and Sale Agreement

Purchase Price and Terms

Escrow Agreement and ConditionsPromissory NoteHoldback or EarnoutWorking Capital/Post Closing Adjustment


Elements Continued

Reps and Warranties

OrganizationalTaxesEnvironmentalTitle IV ComplianceAbsence of Negative Conditions with regulators


Elements Continued

Covenants of Parties

Access to Records and EmployeesProhibited Acts pending Closing

Normal OperationAssistance with pre-Closing requirements (i.e., DOE pre-acquisition review)Assistance with post-Closing requirements

Audits, cooperation


Elements Continued

Conditions to Closing

Representations and WarrantiesNo Material Adverse ChangeCertificatesRegulatory Pre-Closing Approvals Secured


Elements Continued

Events of Breach

WarrantiesAgreementsRefusal to Close


Elements Continued

Definition of Assumed Liabilities and Excluded Assets for Asset Purchase AgreementDisclosure Schedules and Related DocumentsEmployment Agreement(s) and Non-Compete


Elements Continued

RescissionIndemnification

BasketsDeductibleMateriality

Closing DocumentsBoard ResolutionsLegal OpinionsBill of Sale


Regulatory Consents: Change of Ownership Process

Pre-Closing ConsentsU.S. DOE Pre-acquisition reviewAccrediting AgenciesState

ClosingFinancial standards (same day balance sheet)

Post-Closing ConsentsTPPPA/PPPA

Same Day Audited Balance Sheet


Regulatory Consents: Change of Ownership Process

Automatic termination of PPA if change of ownership is not approved.

Financial requirements: 34 CFR 600.20(g); 34 CFR 668.15


Current Regulatory Issues

Institutional Eligibility Pending TPPPA

Timing to Complete Pre-acquisition review process

Title IV compliance of current operations affecting ability to market and sell school


Restrictions on Growth

Peer Review Board

Letter of CreditCash MonitoringLimitations on New Locations and ProgramsOther Restrictions


Rick Thomas, CPA

Mr. Thomas is a Partner at Salmon Sims Thomas and has more than 20 years’ experience providing tax planning, compliance, and audit services to a diverse number of industries, including education, oil and gas, and real estate. He is nationally recognized for his expertise in audit and accounting services for the career school and college sector.

He is a Certified Public Accountant, licensed in multiple states and a member of the American Institute of Certified Public Accountants, Dallas Society of Certified Public Accountants, and Texas Society of Certified Public Accountants.

He earned a Bachelor of Business Administration, Accounting from Texas A&M University in 1982.


Peter Leyton, Esq.

Peter Leyton is the president of the Washington, D.C. area law firm of Ritzert & Leyton, P.C. and head of the firm’s education practice group. Since 1980, Mr. Leyton has represented many institutions of higher education, publicly traded companies, private investment groups and others with respect to resolving regulatory/compliance matters as well as with respect to achieving desired transactional results through mergers, acquisitions and reorganizations. This work involves daily interaction with the U.S. Department of Education (DOE), national, regional and programmatic accrediting agencies as well as state licensing agencies and other third parties. Peter completed his second term on the Association of Private Sector Colleges and Universities board of directors in June 2012. He received his law degree from Catholic University School of Law in 1980, a master's degree in public administration from American University in 1974, and a bachelor's degree in political science from Antioch College in 1971.

Contact information: Ritzert & Leyton, P.C., 11350 Random Hills Road, Suite 400, Fairfax, Virginia 22030; [email protected]; (703) 934-2660


Katherine Brodie, Esq.

Ms. Brodie advises postsecondary institutions and their partners regarding compliance with federal, state and accrediting body regulations applicable to the daily operation of institutions of higher education. She is a member of the District of Columbia and Maryland bars.

Prior to joining Ritzert & Leyton, Katherine served as Vice President of Government and Legal Affairs at the Association of Private Sector Colleges and Universities (APSCU). She earned her B.A. at Bowdoin College and her J.D. at George Washington University Law School.

Contact information: Ritzert & Leyton, P.C., 11350 Random Hills Road, Suite 400, Fairfax, Virginia 22030; [email protected]; (703) 934-9829
