Contents of this Article:
- 1. Legal Structure
- 2. Local Partner
- 3. Choosing the Right Deal Structure
- 4. Protect Your School’s Intellectual Property
Demand for English-based and Western-style education is still running high in many countries around the world. An ever-increasing number of wealthy locals want to prepare their children to attend elite universities abroad and this has created clear demand for suitable schools.
However, starting a private school in a foreign country is actually very difficult even under the best circumstances. Time and time again, our clients and the local partner misunderstand the relevant laws and best business strategies involved in successfully running a new international school. This lack of foresight and preparation frequently leads to negative outcomes not anticipated by either side.
Four key areas to consider when starting a new international school.
1. Legal Structure
Every country has its own school registration and licensing process, which often depend on what type of school is being established. It is important to know how the host country’s education regulatory structure deals with each form of school it allows to be established, and if this meets your expectations:
- Will the school be allowed to be for-profit, or must it be a nonprofit?
- How long does the license application and approval usually take?
- Will the school be public or private?
- Will the school be allowed to enroll local students, and if so, up to what percent of the student body?
- Is an international curriculum allowed, or must a national curriculum be delivered in whole or in part?
- What percentage of the teaching staff is allowed to be foreign?
2. Local Partner
Choosing the local right partner is a critical part of reducing your overall risk in the new school project. Early on in the relationship between parties, the local partner often makes grandiose statements about its assets, government connections, business track record, and the pent-up demand of new students just waiting to enroll in a great school that can be easily solved with their prime real estate. Couple these assurances with some fantastic dinners, impressive architect renderings and financial projections, and it all can be quite heady for those representing the school or education group coming in.
But how do you know if any of these local partner promises are real? How can you even be certain the people with whom you are communicating are even who they say they are and how can you determine the situation is what they say it is? The key here is to conduct due diligence on the local partner to determine the following:
- Is the entity with which they are proposing you contract legally registered? Does it have any real assets?
- Does the local partner have legal problems or a bad business history that might tarnish the reputation of the school, or even worse, be repeated in this new international school relationship?
- Does the local partner meet the definition a “foreign government official” under the US Foreign Corrupt Practices Act (FCPA) or the U.K. Bribery Act? In many countries it is common for local partners to be either a partially or wholly State- Owned Enterprise (SOE), or government officials themselves.
- What intellectual property (IP) has your local partner already registered? Some of our clients have been surprised to learn their trusted partner registered the client’s IP before any contract or agreement was ever signed.
- Is the local partner authorized by the host government to own and operate a school? In many countries, knowing the authorized scope of the business of the contracting entity is of utmost importance.
A due diligence report on your potential local partner(s) will position you to make informed comparisons between what your local partner has been telling you and reality. Knowing this will help you decide whether and how to proceed with the deal.
3. Choosing the Right Deal Structure
International school deals are commonly structured in one of four ways. It is important you choose the right deal structure for your situation and goals because not all deal structures are possible or even desirable in every country. The four main deal structure types are as follows:
- Direct investment
- Franchise
- Co-operation agreement
- Management fees agreements
a. Direct Investment
This is the least common approach because it requires substantial capital investment and excellent knowledge of the local market, something few school investors have. A direct investment structure also requires creating and funding a large management structure to oversee the establishment and operation of the new international school. However, those who are able and permitted to structure this type of deal will have full control of the school and greater share of the revenue stream than under any alternative structure.
b. Franchise
Under a franchise model, the newly established international school adopts the brand name and basic curriculum of the originating school and in return for this it typically pays the international school an initial upfront fee and an ongoing royalty fee, usually calculated as a percentage of the new school’s operating income or student headcount. Under a franchise model the established international school faces some risk of damage or dilution to its brand due in part to its lack of full control over the school operating under its name. However, when allowed, a franchise school tends not to require the established school to expend much time or money.
c. Cooperation Agreement
A cooperation type of deal structure is analogous to a business joint-venture (JV); however, it is usually strictly regulated by the local government authority as to ownership percentages, type of school and type of student allowed. In a co-operation agreement, the local partner will usually fully finance the project while the originating school invests most of its time articulating and transferring its ethos, operational design, curriculum, and business model to the new international school. The originating school recruits and trains the staff, designs the curriculum, recruits the Head of School and school management team, and advises on the design and construction of the school. Though the originating school does not totally control the new international school and must spend considerable time on the school and its relationship to its local partner, it normally receives an upfront fee and an ongoing percentage of overseas school’s income.
d. Management Fee
A management fee deal structure typically has the local partner fully financing the project and in return the originating school enters into an agreement to operate the international school on a day-to-day basis in return for a management fee. A management fee structure means the originating school will need to invest a great deal of time in establishing and operating the new international school, but this also means the originating school should have a great deal of control on how the school is run and a consistent stream of revenue, at least in theory.
Why only “in theory?” The key to successful management fee deals is getting paid. I have seen many international school companies that have done these deals not get paid either early or late in the process. This failure to pay usually occurs when the local partner claims it can no longer keep paying for one of the following reasons:
- The structure of the deal does not comply with the host country’s laws in how schools can pay overseas partners;
- The contracts do not account for which party pays the required taxes and the school does not want to pay them;
- The overseas bank account of the international school is in a country flagged by the host country’s government for money laundering or tax evasion or terrorism or really anything that makes sending money there difficult or impossible.
Of course, the local party is happy to keep the money for itself in the host country. All of these reasons could have been overcome by drafting a compliant portfolio of contracts that allowed the originating school to get paid what is owed. They key on these deals is to make sure from the very beginning that payment is possible and then to draft contracts that will ensure exactly that.
4. Protect Your School’s Intellectual Property
As is true for any company doing business overseas, it is imperative that you protect your IP. For international schools this usually means they need to register their brand name and logo as trademarks in the foreign country and this also often means they need to secure copyrights on their curricula and lesson plans. They also usually have trade secrets (teacher names, student names, and internal processes) that they need to be careful to protect as well. It is also important to realize that if you are going to license any of your IP (such as your brand name or curricula) to anyone overseas, you not only must register the IP that is tied up in those things, but you need a licensing agreement that does not inadvertently lead to you permanently relinquishing your IP to your licensee.
