Acquisitions Anonymous - #1 for business buying, selling and operating - Let's buy a $25 million college - Acquisitions Anonymous 254

Episode Date: December 15, 2023

Today's episode has a  deal that involves a highly profitable degree-granting career college in Pennsylvania with an asking price of $25 million and an annual cash flow of $6.2 million. The college offers various programs, including healthcare, dental assisting, veterinary science, business law, and more. While the business appears lucrative, potential buyers should be aware of the regulatory and customer concentration risks associated with Title IV funding and the dependence on government programs. Tune in as Heather and Michael break down this fascinating business. Check out the listing here: https://www.bizbuysell.com/Business-Opportunity/large-highly-profitable-degree-granting-career-college/2123269/Thanks to this week's sponsors!CloudBookkeeping offers adaptable solutions to businesses that want to focus on growth with a “client service first” approach. They offer a full suite of accounting services, including sophisticated reporting, QuickBooks software solutions, and full-service payroll options.Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Hey, Michael Gridley here. Welcome to Acquisitions Anonymous. Today, I am wearing an Alamo Fireworks T-shirt. I do this hold code stuff basically for the swag, not actually for any sort of monetary gain. Like, that's just secondary. It's all about the swag. But it's almost fireworks selling season. So I'm celebrating by wearing one of my favorite t-shirts from one of my favorite companies.

So today, Heather and I dug into a business that I found thrilling and is actually a space I know a good amount about because I've been an educational entrepreneur throughout my career. So I know things about this business. And it was actually a career school located in Pennsylvania, very profitable and a great business case study, and also one to dig into and understand, you know, what is there to learn here. And a spoiler alert for you. If you stick around, you might see what we liked about this deal. So thanks for being here. Hey, Michael here. Want to talk to you about today's sponsor for the episode, which is cloudbookkeeping.com.

So cloud bookkeeping is actually run by my neighbor, Charlie. So I've met him in person and can attest that he's a real human being and a good person. And what cloud bookkeeping does is offer a full suite of bookkeeping services all in the cloud for you around QuickBooks and other technologies that you're using as a small business owner. So if you're interested in getting the bookkeeping part of running a business off of your plate and focusing on running your business, Charlie and his team are one to call. They can put together a bunch of other stuff in terms of helping you manage and grow your business besides just bookkeeping, sophisticated reporting, definitely helping you get your QuickBooks online set up in the right way, and a number of things around payroll as well. So definitely know them and recommend them.

If you want to find out more about Cloud Bookkeeping, you can go to their website at cloudbookkeeping.com, reach out to Charlie. I know many of you have and see if he can help you. make running your business easier and more fun by letting them help with a lot of the bookkeeping solutions. And when you call, mention this podcast, it would help us and help Charlie know that we're supporting him as well. So thanks a bunch and cloudbookkeeping.com as the sponsor for today's episode. Hey, Michael. How's it going? You win the best dressed award for like the 400th episode in a row. In my formal attire, as you say, yes. The Tierra is next.

I've got an Alamo Fireworks T-shirt on for those of you watching from not YouTube's. So one thing I wanted to talk to you about, which was pretty special. I don't know if you saw it, but Spotify does their end-of-year recap for people, if you're a Spotify user. And one of the things that was included there is it goes through and it shows you which podcasts and which songs and artists and all that stuff you really got into. And there were people who were like posting their things. They watched dozens of hours.

of our podcast this year, like top 1% fans and stuff like that. I don't know if you saw that. I did not see that. I'm going to go, look. I'm not a Spotify person. I don't know why, but I don't like the music platform that I use, but I still use it. That doesn't make any sense. Right.

Yeah. It's the one great thing about Spotify. They're starting, at least from a music perspective, they're starting to watch your history and they're showing me things like I liked like five years ago. And that history is really very fun. And so I like it. But anyway, it was cool to see, I think so many people, this podcast is really touching them and helping them do better, right?

If they're considering buying a business, or they already own one and want to think better about it, like, it makes me feel good that we're, like, making people's lives better. But one thing that did really stand out is the number of people we get these messages that were like, you know, I am so impressed by y'all's podcast. It seems like every other one I listen to where business gurus are giving advice. and stuff is people that have never done anything. And you guys actually seem like you've done some stuff. So you're marginally credible. It's like, well, the bar is... That's good news. That's good news. The bar is low. The bar is low, unfortunately. Yeah. That's true. Well, cool. Well, I challenged everybody

to bring a deal today. And so that meant that Mills and Bill didn't show up. They didn't show up. Exactly. They didn't do their homework, so they're not here. Yeah. You're here. And I brought a deal that I think is something unlike anything we've ever done before. So I would love to read it to you, and then I'd love to see what you think about it. I'm scared already when I see this picture, for those of you who are not on YouTube. Yeah.

Interesting. So it's on Biz Buy Sell, and it is a large, highly profitable degree granting career college located in Pennsylvania. The asking price is $25 million, and the cash flow is $6.2 million. So it's a little over, a little under four times cash flow.

Gross revenue. Listen to this about education. Gross revenue is 13.9 million, Heather. So they're bringing in 13.9 million in revenue and their cash flow is $6 million a year. Rint is $51,000 a month. Oh, I'm sorry. I kind of, I buried the lead there. The profit margin for this school is nearly 50% cash flow margin.

Wow. Nearly 50%. Rent is $51,000 a month. and it's been around for 28 years since 1995. In 2023, they project to do 13.9 million in revenue, and 23 adjusted EBITA is projected to be 6.2 million. Investment highlights a nationally accredited Title IV degree granting institution,

28-year operating history, two campuses plus fast-growing online programs, 15 different programs with a clean regulatory record, outstanding educational outcomes, feed our programs to higher credentials, and a 24% compounded annual growth rate over the last five years. Description.

Are you interested in a lucrative opportunity that is benefiting from the long-term shifts in student preferences for career-based training programs rather than traditional four-year degrees? Want to immediately enter into the fast-growing online education sector? Our client, Project Career, is a for-profit degree-granting

Title IV Vocational College that can deliver all the above. Since 1995, the college has trained students for careers in healthcare, dental-assisting, veterinary science, business law, and the trades. Its new practical nursing program is expected to go live by Q4 of 2023. Located in the Northeast, it said Pennsylvania before, Project careers has over 731 students attending its two campuses and fast-growing online programs. The college offers 15 degree in deployment programs, its health care programs, including medical coding, 273 students, medical administrator, 130 students, health sciences support 160 students,

and medical assisting 46 students are the most popular programs. The college's graduates have no problem finding good paying jobs as evidenced by the school's 88% placement rate. The college has 65 employees, including 25 management and administrative staff and six full-time and 27 part-time instructors. Project Career is accredited by the Accreditation Bureau of the Health Education Schools, the gold standard for accreditation schools with allied health care programs. The college has a spotless regulatory record, the State Board of Education, the U.S. Department

of Education. The owners have dedicated their 40-year professional careers to career education and are interested in selling so they can retire and pursue other interests. If you are a qualified buyer and would like to learn more, please contact me to sign an idea and receive additional information. One thing that is here is they're interested in expanding it into computer program in cyber security boot camps, and it comes with experienced and talented management team. In addition, the sellers have been here for 40 years,

and they're willing to help the next owner with a smooth transition. And they have two campuses, and the real estate can be bought. So yeah, that's it. So what do you think? Wow. That is a great business.

But I do, you know, I feel like it's a great business for the right person. This is kind of one of those great margins. And it seems like they're pretty smart about serving career niches that are in demand. You know, just when you look at the things that they're about to go into,

Over 40 years, it sounds like these owners have followed, where are the labor shortages? And they're training people for those. And that's a genius business, if you ask me. I do think that it takes a lot of skill. You know, it's a title for degree granting institutions. So there's, you know, there's a regulatory sort of compliance side to it. I'm sure that impacts their revenue and, you know, how they're paid. I don't know if student loans are part of this, probably.

maybe or even grants. So there's probably a lot of knowledge here that the sellers are going to have to transfer to a new buyer or you need a buyer that has some kind of background in the space. But wow, it seems like a great business to me. What do you think, Michael? Yeah. Well, okay, anything that does 40% on revenue cash flow margins, like you're just right there. You're a pretty good business.

Whether it's legal or not, you know, you don't know. That I think that's a, Pablo Escobar, also ran at 40% margins. So, yeah, I know actually a lot about this space. The Title IV is actually the way they described the federal guaranteed loans that are super low interest rate and also the ones that don't go away if you declare bankruptcy. So that's how schools like this get funded. They market to you and they'll say, you know, here in San Antonio we have three or four of these and one of them's career point,

and other ones, ECPI, like all these different career colleges. And they do exactly, I think, what you're talking about, which is tailor their programs based on maximizing placement and also what the students want. And it looks like where they've been spending

a lot of time recently is not in the law and other places where they were historically, but in things like healthcare, where those are their most popular programs now. Medical coding, medical administrator, health sciences support. It looks like their top five programs are all medical.

But yeah, Title IV, Title IV is the loan program that all these people who take these use to pay for the degrees. Interesting. So there's got to be a lot of challenges to staying compliant with that, right? I'm sure that there's regulation on what the school has to provide. And I guess I think of it in terms of the way lenders think of pay or risk, right? We look at sometimes companies and we say, gosh, here's a company that's 100% Medicaid. and there's payer risk. They may change the rates.

They may have this, you know, policy decision that changes and wipe the company out one day. Is it the same kind of risk with Title IV? So the difference between Title IV loans are their classic student loans. And those are the ones that if somebody declares bankruptcy or tries to get out of them, you can't get out of them. Like, they're not bankruptcy discharged. And because of that, the borrower risk is relatively low because basically for you to not get paid, somebody has to default, and the lenders know, oh, the government's also involved in the guarantees

of these things. So the interest rates end up being super duper low on student loans. They were, I mean, I think you saw where they went over the past few years. Like during, you know, zero interest rate phenomenon times, they were super duper low. Okay. So great funding source. So you have a great funding source and you serve a niche where people, well, you know they can get jobs because these are areas with job shortages. You know, I think every maybe 10 years, they've got to probably change, you know, what niches they're serving

because they've got to go wherever the labor shortages are and there's probably some development costs with that. And so they're probably in a nice point right here with this great margin, I guess, is what I'm trying to spit out, is that, you know, they're past those development costs for all this health care stuff that they're doing. But you as an owner, you know, you may, in a few, you know, maybe five or seven years have to develop new programs, you know, for other niches

that are needed as the labor market changes. But that's not even, that's not such a bad thing. You know, with these kind of margins, you can make this money for a few years and have plenty set aside for that development. Be ready for the next one. Yeah. And I think the challenge with those other things is, you know, it's, I think it's relatively easier to transition and spend up a lot of those programs because they're relatively standardized, right? Let's say that there's, you know, you decide that, oh, what's going to matter here is paralegals, right? It's not like that's magical from school to school. So, you know, there's a lot of off-the-shelf kind of diploma programs and curriculum and textbooks and all that kind of stuff you can standardize. And the good news is

because you're accredited. So all the regulatory bodies look at you. They also are in a case where, like, they like it if you're using standardized stuff because they don't want to be doing off the wall, off the wall things. So yeah, and you could imagine right now, it looks like it's very medically oriented. But the other thing that comes into play here, which is important, is there are times in the job market

where what people want to hire is not what anybody wants to become a student for. For example, like you notice there is no accounting degree here, and you notice there's no petroleum engineering degree, and you notice there's no HVAC stuff, which may just may not be this type of school, but also like that's what people are hiring for now. And, you know, while medical has continued to grow and blossom and doesn't slow any sign of slowing down,

that could happen in the future if the regulatory environment and stuff like that happens. You can end up in a situation where the jobs that you want to train people for, like nobody wants to do HVAC or plumbing, if that makes sense. Yeah, it does. And I think that's a very interesting point about some of the shortages that we have is just the demand that people don't want to do it. they're not making the jobs seem attractive. They did point out here, there's a shift away from four-year degrees into more vocational and job training.

And I do believe that's, I do believe that's true. I don't know if there are statistics, though, on that. Do you know, Michael, are there, is that just something we talk about or is that really happening in a way that we can see in statistics statistically? I'm trying to think, I mean, I've just taken it for granted because I've seen people talking that way, so I totally believe it. and never look at the stats. But I think you're also seeing college enrollment,

especially in the bottom, you know, third quality of colleges is really struggling. Like a number of, you know, obviously the quality universities, especially ones that cater to affluent parents and privileged kids and stuff, they're all still doing fine. Harvard has all the applicants I could ever want.

And even then the next tier down, University of Texas here has more applicants than it could ever want. It's also a great value. But I think the second and third tier schools, anecdotally, and the data I've seen as are all very much struggling. You know, if you're, there's actually a university here that's like seven hours west of San Antonio and a little 7,000 person town in West Texas called Sol Ross State.

They have trouble hiring teachers, not to mention hiring a president of the college. Like they routinely will go years where they don't have a president because nobody wants to go out there. So I think a lot of those colleges that aren't the top 20 to 30 percent are struggling from the data. I've seen. Interesting. And I wonder if we're going to get to a point in the near future where colleges will fail. It'll just fold up and stop. If the demand is not there, they should. But they don't really act like businesses. So it'll be kind of interesting to see how that happens. Yeah. And well, and then you end up with all kinds of complexity there. So Sol Ross is part of there's a third state system here in Texas. So people know the main UT system and they know the A&M

system. There's actually a third system, which is we have our own polytechnic system here in the state of Texas, just like you guys have Cal Poly and stuff like that. Because you have, well, you have, you have the state, the Cal. State, UC and Cal Poly. Yeah. Yeah. So our Cal Poly is relatively small just because, well, football. So that's right. Football. I forgot about that. We don't care about that here, so we forget. Well, then the funnier thing is like there's Cal Poly, but then that's, there's this whole University of Houston system where like that's the one thing, like people don't talk about

how special the city Houston is. Because of like the history and the oil business and like the fact everybody's living in a swamp, like it attracts these people who just decide to take their own future in their hand to an extreme degree. And like my favorite story there is, did I be tell you that my airport story about Houston?

Do you know why they have a good airport? No. So they looked up. So it was a bunch of old white guys because that's who ran the city back in the 60s. And they looked up and realized that Houston had these major league ambitions to be a world city. And they were like, how are we going to be a world city? And we're an ambitious group of people. We're going to be the energy capital of the world, all this stuff.

And they looked up and they saw Houston hobby, which is too small of an airport for their ambitions by far. And it's on the wrong side of town. And they went to the city back in the early 60s. and they went to the mayor and told the mayor like, hey, look, you got to go stake a claim for where we're going to put an airport. Otherwise, if you don't do this soon right on the edge of town, it's going to get pushed out so far

that we'll never have a functional airport. And the Houston growth will be finite. Like, we won't be able to keep growing. And we won't hit our ambition. And this is super important for the community. And the city council, they're like, yeah, whatever. like we'll worry about it in a decade. We don't need a new airport.

Hobbies just fine. You know, we'll be great. And so these guys went, these business leaders went and bought up the land for what is today Houston Intercontinental and basically said, well, we're going to buy this as a group. We're going to do it for the community. We're going to sit on it until the city is ready and gets their mind right. And then a number of years later, close to a decade later, they sold it to the city at a very fair price.

And it was basically this idea that they were just like, oh, like the government's not going to do it, well, we're going to fix it. It's that. Yeah, that's incredible. That's great. I wish we saw that more often, actually. And I don't know how I got on that topic, but it was just like this idea of what's beautiful about Houston is these people just, you know, they just take their boost drops. Oh, anyway, okay. So the reason I got there is because you have all these other systems in Texas that are all these public systems, the polytechnics is the one. And there's the University of Houston system, which is just like, forget all you guys. Like, we don't want anybody else here. We're just going to be University of Houston because we're Houston and we do we're special and uh one time maybe three or four

years ago the UT system was like we're gonna put a medical school in Houston and like everybody in Houston freaked out like they're calling the governor like you're not putting another you're not coming in here on our turf we own this it's university Houston keep those Austin people out here and it was just kind of the most beautiful Houston and Texas thing to ever happen and when I saw it happen I smiled a little bit and I was like go Texas fighting within even oh that's too much I did not know that they had their own school system in Houston. That's crazy. I've never heard of that before.

Amazing. But I think it comes back to like, we're in a world today where there are still way too many colleges. And we've looked at a couple, I think maybe it was before you became a co-host. We looked at a college campus for sale, like in rural Vermont or something, something I'd never heard of in some like 2,000-person town,

just not a viable business in the least, and probably not viable as land either. Interesting. Well, this one has a pretty good size building. Did we say 51,000 square feet? Or no, 51,000 a month rent is what it was. It looks like this is another case where, you know, if you're a potential business owner,

you want to do this. If you own a business, start to figure out how to own your real estate because it makes it very easy for you to own cash flowing assets after you graduate from owning your business. You can sell your business and keep owning the real estate.

And that's what these guys are doing. Here it says the college has two campuses, the owners of the school also own the real estate so the real estate can be included in the purchase of a buyer wishes it. Otherwise, the campuses can be leased at a fair market rate. So the beauty here is like they can sell the business and keep making $50,000 a month cash to rent the school to the new owner. So I don't know about you. That sounds pretty good. I would say the vast majority of SBA deals that I do that I look at are just like that. They'll give the buyer the option. The buyer doesn't want to take the option. It's too much to

try to take down at once. So they'll just lease the real estate. state from the owners and buy just the business initially. And then sometimes they'll come back a couple of years later and exercise a lease option if they have one and buy the real estate from them eventually. But yeah, it's a great, it's a beautiful thing. It's much harder when it's a third party landlord and you're trying to sell your business that's, you know, in a rented facility. That can be kind of challenging. Yeah, a million percent. So I think it's also worth noting one of the challenges of all these schools is a thing called a 90-10 rule. And the way the 90-10 rule works for Title IV is you're only allowed as a school that takes loans under the Title IV loan program from the Department.

You can only take 90% of your loans from the government. At least 10% of your money has to come from other sources. So if you're bringing people in off the street, you're treating them to be medical assistance and stuff like that. Most of them do not have the amount of money required to do a copay on any of this stuff, to do 10% of the tuition. I have nothing. So like you're doing 100% financing for them and that creates a problem for you. If you finance a bunch of people at 100%, eventually you're going to run into this 90-10 rule where you have to figure out other ways for cash to come in. And a lot of these schools from what I understand, I've never operated one, but a lot of them end up limiting how far they can grow because of this

90-10 rule. Because like, yeah, it so it becomes part of the limitation around all this stuff. There's only so much they can fill the 10% with. That's interesting. That's too bad, really. actually, because it doesn't seem like it serves a good purpose to have that rule. It is meant as a systemic check on abuse of the program or abuse of government programs. So imagine if they didn't have that rule, then what a program could do is just be like, okay, like, we're going to charge enormous amounts of money for this stuff. And what 9010 does is it forces them to stay at least close to market so that the government knows at least based on that break on the whole thing,

they're potentially not underwriting loans that have no future whatsoever or way above market. I take it back because as an SBA lender, I should have known that because that's exactly why the SBA only guarantees 75% of the loans to banks. If they guaranteed 100%, the banks would go crazy and make lots and lots of bad loans. So yeah, correct. Yeah.

So this deal also has something that I like to consider and call, and I just made this name up, but I call it hidden customer concentration. And what it means is, is that if you think about what's really going on here, you have a bunch of students. And right now they say they have 731 students. And it's like, okay, well, cool. You know, like that's not a lot of customer concentration. Well, then when you double click on those students and you realize they are all, all, all dependent upon Title IV funding and loans, then you realize that, oh, like, I actually do have a player in this whole thing. and it's the regulatory bodies in the U.S. government who can change things in totally torpedo this particular thing if they change the way loans work. Let's say, for example,

the Department of Education decides to stop doing Title IV loans for medical coding. That's 273 of their students, according to the listing here. That is, what is that, 20% of their business if that happened. Now, is that going to happen? Is it likely? Probably not, but it's customer concentration, it still is a big risk to the business. Yeah, and that's what I was saying earlier, that lenders call that pay or risk. Like, who's paying? And if it's all one, you know, it's concentrated like that. Yeah, the stroke of a pen and you could be losing a huge chunk or all of your revenue

or could just dramatically change your cost profile. So, yeah, it can be risky. I looked at a deal not too long ago. it's actually, should close actually pretty soon, but it's a company that provides products for people who are blind. So braille, you know, signs and all kinds of different products. And it's all paid by government programs, state government programs. And that's, you know, a similar thing. It's a payer risk. But you sort of end up looking at it and think, you know, what state is going to cut funding for the blind? Yeah, unlikely, right? 100%. So you have to kind of look at the political risk of something happening when you have those. kinds of risks. Yeah, 100%. I still like the school, though. You got to love the business. Look, I think the other thing to love a lot about this, if you do this with your values high and you provide people a good value, which by the way, I did the math, if you take the number of students,

if you take their amount of annual revenue, which is 13.9 million, and you divide that by the number of students they claim to have, which is 731, the average student is paying 20,000 a year in tuition. So not crazy for a one year to two year program to get, you know, potentially a better future and a better job for somebody. And I think that's that's also something when education is done right. You know, these guys are doing exceptionally well. I mean, you can't argue with that. But this is a pretty big school. They've built up over time.

But they're helping people, which I think is something, you know, that there's, that's admirable. Absolutely. It helps society, too. It doesn't just help the students, but they're, They're being wise about it, and they're training people that society needs, you know, into roles that society needs. I'd like that a lot, too. Yeah.

So here's a question for you, Heather, and not to put you on the spot. But I would ask you, if you look at all this, ask yourself, there's a lot of very, let's say, professional and large chains of career schools that grant degrees. Why are we the lucky buyer to find this on biz buy sell? Right. And it is a low margin. And why is it on biz by sales? You're putting me on the spot.

I don't have a good answer. These folks have been doing this for 40 years. You'd think they'd be very well connected within their own industry. And a strategic buyer would be able to pay a higher multiple than a standalone buyer. It is a good question, and I don't have a good answer, but it's definitely something to be wary of if you're looking at this deal. Yeah. So one thing, one thing that's interesting looking at here, worth noting, this guy from Jackham Woods, Richard Jackham, one of the things I like is you start to identify that there are brokers who have wisely gone and specialized in certain niches, and they actually specialize in educational businesses. So as a broker, that's a good sign that you're seeing here.

Who's a broker who know what they're doing? And it's worth digging into. Then the question is, okay, you seem like you're a broker that knows what you're doing. Why has everybody else who's in your Rolodex? And looking at Richard, he probably does have a Rolodex still. Why is everybody else in your Rolodex passed on this one? And, you know, hopefully Richard would be able to give you an answer that's plausible. But if not, you know, that's one of those things that I love to ask myself.

I think Richard's got a computer. I don't think he has a roll of it. I felt like how to stand up for him. Cool. All right. Well, I thought you'd like this one. I'm glad you did. So just back up the old SBA loan truck to this one.

And Vizzo can just drop some good. It's a little big for SBA, unfortunately. But I do like the deal a lot, a lot. See, we're good. All right. Well, let's wrap it up there. Thanks for spending some time with me, Heather. This was delightful, as always.

And folks, if you enjoyed this episode, please do us a solid. The whole thing grows by you telling your friends about what we're doing. We're enjoying helping people. And frankly, there are more lucrative things that me, Bill, Mill, and Heather could be working on. But we love doing this because it's helpful and helping people at scale. So do us a solid back and tell your friends about it. And we'll see you next week.