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14 May 2019

Charity begins at school

This article was first published in Governance Insight, Summer Edition 2019.

The sale of independent charitable schools to commercial companies is not a new phenomenon; large commercial groups such as Cognita and Alpha Plus, as well as much smaller operators, have been buying up schools both in the UK and abroad for a number of years.

If, however, the current and by no means supportive political backdrop harshens and the Government turns the screw on independent schools, whether by significantly raising the public benefit bar, or – in what would be a devastating blow to the sector – by following Scotland’s decision to remove the 80 per cent business rates relief for independent schools, the financial incentive behind school sales may turn into a financial imperative.

In this scenario we explore some of the points governors should consider if contemplating the sale of their school.

Scenario

The agenda for your next governors’ meeting includes a proposal to sell the school to Educated Learning Ltd, a commercial education company. As a governing body you have had numerous discussions about the declining pupil roll and the limited extent to which the pressure on income can be alleviated by cost cutting. Last autumn your chair organised a governors’ away day with the senior leadership team to review the school’s long-term financial viability and to consider potential merger opportunities. However, the sale of the school is not something that has been on the agenda before, and it rings alarm bells with you: surely your role is to protect and keep the school going, not to sell it?

Also, you recognise the name of the potential buyer because it was cited in the local paper for having bought a nearby prep school but you don’t know anything else about the company and are not clear what selling the school would entail, particularly given it is a charity.

How should you react?

Q1: What is being proposed?

School acquisitions in the independent sector most commonly comprise asset sales, whereby a commercial company buys the school buildings, contracts and employment arrangements etc from the charity that ran the school. The key distinction that governing bodies need to be clear of is between the charity that operates the school and the school itself. The charity will continue in existence and its governors will continue as charity trustees but rather than delivering the charity’s
education objects by running a school they will, ordinarily, become an educational grantmaking charity (commonly providing bursaries to benefit students at the school
in question).

Q2: Is a sale the only and best option?

It is important the governing body tests why this particular proposal has been included on the agenda and considers what other options should be on the table. For example, some schools successfully implement a radical restructuring of their offering, including by cutting school fees to significantly increase pupil numbers, or by closing a loss-making prep school. In this scenario, potential merger options have already been considered and discounted (cultural differences or a concern that one school’s finances will not necessarily be shored up by another’s during a merger can scupper those discussions).

The alternative way to structure a sale to an education company is to sell the entity running the school itself rather than just selling its assets. However, given most independent schools are established as charitable companies limited by guarantee (as opposed to companies limited by shares) this option is unlikely to be feasible.

Q3: Are there any barriers to sale?

The sale proceeds must be used for your charitable purposes and the governors will need to consider how the charity will change its strategic objectives and activities following the sale, most likely by becoming an education grantmaking. Have you checked that your governing document would permit this? Depending on how your existing charitable purposes are worded you may, if they are fairly restrictive and linked to the running of a school, need Charity Commission consent for this change in activities. You should also check whether the school’s property is held subject to any particular restrictions. For example, some schools have received gifts of land on the condition that it is held as permanent endowment, or on the condition that any attempt to sell the land will trigger a reversion of the land to the donor.

Q4: What is the buyer’s track record?

There may be sound reasons why Educated Learning Ltd has been proposed as the potential buyer but this should nevertheless be tested by you and your fellow governors.

Have you researched their financial position and track record in the sector? Have their previous acquisitions, in particular of the local prep school, been a success both in financial terms but also with the wider independent school community? Have you made sure that they do not have a history of ‘flipping’ school properties? It is also important to identify and manage appropriately any potential conflicts of interests in connection with Educated Learning Ltd, whether held by a governor or by a member of the SLT.

Q5: What are the key conditions of the sale?

If you go ahead with the sale, you will of course want to make sure you get a good deal. It will be important to remember, particularly in the heat of negotiations when there is a tendency just to want to ‘get the deal done’, that charity law restrictions on the sale of charitable assets mean that the governing body must be able to demonstrate it is satisfied that the proposed terms (ie both the price and the conditions of sale) are the best that can reasonably be obtained in the circumstances. In addition, make sure you factor into the timings and cost considerations that, to avoid having to seek Charity Commission consent to the sale, the governors must fulfil a number of conditions set out in the Charities Act 2011 in relation to the sale of land, most notably obtaining a valuation from a qualified surveyor.

You will also need to obtain consent from the DfE for the change in registered proprietor.

Q6: How do you communicate the sale to parents and pupils?

There is a real risk, if the proposed sale goes public too early and particularly if the wrong messages get out, that there is a sudden exodus of pupils. You should, therefore, ensure that a nondisclosure agreement is put in place at the outset of discussions with the potential buyer. In addition, the TUPE consultations (that protect employees when a business changes hands) with staff will need to be managed carefully.

Prior to going public on the sale, the governing body should agree with the SLT a batch of communication materials, including a press release and Q&A, making sure that these provide reassurance, where possible, as to the cultural fit of the buyer and the long-term future of the school.

Lessons learned

It is somewhat inevitable that a school is taken to market only as a very last resort, once all other options to continue the school as a charity have been exhausted. Nevertheless, such decisions should not be left so late as to make it a ‘fire sale’, where the seller has very limited negotiating ability.

As a governor your responsibility is to deliver the organisation’s charitable objects to advance education and it may be in the organisation’s best interests to accept that doing so in an effective manner does not necessarily mean running a school but could instead be acting as an education grantmaker.

Such a sale could also be the best way of safeguarding the future viability of the school and education of its pupils.

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