Guide to international expansion in the education sector – part one

Introduction
Why go international?
Keys to success
Finding a suitable partner
Choosing the appropriate market
Deal structuring
Comment

Introduction

The UK education sector is undoubtedly facing numerous headwinds but, from the outside looking in, this sector is in fact a success story for 'UK plc'.

A British education is internationally regarded as the gold standard. This is reflected in the dominance of British international schools – there are over 4,300 British 'international schools' (ie, schools located outside the United Kingdom which teach a curriculum that would be wholly or partially recognised in the United Kingdom and which have a British ethos), and they make up over 45% of the international school market.(1)

There are numerous factors driving this growth, including:

• the emergence of a wealthy middle class in developing countries;
• the slow response of such countries to provide their own high-calibre education to meet this demand; and
• an increasingly globalised workforce.

Why go international?

One option for international growth is to enter a new market and establish a new school using a school's human and capital resources. However, the reality is that almost all private schools choose not to do this and instead appoint a local partner. This approach allows for:

• faster expansion;
• the generation of new income streams and relationships with new students without the need for significant capital investment; and
• an extensive management infrastructure.

Done correctly, the execution of a school's international franchising strategy can become a core asset, helping to secure its long-term future as a global education brand and hedging the impact of economic and regulatory risks back home. Indeed, a number of UK private schools increasingly rely on their international income to fund capital investments in the United Kingdom, as well as increasing the availability of bursaries to support social mobility.

Appointing a well-resourced, suitably qualified and highly motivated local partner to make the school a success in their own country removes the otherwise intensive capital requirements and associated risk profile on the licensor school. Such partners often have a strong understanding of the local educational market and have good ideas about how a school's curriculum and other systems may have to be adapted to local needs.

However, these types of relationship are complex, high value, long term and subject to changing regulations. A licensor school should countenance this type of venture only with a full understanding of the risks and commitments involved.

Keys to success

Having taken the decision to consider international expansion, a school must empower a select number of governors and senior management at an early stage to investigate opportunities and develop and implement robust procedures. Below are some of key issues to explore during this planning phase.

Brand protection
The international strategy must be underpinned by strong IP rights. A school should carry out a brand audit and ensure that its brand is fully and appropriately protected by way of trademark registrations and that those marks are held in the most tax-effective manner. This is a costly exercise, but the cost (financial and loss of opportunity) of dealing with pirates and cyber-squatters far outweighs the upfront protection costs.

Identifying school ethos
Schools should invest in documenting their most valuable yet intangible asset – their ethos. In addition to a brand and a curriculum, a franchisee will also expect to benefit from a school's research and development in issues such as:

• teaching techniques;
• governance;
• pastoral care;
• the provision of extracurricular activities; and
• the development of physical infrastructure.

In the context of franchising, these operational aspects are often documented in a manual which sits alongside, and is referenced heavily in, the principal franchise agreement.

Developing the commercial model
A school would ideally seriously consider what it is prepared to offer and deliver to a prospective partner before it embarks on its first deal. A licence to operate could take the following forms:

• licensing aspects of the school's curriculum or the development of an online curriculum for an international audience (often referred to as 'edtech');
• leveraging off the school's ethos to partner with other schools in different countries and mentor them. This is could be characterised as a 'white label' licence or service; or
• cloning the school in an international market. This is by far the most common type of activity.

Each variation will have a different risk and reward profile and a school must have an understanding of its appetite thereof and its ability to resource an expansion plan – in terms of both financial and human resources. This article discusses the third option.

Finding a suitable partner

Many schools are regularly approached by potential partners offering to establish the school abroad. Finding a potential partner is rarely a problem. The problem is finding one with:

• resources;
• a proven track record; and
• empathy for the school's values.

If a school fails overseas, it is most likely due to the recruitment of an unsuitable partner. Therefore, schools must spend time not only preparing their prospectus to attract potential foreign partners, but also profiling their ideal partner and implementing an appropriate recruitment or screening process rather than committing to the first individual willing to pay.

Choosing the appropriate market

Not all countries have the same potential for all schools. A country that allows one school to thrive (perhaps due to its heavy focus on academic achievement in exams) may be extremely challenging for a school that is more focused on sport or offering a more rounded educational experience. Educational establishments must be contextualised within the norms of the potential target market, including with regard to:

• education;
• culture;
• economics; and
• religion.

A good partner will be able to help the school to overcome at least some of these challenges and localise the curriculum and other systems in an appropriate manner. However, some schools will find it difficult to succeed in some countries and common sense dictates that a school should focus on the easy-win markets before tackling the more challenging ones.

Deal structuring

It is highly likely that a school will license a partner to open a single campus, or possibly a few campuses, in any particular jurisdiction. Multi-level structures such as master franchising (common in the retail, food and beverage and services sectors) are rarely appropriate for international schools.

Therefore, a development licence will likely be required. However, each market and each partner is likely to require an adaptation to this basic structure. For example, joint ventures are possible and can be structured to allow the school to hold an equity stake in the operating company without the corporate governance burden imposed by a typical joint venture. The more sophisticated a structure, the higher the cost of implementation in terms of both professional fees and infrastructure, so the school needs to carefully weigh up the potential return on investment that it will receive through each possible structure.

Whatever structure is adopted, it is essential to ensure that the legal documentation re-enforces the values of the school and the economic drivers of its business model, as well as minimising any inherent risks to the school.

Key considerations for a licence agreement are as follows:

• Governance – in order to ensure that the school can be in charge of aspects such as curriculum and facilities, it must ensure that it is represented on the franchisee school's board of governors.
• Appointments – the school should have the final say and veto rights over key appointments, such as the head teacher and bursar.
• Targets – there must be clear commercial targets for promoting the school and growing the number of students. The consequences of failing to meet targets must be carefully considered and a simple termination right is rarely appropriate.
• Income – the school must carefully plan its differing income streams from the deal, spreading commercial risk, ensuring effective tax planning and allowing easy access auditing throughout the term of the agreement. Personal guarantees from the main shareholders of the partner should be sought. The school should also ensure that it complies with the restrictions placed on it by its charitable status.
• Exit – the school should never enter into a deal without being certain that it has a viable exit if problems are encountered. Careful thought must be given to this and to the post-termination non-competes placed on a terminated partner. The high capital investment demanded of the partner means that it will not accept a total restriction on it using the school facilities as a school once the licence has ended. On the other hand, the school must not simply allow the partner to continue trading without any restriction. Numerous solutions to this problem are available and careful thought must be given as to which one is most appropriate.
• Technology – given the rapid pace of change in the workforce and technological developments, schools should consider how they can optimise their information technology to deepen the interaction between each international school, the principal school and the global website. Some schools are developing a cloud-based way of sharing resources and assessments and it is important to consider how universal aspects of the school's curriculum can be taught consistently and simultaneously across multiple markets. If a school engages with a corporate partner for the provision of education to families of employees working overseas, there should be a seamless transition between one campus to the next to avoid a situation where a student is having to sit through the same lessons because the family have moved from Shanghai to Seoul.

These aspects must all be caught in the manual and the licence agreement or a separate edtech agreement which sits alongside the franchise agreement.

Comment

There is no one-size-fits-all solution to international expansion. Such ventures must be carefully structured to reflect the needs of the school, the target market and the partner. The most appropriate structure must be determined at the outset, as restructuring an international licence is a complex, costly and time-consuming exercise.

At its core, the legal relationship between the school and the local partner is that of a licensor and licensee. Therefore, it is imperative to choose to work with experienced legal counsel who are specialists in licensing (as opposed to specialists in corporate or regulatory law, for example), know the international landscape and have walked down this path before.(2)

For further information on this topic please contact Gordon Drakes or David Bond at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (gordon.drakes@fieldfisher.com or david.bond@fieldfisher.com). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.

Endnotes

(1) Open Access Government, "British international schools need 230,000 more teachers", 6 November 2018.

(2) This article is part one of a two-part series on international expansion in the education sector. For part two, please see "Guide to international expansion in the education sector – part two".