Under pressure: Options for independent schools under financial stress

In our last article for the Bursar’s Review we discussed the warning signs of financial stress in schools and the catch-22 many schools will face; whether to keep fees low amid rising costs and fall into deficit, or increase fees and potentially lose pupils then still face some financial challenges. Here, we review the various turnaround scenarios and, if there is no alternative, closure options and the key considerations for each.

Turnarounds

A successful turnaround is, of course, the most preferable option for any organisation experiencing financial distress. But to achieve this, schools need a clear plan that will bring about significant change. School leadership teams and governors certainly cannot expect things to get better while things stay the same. Usually as part of this, earnings need to be significantly improved or costs have to be cut. But, with often limited room to increase fees or quickly increase pupil numbers, the latter is typically a more achievable option. Staffing costs are overwhelmingly schools’ single largest cost. While letting go of talent is never a preferred option, for schools looking to reduce expenses it may be necessary to start by reviewing the curriculum and staffing options to see where reductions in resource can sustainably be made. If schools need funds to help them continue operating, then there are two pathways available – borrow or sell assets. Land is often the asset that many schools turn to. This can be a great way for them to raise capital, especially if the land is in an urban area and has scope for further development.

Other assets that might be sold include any properties on the premises that are superfluous to the school’s actual needs. If schools are considering selling land, they should consider possible ways to enhance their value prior to marketing. Securing a property options report from a surveyor can help lay out options for value addition and is – in our experience – a valuable investment in terms of the additional return it can unlock and provides an important reality check on the art of the achievable in relation to value and timings. They might also consider outline planning permission discussions with the local authority to attract developers’ interest. Of course, selling assets can only be done once. Careful consideration should be given to any long-term impact on the schools’ offering before the sale route is decided. Similarly, the cash generated usually won’t by itself deliver an end to schools’ financial pressures – sales should be seen only as a bridge to long-term profitability, accompanied by significant cost and operational changes.

If schools need to borrow, be aware that a lender will want to see a clear turnaround plan, and that change is already underway; they won’t be convinced by mere intentions. And bear in mind that a turnaround is an ongoing process that needs someone to drive it forward. Very often changes to leadership teams might be part of a turnaround process as schools bring in people with specialist skill sets to make sure the strategy is executed consistently.

Charity merger or a sale

But not all turnarounds are successful and back-up plans should also be in place. If a turnaround isn’t viable, the next best option for schools to pursue is either a charity merger or a sale. The process for both starts in the same manner and often schools won’t know which option they’ll end up with until they go to market.

The first step for those exploring a merger or sale is to secure the support of an adviser – often a specialist lawyer or restructuring expert. They will leverage their deep sector knowledge of the market to help generate a shortlist and long list of potential suitors and will kickstart the sale or merger process by preparing a teaser document to share with these prospects. This won’t name the school yet but will include fundamental details. If parties are interested in learning more, they will then sign non-disclosure agreements to get access to a data room containing more detailed information such as financial performance and outlook. At this stage, interested parties will also be given a process letter that sets out a timeline for making proposals or bids, through to completion. If bids are received, the school will have an opportunity to choose which they like best and agree heads of terms, always cognisant of their duties to beneficiaries and creditors if there is an element of distress. The other party will then complete their final due diligence ahead of completion.

Schools in this situation often prefer to find a charity partner to merge with. But, in some cases, the only – or best – offer will come from a commercial, for-profit body, like a schools’ group potentially specialising in turnaround, based in the UK or overseas. In these cases, by law a charity needs to sell its assets for what can be shown to be good value. However, schools in distressed situations may often find that the bid they’ve received discounts the cost of completing a turnaround from the value of their underlying assets. In these cases, it can be valuable for schools to use ‘overage’ clauses. These mean that schools will receive extra funds from the buyer at a point in the future, if and when the buyer sells some of the school’s assets. This enables schools to agree acquisition deals with buyers that are reflective of their distressed state, but that ultimately see them receive a fuller value of the assets if the school or its land is sold within a period of time, say six years – meeting their obligations under charity law. Finding the right buyer or acquirer can be complicated, and schools’ legal obligations, as charities, create risk if the right processes aren’t followed.

This is why it is so valuable for schools exploring this pathway to seek expert advice and support.

Solvent closure

But what if no buyer or acquirer can be found? In those cases, then distressed schools will have few options but to look to close. Schools should have a contingency wind-down plan for a solvent closure in place from the moment they start reviewing turnaround options This is important because a controlled closure will need to be done on a certain timeline – school leaders and governors need to know the cut-off time for making decisions if they’re to do so responsibly. This plan should span a whole academic year. A school shouldn’t be starting a new one without full confidence it has the money it needs to operate over the entire period.

In terms of timings, most teaching staff will be on a term’s notice, so notice for a wind-up within an academic year ending 31 August must be served by Easter. Prior to this, however, schools will need to enter a consultation process, which can last up to 30 or 45 days dependent on the number of employees. This means that they’ll likely need to start the redundancy process by February, or very early March – this marks the point by which schools should know if they will be able secure a sale or merger. School leaders need to make sure that any wind-up plan is fully costed. This should incorporate the cost of basic necessities like redundancy procedures, but also factor in things like the cost of pupil attrition. It’s likely some parents will decide to take their children out of the school straight away, which will affect fee revenue. Schools will therefore need to make sure they can fund their wind-up even in the case of what might be large fee revenue loss. If they find themselves caught short and unable to continue funding a solvent closure, there are specialist lenders available who could provide additional bridging finance against a final land and property sale, but only if the security supports that.

Insolvent closures

In some cases, schools simply won’t be able to complete a solvent closure. If this is the case, it might be worth exploring the option to complete a pre-pack sale. This is where a school in financial difficulty sells its assets immediately after entering administration, based on an agreement with a buyer that was made before the administrator is appointed. Because the school is selling as an already insolvent entity, it won’t have the same bargaining power as if it were to sell or merge as a solvent organisation. However, a pre-pack can still be in an insolvent school and its stakeholders’ best interests, as it can provide the most possible security and continuity for pupils and staff.

A restructuring adviser will help schools explore pre-pack options in advance of formally entering administration. A ‘crash’, uncontrolled, insolvent closure is the very worst outcome. It causes significant disruption to pupils’ educations and can seriously damage the reputation of both the school and its leadership. In the very worst cases, governors or school leaders could find themselves legally on the hook for freshly incurred liabilities. When it comes to outstanding liabilities, the Insolvency Service is particularly likely to look unfavourably on anything that means the government or consumers are left out of pocket. For schools, this means that there’s a heightened risk of issues arising if they collapse with large outstanding HMRC liabilities, or if significant fees for future terms or years have been taken in advance.

Looking ahead

Strain needn’t always lead to collapse. When we are speaking to schools facing distressed situations, we often walk back from ‘worst case scenarios’. This helps to highlight just how many junctures there are for proactive, remedial action and what the result of these actions can be. And what can often make a big difference in distressed schools’ prospects is pro-activity, good information and preparedness. Prompt action in the face of trouble always maximises the chances of recovery. Even if your organisation isn’t currently in distress, think about what contingency plans you might need and, if there are cracks appearing, seek help and advice early. Don’t wait in the hope that troubles will blow past. Schools will continue to face a challenging environment over the next year and beyond, but with the right strategy and contingencies mapped out, they’ll be in the strongest possible position to weather any storms.

First published in The Bursars Review February 2025.