Selling Part of Your Education Business to an Investor or Operating Partner

Can you sell only part of your education business?

Yes: you can sell a minority or majority stake in the company that runs your preschool, tuition or enrichment centre to an investor or an operating partner, and keep the rest.

A partial sale suits owners who want some cash now, a partner to share the work, capital to grow, or a gradual exit rather than a single handover. It only works if the business is held in a company, because what you sell is shares. If you run the centre as a sole proprietorship or partnership, the usual first step is to move it into a company, which for a licensed childcare centre counts as a transfer of licence needing ECDA's approval, even though the owner is the same (ECDA Code of Practice s3.3.1). Take advice before you do that.

There are two ways the stake can be created, and the difference matters for where the money goes:

• You sell existing shares: the investor pays you, and the company's own cash does not change. This gives you liquidity.
• The company issues new shares: the investor pays the company, and your percentage is diluted. This funds growth, such as a second centre, but puts no money in your pocket.

Many deals combine the two. A transfer of existing shares attracts stamp duty, which IRAS sets out, and the buyer normally pays it unless agreed otherwise.

Should you sell a minority or a majority stake?

A minority stake lets you keep control and raise some money; a majority stake hands control to the buyer and usually commands a higher value per share.

The right answer depends on whether you need the partner's money, the partner's skills, or a route out. Be clear about which before you start talking to investors.

What is an operating partner structure?

An operating partner buys a stake and runs the centre day to day, usually with an agreed path to buy the rest of the business later.

This structure suits an owner who wants to step back but whose business would lose value if sold outright without someone in charge. The operating partner might be an experienced Principal, a teacher-entrepreneur, or a smaller operator looking to expand. Edugrow has listed partnership opportunities of this kind, including an operating partnership in a robotics enrichment centre with a path to full ownership. Each listing states clearly whether it is a full sale or a partial stake.

The key terms of an operating partnership are:

• Initial stake: what the partner buys now, and what they pay.
• Role and pay: the partner's management role, salary and authority, written separately from their rights as a shareholder.
• Path to full ownership: when and how the partner can buy the remaining shares, usually through call and put options.
• Price for later tranches: fixed in advance, or set by a formula based on future earnings, or by an independent valuation at the time.
• Performance conditions: targets the partner must meet to keep the option, and what happens if they leave early.

Paying for later tranches from future profits has the same features as an earn-out or vendor financing. Our guide to earn-outs in education business deals covers how to define the targets and protect the seller.

What should a shareholders' agreement cover?

A shareholders' agreement sets out who decides what, how shares can be sold, and what happens if the shareholders disagree or one wants to leave.

The company's constitution and the Companies Act set the default rules, which say little about the situations that cause disputes in a small education business. The agreement fills those gaps. The main terms, in general:

A 50:50 structure is common in operating partnerships and needs a deadlock clause more than any other. Have a lawyer draft the agreement alongside the share sale documents.

Which regulatory rules apply when you sell a stake?

A stake sale can trigger ECDA notice if directors or managers change, HDB consent if the premises are HDB-tenanted, and updates to MOE or other regulators, depending on the business.

• ECDA (childcare and infant care): directors, partners and anyone with general management of the centre are Key Appointment Holders. If the investor or operating partner joins the board or takes over general management, the licensee must give parents and ECDA written notice at least 1 month before the change, and each new Key Appointment Holder completes ECDA's self-declaration and consent form on offences, warnings and financial capacity (ECDA Code of Practice s3.5). The licensee does not change, so no transfer of licence is needed unless the licensee itself changes (s3.5.4). See our guide to the ECDA Key Appointment Holder change.
• HDB premises: HDB's tenancy terms require its prior written consent to any substantial change in shareholding. If the shareholders at the start of the tenancy and their next of kin keep less than 51% of the shares, HDB deems this a substantial change in control, which counts as an assignment of the tenancy (HDB). Selling a minority stake is usually below that line; selling a majority, or several stakes over time, can cross it. Count cumulatively, and speak to HDB before you agree terms.
• MOE-registered tuition and enrichment centres: if the partner joins the school's management, the Committee of Management records with MOE must be updated (MOE).
• Private education institutions: check the current notification requirements for changes in ownership, control or management with the Skills and Workforce Development Agency, which now administers the Private Education Act.
• Private leases: many commercial leases need the landlord's consent to a change in shareholders or directors. Read yours before you start.

How is a stake in an education business valued?

Start from the value of the whole business, then adjust for what the stake does and does not control.

The value of the whole business comes first, usually from normalised earnings and a multiple that reflects the centre's enrolment, lease, licence and dependence on the owner. Our guides to what a childcare centre sells for and how tuition and enrichment centres are valued explain this.

A simple pro rata share of that value is the starting point for the stake. In practice, it is then adjusted:

• Minority discount: a stake without control is usually worth less than its pro rata share, because the holder cannot set dividends, choose management or force a sale.
• Marketability: shares in a private company are hard to sell, which also reduces value, unless the agreement gives a clear exit route such as a put option.
• Control premium: a stake that brings control may be worth more than its pro rata share.
• Protections: strong reserved matters, tag-along rights and a put option narrow the minority discount, because they give the holder more say and a way out.
• New money: if the investor subscribes for new shares, value is measured after the cash goes in, which changes each party's percentage.

The size of any discount or premium depends on the facts and on negotiation, so there is no standard figure. An independent valuation, setting out the value of the whole and the reasoning for the stake, gives both sides a neutral starting point. See our valuation service.

How Edugrow helps

Edugrow works with owners who want to sell all or part of their education business. We can value the whole business and the stake, introduce screened investors and operating partners under NDA, and help structure the path to full ownership, coordinating with your lawyers on the shareholders' agreement. Edugrow's services also include capital raising for education businesses. Edugrow charges a success fee on the sale, with no retainer. A written valuation is a fixed fee, credited in full against the success fee if you sell with us within 6 months. The first conversation and a written recommendation are free. Start on our selling page.