By Harris Rosen
In Ontario (and likely most other provinces across Canada), Investors looking to enter the private career college (PCC) industry should be prepared to spend a six-figure amount per year on mere compliance costs in a small college environment, running basic registered, approved programs.
Where a registrant is operating a PCC with different layers of regulatory requirements (e.g. regulated by both the Superintendent of Private Career Colleges (Superintendent) and a professional governing body or Transport Canada, etc.) there is a steep, ascending cost of compliance.
Ontario has approximately 600 PCCs that offer career-focused training in fields such as trades, health care, information technology, applied arts and design, transportation, personal services and law enforcement.
These institutions can be sound investments — and I have helped many clients successfully navigate the process over a span of two decades. I have seen more than one acorn of a school engage in a leveraged purchase for more than one campus, which the school could ill-afford — until in hindsight, they could! Years later, a few of those schools are worth small fortunes. But buyer beware, as you need to know what to look for.
Based on recent transactions which I have handled, I have seen surprisingly optimistic valuations in the wake of COVID19. Canada’s labour market demand and stated federal immigration policies may have everything to do with this: Canada needs a tax base, and plans to bring in 1.2 million immigrants over the next three years along: Where will the next generation of truck drivers, paramedics, and personal support workers come from? From PCCs. The reduced cost of program delivery for efficient distance learning providers during COVID may also be a factor in valuations.
Interestingly, no one (neither business valuators, nor investment bankers, nor anyone else) can provide me with meaningful metrics on the question of valuation. It strikes me that there is far more consensus south of the Canadian border on how to value this type of business than there is north of the border. Although I defer to the accountants and investment bankers on this question.
In this post, I will outline the main regulatory considerations for private investors to help them determine if this sector warrants further investigation. This process should be lock-step with accounting professionals familiar with the private post-secondary sector.
Regulatory framework
While PCC’s have been part of Canada’s education landscape for some time, a report by the Conference Board of Canada shows that changing market and regulatory conditions have impacted the overall movement of the sector in terms of school closures, openings, mergers and consolidation.
Regulatory frameworks have been in place across the country for more than 20 years, with each province and territory having its own system for licensing, registering, monitoring and regulating PCCs. While provincial autonomy gives each province more control over the regulation of the sector, it has also created significant impediments to Canada’s ability to “export” a unified “brand” of Canadian education.
The first hoop through which aspiring owners will need to pass is the registration process, which is similar to that of other regulated industries in Ontario, such as real estate, car dealerships, or funeral homes. Applicants who have an adverse business history that goes to the heart of the registration criteria under the Private Career Colleges Act, 2005 (PCCA), such as a fraud, economic mismanagement, or dishonesty, may be refused for registration. Honestly and integrity, and financial responsibility, have always been the “pillars” of registration pursuant to s.14, PCCA. Fail on these criteria, and you will likely fail to get registered.
Before any private institution can even think about delivering programs, the Superintendent of Private Career Colleges must first register and approve it through a rigorous three-step process:
- registration pre-screening
- application for registration, including application for program approval
- site visit/inspection
If you’re a new entrant to the space, the vetting process is onerous. You will also need to provide three references who can support your application, and they should expect a comprehensive examination by the Superintendent’s designates on your ability to launch a successful venture. The PCCA is a student protection statute. The Superintendent will care little about improvident or lop-sided consideration in the purchase and sale process, except to the extent that it may impact students.
Something else investors will want to consider before diving into this space is the annual requirement to produce audited financial statements and submit to a regulatory compliance audit. As I said at the top of the post, unless you’re prepared to spend $100,000 a year on compliance (in a very basic environment), investing in the PCC space probably isn’t a good bet.
Financial considerations
To be registered in the province of Ontario, all PCCs must provide the Superintendent with financial security in the form of a surety bond, a letter of credit issued by a recognized financial institution, or a personal bond accompanied by collateral security.
This requirement was strengthened in the wake of high-profile failures of large private schools such as Everest College, which was shuttered in 2015 due to financial concerns, leaving 2,400 students in the lurch.
To understand whether a new or existing college will generate healthy returns, investors must take a hard look at the cost of administering the overall program. A flight training school, for example, will be much more expensive to run than a school that trains personal support workers. On the other hand, the same flight training school can command significant tuition that is not merely related to the cost of petrol: pilots are in demand, and their earning potential significant. This is an accounting exercise.
Purpose-driven investing
When passion and values align with investment strategy, it can be a winning formula.
Impact investing helps investors balance a measurable environmental or social impact on the one hand, with a financial return on the other, according to The Asset. The potential opportunity for operators is massive. In the context of PCCs, investors should increasingly look at programs that are needed to save the blue planet. Health care programs, plant-based content, climate change and energy-efficient transportation training are the future, and metaphorically speaking, it may be the wild west in this space.
While the challenge for investors traditionally has been choosing between desirable returns and “doing good”, impact investing enables them to accomplish both. There are many global problems to be solved. Opportunity knocks.
Comments or questions? I’d love to hear from you.
*Disclaimer: The above is neither financial nor legal advice. Nor does it not constitute a retainer relationship between readers and Harris Rosen Professional Corporation. The author is not qualified to give financial advice. Readers should consult with their own financial and legal advisors in relation to the buying and selling, and valuations of PCCs.
