Maximising Revenue for Independent Schools – Franchise Expansion

Schools can license their name and ethos to third party operators, both domestically and internationally, capitalising on their reputation for educational excellence.  A franchise model can generate a steady revenue stream whilst reducing a school's financial risks by working with local partners who take responsibility for operating the schools. While franchising can provide greater financial stability and create a global presence, schools must navigate its complexities, ensuring all risks and commitments are well-understood and managed effectively.

1. Background

The UK's independent schools are facing unprecedented financial challenges, influenced by both external economic factors and internal operational demands.

Even before the recent budget (30 October 2024), independent schools were managing higher energy and operational costs, increased staff costs fuelled by post-pandemic challenges in recruiting and retaining quality teaching staff and increasing pressure on parents' ability to pay tuition fees.  The budget simply added to these burdens with the introduction of VAT on tuition fees, the increase to the rate at which schools must pay National Insurance and the decrease to the threshold at which such payments begin.

Independent schools are caught between passing these costs on to a parent body that is already struggling financially or absorbing the costs by making substantial cost savings with the inevitable impact that would have on the quality of education they provide, including their extra-curricular provision.

Given this context it is not surprising that independent schools are looking increasingly at ways to supplement their revenue whether through renting out their buildings and grounds, actively seeking donations from alumni, parents, and other supporters, applying for available grants, organising summer camps and language courses and partnering with local businesses for sponsorship.

However, perhaps the most significant opportunity to increase revenue is to extract value from what independent schools do best - achieve outstanding results, not only in terms of academic excellence, but also in terms of promoting personal development, leadership and resilience within a holistic approach to education.

Those qualities have long been admired outside the UK and many schools have already taken the decision to license third party operators to use the parent school's name and ethos to develop and operate new schools through a franchise model.  In the past, the primary objective of such arrangements was to secure additional revenue to enhance the parent school's existing programme of bursaries.  Now schools are looking to supplement existing revenue streams to provide some cushioning from the current financial instability.

If done correctly, franchise expansion will not only provide much needed additional revenue but can also enhance the status of the parent school by creating an international family of network schools, supporting diversity and a global perspective.

2. Benefits of a franchise model

There is no right or wrong way to open a second school, however in our experience using a franchise model affords parent schools with the optimum balance between risk and reward and has a better chance of long-term success. 

Most people have a pre-conceived conception of what a "franchise" is; often narrow and frequently associated with quick service restaurants.  In reality, the franchise model is used across a diverse range of sectors including food and beverage, retail, hotels and leisure, professional services and education.  At its core, a franchise requires a licence of both a brand name and a concept or system, i.e. a way of operating a particular business that is associated with that brand name.  There is, however, no requirement to refer to that arrangement as a "franchise".  Many organisations use other expressions, and, within the education sector, "licence" is often used to avoid any pre-conceived negative connotations associated with a "franchise". 

Once a parent school decides to open further schools, either in the UK or overseas, it might choose to open those schools itself or by using a third-party operator.  There are obvious attractions in opening the schools directly, most notably:

• the parent school retains complete control over the new schools, ensuring they adhere to the parent school's ethos and standards; and
• all profits from the new schools are retained by the parent school without the need to share any revenue with the third-party operator.

On the other hand, this corporate growth strategy also brings increased risks, most notably:

• the parent school must invest significant capital and resources to develop the sites of the new schools and fund their initial operation;
• growth of additional schools will be slower due to the need for the parent school to provide further internal funding and resources;
• the parent school must develop sufficient internal resources to manage the new schools and, if located in different jurisdictions, acquire knowledge of the local education systems and market;
• the entire risk associated with the new schools will be borne by the parent school, not only in terms of the capital investment, but also any risks associated with their day-to-day operations.  These risks are often too high for the parent school's board of governors.

In contrast, a licence model generally provides an acceptable balance between risk and reward.  In particular:

• appointing a well-resourced, suitably qualified and highly motivated third-party operator to make the new schools a success removes the otherwise intensive capital requirements and associated risk profile on the parent school;
• the local operator will have a strong understanding of the local educational market and will be able to make valuable contributions on how a school's curriculum and other systems may need be adapted to local needs;
• the parent school receives a percentage of the on-going revenue from the schools and would typically require the local operator to provide a minimum annual payment, thus providing financial security to the parent school;
• the local operator will operate the schools as an independent business and therefore remain liable for those operations;
• although the parent school will not control the local operator through any shareholding, the licence agreement can impose detailed obligations to ensure quality standards are maintained, including the right for the parent school to terminate the relationship where this is not the case.

3. Preparing the groundwork to license

It is important that, having taken the decision to consider expansion, a school empowers a select number of governors and senior management at an early stage to investigate opportunities and develop and put in place robust procedures. Here are some of the key issues to explore during this planning phase:

3. 1. 1. 1. Internal structure: Many UK independent schools operate through charities and their trust deed will require them to incorporate a trading company to enter into the commercial licence arrangement.  This will also enable the parent school to ring-fence its liability.  That trading company will need a licence from the parent school in order to sub-license the school's name, standards, policies and procedures and guidelines to third parties.  Until the revenue generated from the licence justifies the recruitment of dedicated employees within the trading company, the trading company will need to rely on support from existing employees of the school under an inter-company services agreement.
         2. Brand protection: The majority of UK independent schools have protected their trade marks and logos as registered trade marks, but these registrations should be reviewed to ensure they are comprehensive, before licensing their use to third parties.  If the school is targeting an overseas market, then additional protection for the name should be sought in the local target market(s) at the earliest opportunity.
         3. Policies and Procedures and School Guidelines: It is often difficult to pin down what makes a particular school unique and there are often many contributory factors.  However, if those qualities are to be transferred to a third party, they must be recorded.  Therefore, parent schools should invest in documenting that most valuable yet intangible of their assets – their "ethos". The most practical way to achieve this is to collate existing guidelines, policies and procedures, including design and brand guidelines, and create new ones where none exist.  In addition to the brand, a licensee will also expect to benefit from the parent school's expertise in areas such as the British curriculum, teaching techniques, governance, pastoral care, the provision of extra circular activities and the development of a physical infrastructure. In the context of franchising, these "operational" aspects are often documented in a set of guidelines which sit alongside, and are heavily referenced, in the principal licence agreement.

4. Developing a licence structure

The licence deal will be structured according to the specifics of the relevant project.  An individual licence is appropriate for a local operator that develops one school at a specific site, often converting an existing school, and then operates it under the parent school's name.  Alternatively, if the local operator has ambition to open multiple schools within a specific region or country, then a development licence agreement will be more appropriate. In a development licence agreement the local operator is granted geographical exclusivity for an agreed area in return for committing to open an agreed number of schools within an agreed timeline.  Failure to adhere to the development schedule will typically allow the parent school to remove exclusivity or ultimately terminate the arrangement.  However, each market and each local partner are likely to require an adaptation to this basic structure, including the use of local affiliates for the operation of each school.

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

Here are some key considerations for the licence agreement:

1. Governance: The parent school will want to provide on-going advice and support to the new schools and will therefore want representation on the local operator's advisory board and each school's board of governors.  The relevant board will have decision making capability concerning all matters relating to general policies, academic and non-academic standards and ensuring that the schools are operated in accordance with the terms of the licence agreement.  Aside from certain reserved matters, such as the appointment of the Head Teacher (see below), the local operator would typically have majority control of these boards, whereas the parent school will rely on the terms of the licence agreement to ensure that the operation of the schools is in line with the parent school's ethos and standards.
2. Standards and Quality Assurance: The new schools must be operated under the parent school's name, or its chosen international variant, and must adhere to the parent school's culture, ethos, teaching methodology and overall standards.  Much of the formal licence agreement will focus on achieving these objectives in all phases of the school's life, including its design and build, operation and ultimate de-branding on expiry or earlier termination. Regular performance and quality control audits are essential to identify and remedy problems at the earliest opportunity.
3. Key Appointments and Staff: The parent school will need the final say over key appointments at the new schools, such as the Head Teacher and bursar, together with the right to insist on their replacement if they are unsuitable.  It is also standard practice for the Head Teacher to have first-hand experience working in the parent school.  The quality of the teaching staff is crucial to the success of the new schools; therefore, the parent school should require the local operator to recruit and retain only the best staff.
4. Targets: As the local operator will likely request some form of exclusivity, there must be clear commercial targets for promoting the new school and increasing enrolment numbers.  Where the local operator is developing a territory, there must be clearly agreed dates by which each new  school must be open. The consequences for failing to meet these targets also needs to be carefully considered.  A simple termination right is rarely appropriate.
5. Income: For the parent school, generating a supplemental revenue stream is fundamental.  Therefore, the parent school must receive sufficient revenue to cover its initial and on-going costs and also generate a surplus.  Payment terms can vary significantly but will often involve an initial development fee or pre-opening fee to cover initial costs, followed by an on-going service fee calculated as a percentage of the new schools' income.  The parent school should ensure effective tax planning and, if setting up overseas, legislate for local tax requirements such as GST/VAT and withholding taxes. It is also crucial to ensure that the local operator has sufficient financial strength to meet any liabilities under the licence agreement.
6. Termination: The parent school should never enter into a deal without being certain that it has a viable exit if problems are encountered.  Careful thought needs to be given to this and to what happens to the new schools following termination. There will be certain obligations that are so serious that any breach by the local operator will require the immediate termination of the licence agreement, such as breaches which could have a serious adverse impact on the goodwill and reputation of the parent school.  Other obligations, although their breach might still be material, can be remedied, and the local operator will be afforded a period to do so and avoid termination of the licence agreement.
7. Post-termination/De-brand: What happens following expiry or termination of the licence agreement is often a sensitive matter.  In many traditional franchise systems, a franchisee is required to de-brand immediately and cease operating from the site of the franchised business.  That is not possible in the education sector for two reasons.  First, the high capital investment demanded of the local operator means that it will not accept a total restriction on it using the school facilities as a school once the licence has ended. Second, both parties will wish to minimise any disruption for the students, therefore allowing the new schools to continue to operate under the parent school's name and using their curriculum and materials for a limited transition period should always be an option. Of course, protecting the students' and local operator's interests must be balanced against protecting the parent school's name and reputation.  The parent school must not simply allow the local operator to continue operating without any restriction. A number of solutions are available to address this problem and careful thought needs to be given as to which one is most appropriate given the individual circumstances.
8. Local law compliance: When expanding through a licence model, the parent school should consider developing a template licence agreement that can be used with each local operator.  Using similar terms with all operators will make policing their compliance much easier.  If the parent school is UK-based it makes sense for the licence agreement to be governed by English law.  However, when granting rights overseas it is essential that local law advice is taken to ensure the licence agreement complies with local mandatory laws.  In particular, an increasing number of jurisdictions have specific franchise/licence laws and failure to comply with them can result in fines and render the licence agreement unenforceable.

All of these aspects, and many more, need to be caught in the licence agreement and the school guidelines and policies and procedures that sit alongside it.

Although UK parent schools have traditionally used a licensing model to expand overseas, this does not have to be the case.  The same licensing model can be used to open new schools in the UK and some parent schools are already doing this.  Alternatively, the model can be used to allow third parties to develop complimentary schools, such as feeder schools or sixth forms. The licensing model is truly flexible and can be tailored to specific needs and requirements.

5. Conclusion

There is no “one size fits all” solution to expanding a school through a licence model. Such ventures need to be carefully structured to reflect the needs of the parent school, the target market and the local operator. The most appropriate structure needs to be determined at the outset, as restructuring a licence is a complex, costly and time-consuming exercise.

Done in the right way, the execution of a solid franchising or licensing strategy can become a core asset of the UK school, helping to secure its long-term future as a global education brand and hedging the impact of economic and regulatory risks back home. Indeed, many independent schools already rely on their international income to fund capital investments and minimise tuition fee rises in the UK, as well as increasing the availability of bursaries to support social mobility.

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

David Bond is a partner and co-head of the Franchise & Licensing team at European law firm Fieldfisher LLP, with over 15 years' experience supporting school expansion using franchise and licence models.  If you would like to discuss any of the issues raised in this article, please do contact David at david.bond@fieldfisher.com or +44 330 460 6316.