Selling a Language School in Japan

But what’s it worth?

Many people in Japan think about opening their own English school. Some people actually do so. But what is the end game? What happens when you no longer want to operate your school?

One option is to sell it.

There are many things to consider when selling a school. I’ve been doing a bit of research on this recently, and it’s been interesting and a bit discouraging 🙂

Valuation

This is probably the hardest aspect of the whole thing. There is no easy way to decide how much a business is worth. Ultimately it comes down to how much someone is willing to pay for it, and whether the owner decides to accept that price.

Some metrics I have heard about are a price per current student, or a multiple of net annual profit (2-5 times seems possible).

Whether the school is a company or just privately run by an individual would appear to make a difference (it’s more valuable as a stand-along company).

Having the owners involved in teaching or admin roles makes the school less attractive, as the students may be there because of the personal connection and may leave when the owners do.

Any assets held by the school may be added to the purchase price, but most teaching materials or furniture probably aren’t worth very much second-hand.

Taxation

Now even if you manage to sell your school for an acceptable price, the government is going to want its share of the proceeds.

There appear to be two possibilities here. If the school is incorporated and was bought then capital gains tax might be payable.

If the school was privately held then income tax would be payable. Looking at national income tax, the brackets seem to be:
-under 1,950,000 yen 5%
1,950,000-3,300,000 yen 10%
3,300,000-6,950,000 yen 20%
6,950,000-9,000,000 yen 23%
9,000,000-18,000,000 yen 33%
18,000,000-40,000,000 yen 40%
Over 40,000,000 yen 45%

You would also have to add inhabitants tax of around 10%.

What this means for us

Well, my wife runs a small English school. We are considering a number of options for when we are no longer willing or able to run it, including selling or giving it to a family or staff member, selling it to a third party, or closing it down (and donating resources to local schools or organizations).

My research indicates that most schools seem to be bought and sold as fire, or forced, sales, when an owner needs to sell quickly as they are leaving the country. This results in low prices paid for schools.

For us, selling for three times net annual income doesn’t sound like a great deal, particularly if we do the work to make the school run without our day-to-day input. Once you consider the impact of taxes on the sale price, we’d be better off running it for another couple of years and would be able to save more than we would get in a sale price.

It’s not even much of a jump from a hands-off business to one that you could monitor remotely.

I guess if we ever reached the point where we didn’t want anything to do with the school I guess we could sell, but even in that situation I think I would rather sell to an owner operator and amortize the purchase price over a number of years, possibly by securing an advisory role. This would probably reduce taxes and increase the eventual gain from the sale.

Anyone have any advice/experience on this topic? Am I completely wrong on anything?

Edit: Steven N. posted this great article by Dean Rogers (who is a really approachable and helpful person) on the Facebook page. Well worth a look.