Managing How M&A Buyers Interpret Your Price per Student Metric
- How M&A buyers interpret the price per student metric
- Why positioning the price per student metric is important for achieving good outcomes in M&A
Note: For the purpose of this article, we define price per student as the total revenue generated by students across all products a company is selling, whether from one product, one product with multiple modules, or multiple separate products.
In the K12 EdTech sector, price per student has become a significant metric for EdTech vendors and customers to price software, but it’s implications extend beyond pricing.
What founders may not have yet taken into account is the role price per student plays in positioning a business for an eventual sale or capital raise. When the time comes to sell their EdTech business in full or in part, founders will find that price per student is a key point of conversation and diligence, affecting the founders’ ability to:
- Garner interest from qualified buyers
- Settle on desirable terms at deal close
- Close a successful deal with the right partner
Generally, EdTech companies with high or moderate price per student metrics (high being $7-10+ and moderate $3-6) will be better positioned for a transaction than those with low price per student ($1-2). But even in the case of a company with exceptional metrics, if not properly positioned for a formal transaction, strong price per student metrics can be negotiated down by seasoned strategic buyers. In other words, founders need to come into a transaction armed with the right materials and messages to communicate the value of their business so that they receive strong terms in their deal.
Having advised multiple EdTech companies through successful M&A or capital raise transactions (among which were GoGuardian and Pear Deck), here are our thoughts on how founders should position price per student and other aspects of the business as part of the M&A discussion.
Why Strategic Buyers Care about Price per Student
Limited market size (i.e. a fixed number of schools/districts) in US K12 EdTech makes the price per student metric particularly important for acquirers.
Although EdTech spend has changed drastically through the COVID-19 pandemic, the number of US K12 schools/districts is largely the same from year to year (between 2010 and 2019, the number of K12 public schools in the US actually went down 62 schools). With COVID-19 stimulating rapid technology adoption, successful companies are saturating the limited market more quickly than anticipated, making their only feasible growth opportunity to increase price per student via new paid products/features.
Given the dynamic mentioned above, customer saturation (certainly in the US market) has been a reality for many of the largest strategic players in K12 EdTech for some time. In response, these players look to acquire companies with strong price per student economics to graft on new revenue-generating products and increase wallet share. For this reason, companies with strong per student economics that are looking to sell will be able to demand more favorable deal terms.
But having a strong price per student alone won’t yield the best deal terms. Large EdTech acquirers are repeat players in the M&A space, and therefore are experienced negotiators prepared to discount the value of any seller.
How and Why Buyers Discount Price per Student During Negotiations
What many founders don’t know is that the unit economics of their company’s per student pricing will likely experience some erosion upon acquisition. In other words, an acquiring company will often have to charge less for acquired and bundled products/features compared to what the founder’s company charges.
This erosion in price may occur for several reasons:
- As the same provider (the acquirer) sells more and more into their existing customer base, they generally provide buying discounts ("buy more, save more"). These discounts eat into the acquired company’s price per student economics. This concept is particularly salient in K12 where district budgets are notoriously tight to begin with.
- If an acquirer’s core product is significantly more "heavyweight" than the acquired product (say a full LMS/SIS system that acquires a small attendance analysis feature), customers may see the add-on as more of a feature that should already exist in the base product and therefore be unwilling to pay for it.
- Not all an acquired company’s customers will weather the acquisition. Frequently, EdTech companies will tightly integrate into multiple competitive providers (e.g. both PowerSchool and Frontline). Acquirers, on the other hand, may work exclusively with one provider, or are prohibited from working with certain software suites. Consequently, some of your customers will be positioned as having minimal value to acquirers, or at best have a high probability of churning.
Erosion does happen and should be recognized by founders. At the same time, buyers will likely try to push that frame to tip the scales in their favor. As such, when buyers bring up price erosion, founders need to be ready to respond.
Positioning an EdTech Business to Improve Deal Terms
In reality, price per student is just one metric among many that buyers will probe when evaluating a potential acquisition. Questions around retention rates, growth rates, marketing efficiency, sales strategy, and more are certain to surface. In each case, founders need to be prepared with appropriately positioned responses to emphasize strengths and opportunities. Such was the case with the acquisitions of Pear Deck and GoGuardian. Both businesses were able to achieve significant interest and out-of-market multiples despite being businesses traditionally seen as lower on the price-per-student scale ("content filtering" and “Google plugins”).
Case Study: GoGuardian’s Tip of the Spear Strategy
In GoGuardian’s case, they had to respond to concerns about the pricing of their flagship product: a web filtering/monitoring platform to help students utilize the internet without being exposed to harmful content. While their platform was arguably better than the incumbents, the market for web content filters was highly fragmented and commoditized, lowering the price GoGuardian could reasonably charge for its platform.
To allay buyers’ concerns over low price per student, we worked with the GoGuardian team to reveal how their flagship product unlocked additional monetization through ancillary products that capitalized on the data collected by the flagship product. By positioning the opportunity in this light, we were able to reach a favorable outcome for the founders as a result.
Case Study: Pear Deck’s Focus on Teacher Relationships
Pear Deck is another good example of a company that used its strengths to counter buyers’ concerns about price per student/price erosion. Many buyers felt as though Pear Deck’s teaching tools were "lightweight" and not really a standalone product. Something we heard repeatedly was “Isn’t it just a Google Slides plugin?”
In response to this argument, we framed the company’s strong infrastructure and teacher network as a low cost way to cross-sell directly into the support of teachers, the most valuable in-class product advocates. As a result, Pear Deck was also able to command a high valuation.
The above two cases covered companies who were able to command premium valuations through careful positioning, despite lower price per student metrics. However, positioning is just as important for companies with an exceptionally high price per student, as buyers will raise concerns like:
- Is your company’s pricing defensible, or is it at risk of being undercut by new entrants?
- How much will price per student erode upon acquisition and integration?
- How will your high pricing reflect on the pricing of our own platforms?
In sum, buyers are looking for ways to discount the value of your business in order to protect their interests (which is fully within their rights to do). As experienced negotiators, buyers do a good job of finding issues with a business, whether you have a low price per student ($1-2) or a high price per student ($7-10+). The better prepared you are to reveal opportunities resulting from or in spite of these weaknesses, the better the outcome of your transaction will be.
To learn more how we helped the founders of GoGuardian, Pear Deck, and other EdTech companies achieve great outcomes for their businesses, reach out to a member of our team. You can also learn more about the role of an investment bank in positioning your business for sale.