Impact of Covid 19 on preschool franchisees in India :A case study

Impact of Covid 19 on preschool franchisees in India :A case study

Impact of Covid 19 on preschool franchisees in India :A case study

Last Updated:- 2020-06-18

This article is a continuation of the qualitative analysis of the impact of COVID 19 on preschool franchisees in India. Here we will try to sensitive our readers to the investment asymmetry that preschool franchisors face today where they are forced to re-invest to simply survive these virulent times.

Teeny Beans is a solution for those interested to start a new preschool or upgrade an existing preschool franchisee. It is one of the very few national preschool partners that concentrates on educating partners on how to treat this as a business with complete knowledge and management of cash flows, probably the most essential business basic that if oft-ignored. Our partners embark on their entrepreneurial journey fully empowered and knowledgeable. 

In this analysis, we’ve considered the case study of a newly formed preschool and the predicament facing them. In many ways, it is not much unlike other preschools who have typically kids between 20-40 kids. For most, the lock-down came at a time when parents were supposed to renew their commitments for the next year. In reality, they too begin the financial year 2020 much like any new entrant with very few enrollments and a future which appears bleak. 

This case study carries the following assumptions – 

  1. Investment considered Rs 20 lacs.
  2. Rental (and other cash overheads) begins from January 2020. Admissions from March 2020.
  3. Annual Parental spend of Rs 50,000 assumed for Tier A market.
  4. Expected number of admissions within year 1 ~30 students.
  5. Expected working capital (WC) to be deployed Rs 1 lac scaling up to Rs 1.5 lacs.
  6. This business is self-funded and hence nominal interest cost of capital of 7% is assumed. Makes matters worse of course if there is capital borrowing to fund the business.

Let us now see what happens when the lockdown and prevailing COVID 19 uncertainty puts a freeze on fresh admissions –

A mid-term freeze on admissions followed by slow recovery would place a tremendous financial burden on all preschool owners but most significantly on new investors who’ve entered the industry in the last 3-18 months. 

Those who are new entrants in the academic year 2020 are looking at a minimum requirement of Rs 9 Lacs which would be roughly 45% of their initial investment. So in just a matter of a few months, they are looking at a cost overrun of 1.45 times their initial investment. The working capital deployed will not help them tide over even 2 months of cash flow disruption. Factoring in depreciation and interest cost (of own funds), they are staring at losses of Rs 13 Lac+ in year 1. But most of all, it is the shock of a freeze in cash flows that will rapidly dent the will for the new preschool owner to continue in operation with a bleak outlook.

Those who have seen off the academic year 2019 may be slightly better off with some cash collections for Q1 in 2020. But the burn rate of more than a Lac a month (factoring in depreciation and interest) will easily eat into the little reserves accumulated through 2019. 

Ultimately, it is going to be a fight for survival for preschool franchises in India. Those franchisees that are occupying self-owned properties and properties with low rentals are expected to survive through the year 2020. Preschools with zero royalties and little or no outstanding with franchisors are also expected to come out of this stronger than others. It is here that preschool partnership models like that championed by Teeny Beans enable preschools to be self – reliant, capable and financially resolute even in the most trying of circumstances. 

It is however not the end of the road for creative preschools who are quick on their feet to rethink their delivery model. And there is indeed a way forward for preschool franchisees even amidst this unprecedented pandemic. More on this in our next Article– COVID 19 impact on Preschool franchisees in India: How to fight back to get business back on track!

We are reaching out to more and more partners every day, counseling them on how to survive this period. The inquiries for moving away from a preschool franchise have never been higher and the reasons for that have never been as convincing either. If you would like to know more about what Teeny Beans has to offer to help you come out of this stronger, Call us!

Go through our blog section to know more about the preschool industry. Contact us for any queries.

Published By:- Teeny Beans