Patrick: Hey, Patrick Findaro, here, co-founder at Vetted Biz and managing partner at Visa Franchise. At Vetted Biz, we help you find, vet, and buy franchises or businesses for sale. And at Visa Franchise over the last five years, we’ve helped 350-plus entrepreneurs from across the globe find and analyze franchises that are eligible for all different types of investor visas, but mostly, the E-2 treaty visa. Today I’m very excited to have, Marcello Spinelli, from Amazing Explorers Academy. We’ve known each other now for a few years. And we’ve been able to follow his brand starting from one location to five locations open to now 10, 15 locations in development. And they’re pioneers in the early childhood education space.
Marcello and I will talk about different business models and opportunities to own the real estate, opportunities to lease the real estate for an early childhood education franchise. Excited to have Marcello Spinelli. He has an esteemed career on Wall Street where he worked for 20 years or so at some of the largest financial institutions. And he has his undergrad degree from the number one business school in the U.S., Wharton School of the University of Pennsylvania. We’re going to talk about all different types of opportunities in the early childhood space, different cities and states that Marcello thinks are well-positioned to take advantage of different demographic trends, understanding how the preschool environment has adapted to COVID, and all different types of opportunities in this early childhood education industry, which is booming.
P: This is part of our franchise Friday’s series, where I’m bringing on the founders of some of the fastest-growing franchise systems across the U.S. Hey, Marcello. How are you doing?
M: Hey, Patrick. How are you? Good afternoon.
P: Good. Thanks for joining. You could just tell me a little bit about how you got into the preschool space. You spent some time on Wall Street, you’re originally from Brazil. Maybe just tell me a little bit about your background and how you got into this arena?
M: Thank you for allowing us to participate in your business. This is a pleasure also knowing you and your brother for a long time in developing this business. Congratulations.
M: Yeah. After the University of Pennsylvania, I ended up on Wall Street. It was something that I always had a passion for. In 2014, I decided to change things around a little bit. What I was doing was very interesting but after 20 years you’re looking for new opportunities. And I ended up going to Asia, studying a little bit of Buddhism, and trying to do something that added value to society.
Things kind of unfolded in a great manner for me because, by around mid-2014, my brother called me and said, “Listen, I have an opportunity I think we should pursue. There’s this person that understands preschool and wants to build a brand”. I spent almost nine months in Asia and came back. I sat with them here in Florida, had the meeting and I started researching…
P: And was your brother living in Orlando at the time?
M: Yeah. And I said, “Well, I’m going to meet them. I’m going to come to Orlando”. It’s a very interesting business. If you look at the financial markets, there’s only one company. There are not a lot of companies. And when you look at education, there’s a large difference between the different segments. So I quickly began researching that segment of education preschool and I fell in love with it. Not only because I’m a financial guy and I love the numbers, but also it was more in line with what I was doing. And we founded the company in 2014.
P: Did you rebrand it? Like, what was the initial company in 2014? What did it look like?
M: It was zero. What we did was a ton of research. We gathered and we hired a bunch of Ph.D. psychologists, architects, and a lot of different people to help us brainstorm what we were going to put together. One of the things that we studied was STEAM education, which was not in preschools at that time. And we didn’t understand why not. in.
P: And had you worked with your brother before?
M: No, we never worked together. No.
P: You were in New York, he was in Brazil, mostly and in Florida?
M: Yes. We invest in different things together. But overall, we never really worked for hand in hand together. So it’s a great experience. Then I ended up moving to Florida from New York City. And we started creating a brand. With all these people that we hired, we just wanted to understand the basic research that we are going to create and why. And we thought there was a clear gap in terms of STEAM education at the preschool level. And that’s how I got into it. I just fell in love with it and went full force 100% into this business.
P: Look at the numbers.
P: What we’ve seen at Vetted Biz is the market is growing a lot. There’s been a lot of investments from institutional investors, private equity, family offices. And also a lot of money going into online education, different platforms. But preschool is traditionally a brick-and-mortar type business and it is still growing quite a lot. It’d be good just to hear from you a little more overview of the sector and what attracted you to be in it for the next, you know, a large part of your career.
M: Yeah. You’re right, there’s been a ton of investments in education. And I think it’s one of the sectors that are most important for our future. The industry is pretty large. You’re talking about a $55 billion business.
P: That’s just early childhood?
M: Just early childhood.
P: And how do you define it? Basically before kindergarten, five years and younger?
M: We don’t have kindergarten in our schools. It’s just zero to five education. So it’s a pretty large market. If you look, about two million people work in this market today. It’s been growing.
P: What’s driving the growth?
M: There are multiple factors. Like women in the labor force, the participation of women in the labor force. You have several births as well that are continuously growing. And you have government spending, which they recognize the need to fund these programs in certain states. You have funding for the three and four-year-old kids, for which the preschools received part of their funding. Other drivers are disposable income, which has been growing for the last 10 years. For the past years, we’ve seen that developing positively. And also the most important one for this industry is the importance of early childcare development.
P: What are the benefits? Because you have some people that just one of the spouses will take some time off work to take care of the kid, or hire a nanny. Why is it important to focus on the educational aspect from zero to four?
M: That’s kind of what we worked on to understand the real impact and how we would add value to everyone from children to the country. So there’s a gentleman named James Heckman from the University of Chicago, he’s a Nobel Prize winner and created a lot of research in econometrics, “Understanding the Impacts of Early Childhood Education”.
And he calculated the return on investment to be about 13% per year return if we invest in children. So there are significant results in better behavior, education, help employment versus not attending such a program.
P: The kids are two or three years old, I mean, it’s gonna change their life and opportunities that open up or close.
M: It’s like riding a bicycle, you learn at an early age, and then it’s embedded in you. That’s how you wire someone’s brain. We have to wire these kids properly from the beginning because it will help them ride their bicycles with the correct balance later on. Multiple studies have been out there. And as time goes by, we find more of them, which are interesting.
They say that they followed these kids for 25 years and very tied correlation to success.
One of the major universities in the U.S., says that every dollar spent in the childcare sector equates to a broader statewide economic impact of about $2. So there are several factors here that are positive.
Says that long-term achievements in education, cognitive skills, language ability, math skills, grade retention, and social engagement, are long-term effects actually of being in a childcare program.
P: How do you see Joe Biden’s policy and his administration affecting Amazing Explorers Academy and the larger industry?
M: I did have a conversation with someone that’s from Biden’s administration, understanding that for them it’s something that they’re going to pursue. I do believe there will be more investments in education and I think that’s just a natural tendency of things. The country is only good as the people that are here and how educated they are.
P: For sure. Yeah, it’s largely a service-based economy and it’s not agricultural, like many years back where education maybe didn’t matter as much.
M: Yeah. We think of three levels of education. Manufacturing to service to an intellectual. And I think we’re moving to the intellectual and for that, we need to be prepared.
P: And tell me a little bit about the competitive landscape. What’s the competitive landscape like?
M: There are daycares. Daycare is you leaving your child without education. And then a preschool is where you embed some form of curriculum, you teach and you develop kids. In the United States, you’re talking about 670,000 schools. And I would say that about 65% of them are daycares. You’re talking about a 55 billion dollar industry. There is competition, but the market is extremely fragmented. They don’t represent 5%. The top preschools are just a small factor in the market.
P: When you open up a preschool the alumnus that was already at some type of early childhood daycare or preschool. Where are they coming from?
M: There’s a strategy. We’re in developed neighborhoods versus breakout neighborhoods. Breakout neighborhoods. Let’s think of having AT&T in your cell phone and Verizon. That’s kind of the developing market situation.
P: You’re opening up in a nice area like New York City, Manhattan. That’s more the developed market. And then the other market is nice upper middle income in Orlando or Dallas. Is that it?
M: Exactly. We’re looking at Long Island City to open a school there. The school will be open in 18 months. At that stage, we look at COVID. Do we believe that this pandemic will somewhat be curtailed? And how would that impact the schools and education on that side and the migration of people back towards Long Island City? So we looked at that, and more importantly, we look at competition?
M: We are focused on STEAM, science, technology, engineering, arts, and math. That’s the core concept. And we do have an emotional intelligence program that we partner up with some guys from Yale.
P: Before we get more into Amazing Explorers Academy, what are the returns in your industry?
M: The sector is a $55 billion industry with profits of 5.2 billion. They’re running about 9.5%. There was a decrease from the last few years. If you look a couple of years ago, the margins, instead of 9.5% what they’re now, we’re about 14%. COVID had a huge impact.
P: I talked to one familiar school recently in the Miami area. Their enrollment was down 40% and they’re just getting slammed.
M: That was average. Was about 40%. A lot of them couldn’t withstand the turmoil. They weren’t prepared financially. We spend a lot of time thinking about how to implement technology in everything about our business. And that’s what we proposed in all our schools. It’s a pretty much cookie-cutter format so that we’re standardized. There are no idiosyncrasies in one of the schools or any of the units.
M: STEAM is a big differential. And we were pioneers. We did some research and we found that when students reached third grade, about one-third of the kids lost interest in science. Then by the time they reached high school, about 40% of the kids were not prepared for college-level math. And about 30% of them were not prepared for science.
And we found out that a lot of it has to do with creativity. That’s why we have games and fun ways of learning things rather than drilling something. I think in our brand, we’re extremely innovative. We’re extremely focused on STEAM and emotional intelligence. That’s our core. And that’s what you’re going to need for the 21st century. We’re continuously evolving.
We have greater transparency. In front of the school, it’s all glass. There’s a multipurpose room. Some have spaceships, and other attractive features where these kids learn to entice the kids to go in, etc. We thought of everything from beginning to end before we ventured into our expansion phase.
P: What’s the capacity for Amazing Explorers Academy?
M: Most of these larger franchise brands, they’re running around the 150, 200 range. And as you go into, from the urban to the suburban, the numbers change. Our models in Florida, all carry 200 capacity. So it’s around that aspect.
P: How much per student when you look at Florida compared to Long Island City?
M: In Florida, the average is about $1,000 a month per child full-time. In Long Island City, it’s about $3,000.
P: That’s industry average or Amazing Explorers?
M: The top-tiered program is around that much. And New York City is $3,000. A couple of years ago, you’d look at New York City and you could have some programs at $5,000. The cost is more because real estate is more. But there are some advantages. We do a lot of that. We do a lot of due diligence to make sure that we’ll hit our desired margins.
P: From Visa Franchise, we have some folks that are applying for different types of visas. Them, as well as American investors, want to know how many people are going to be managing at the end of the day?
M: We have different capacities. 200 kids which are our norm employ about 40 people. It’s a lot of jobs. The schools are not larger because it’s a lot to deal with 200 children already. I think it’s the optimal size.
P: In terms of your brand, I know that you’ve opened up different opportunities, but you have one that a franchisee coming in can develop and own the land and the physical property that the preschool sits in. And then another one would be built to suit the BTS model. Can you talk a little bit about these two models?
M: Yeah. when we look at a project, those are the two types you can. So if you’re going to Long Island City, you can’t buy the building. Naturally, you have to lease or rent the location. A lot of times what we do as the brand is try to negotiate to price for a turnkey solution for the franchisee or the project. So when the landlord gives you a lease, that lease already incorporates everything you need into the school, except the FF&E.
For the grounds up, it’s a little bit different. We have to identify the land, which we do a lot of demographic work, using a lot of tools. This takes a little bit longer. Also, the capital required to do a BTS is lower than one to own. The grounds up could be a $3 million, 4 million dollar project.
M: We are approved by the SBA, we have our FDD. With the SBA, it’s 100% approved. And so naturally, you know, with the SBA, you might be able to put a lower percentage down.
P: Generally 30% but I’ve seen some as low as 15%.
M: Yeah, I’ve seen 10%, 15%. So if you’re doing a $4 million project, it could be for $400,000, or $500,000, which could be very viable, if they qualify for that.
P: Did you guys disclose in your FDD, the financials for one of the corporate locations?
M: We have item 19 of the FDD that discloses the financial information. If you look at the profit margins of the industry, the whole market is running about 10%. If you operate well you can make a 15%, 20% net profit margin.
P: 10% on the low end, and then you go all the way up to 20% if it’s well optimized.
P: Tell me a little bit about what markets you’re currently in and where you want to grow?
M: We’re in Florida right now. There’s a school opening in Texas very shortly. Close to Austin. It’s important to understand the trends propelled by COVID. What’s happening to the States today? People are working remotely, there’s a huge dependence on technology. So what we’ve seen is a very clear migration.
We’re trying to position ourselves properly in places that are going to be easy for us. And we’re negotiating a lease that could have a lot of value for the long term. It’s all a matter of due diligence. But naturally, North Carolina, Georgia, and Florida.
P: And what type of franchisee are you looking for? What’s the ideal franchisee?
M: Will be franchisees that are entrepreneurs, right? Those are the people that I think they’re interesting, people that understand research. We would look at someone that has entrepreneurial skills, good in research, good in people. Emotional skills are important. You need to be flexible for the training to understand how you need to implement the programs. Someone that has experience.
P: Have you seen any studies in terms of the emotional and intellectual capability of the kids that are not doing anything, and aren’t socializing compared to the ones that continue in preschool and receive an education?
M: We relied on the studies that I mentioned before, from James Heckman, from Cornell University, Frank Porter, that have shown significant positives to these kids. Today, we’re looking at exponential growth. And this has never happened before. We need to prepare our kids to face what they’re going to face in the next 20 years. People have to have the skills to be prepared for the future.
M: Concluding our discussion, education it’s still a very viable business. It’s still a very important business for the future of this country and the kids. And it’s still a very valuable business and lucrative business because we need it. We have 4 million births a year, we have to create space for these kids to learn, we have to create schools.
P: Well, it’s great, Marcello. Thanks so much for joining today.
M: Thank you very much, Patrick.
P: Appreciate it.
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