English Teaching School in Mexico Investment Case Study
We invested $60.000 in opening an English teaching school in Mexico – our subsidiary.
The business offers two types of services, a 1-month course and 1-week intensive course depending on the needs of the customer.
The expenses of the subsidiary are fairly stable, but the revenues vary depending on the number of people that sign up for our courses. The revenues and expenses are denominated in Mexican pesos and most of the revenues that the business in Mexico generates, returns to the US.
Every business should understand the competitive advantages that it will exercise in the marketplace. Different businesses possess different advantages and the degree of such may vary highly.
Our business is located in Mexico, a very special and sometimes controversial market that suggests its advantages and drawbacks. In our opinion, one of the considerable advantages is the cheap labor, rent and capital – all forms of production in general. But these would not be significant if the selling prices for the services would also be very low, therefore, keeping the margin lower, than in, for instance, the United States. This is not the case here, since historically the margins in Mexico has been very good.
In terms of another competitive advantages, we could also name the possibility of talent pool acquisition, which will be the driver of sustainable corporate growth.
Now, if the business grows, we will ultimately need to raise capital in order to fund the growth. There are different ways to raise capital, for example to borrow money or issue equity – shares of stock. The facets of corporate funding vary according to the country and in Mexico there are also specific peculiarities to that process.
In our view, going public, namely engaging in IPO and issuing shares of stock is infeasible for a still small business like ours. Moreover, with only some exceptions, it is very uncommon that educational entities ever go public, maybe only big multinational corporations like DeVry Education Group or Capella Education Company. There is also a way to issue equity and not be publicly traded, a process which is called private offering. In this case, shares of the company are sold to mostly family members, acquaintances, friends or venture capitalists. We are not sure, whether venture capitalists are going to engage in the business like ours, since it’s a bit common and standard business. Venture capitalists mostly engage with companies that offer something really special, a product or service.
Therefore, we came to a logical conclusion that we should borrow money to fund the growth of the business. Now, there are two ways to borrow money. The first one is to issue corporate debt and the second one is simply get a loan in the bank. The first option is probably not really suitable for us, since, as mentioned already, we are only a small business and debt issuance is the destiny of big multinational corporations. What we can do is ask for a bank loan.
Now, if we are …