Efficiencies garnered at the top are almost totally eaten up by more expenses in the classroom. Although Golle expects management deals to constitute a full 60% of his business, with pretax margins of 10%, only 2% to 3% of that is expected to result from cost-saving tactics. The rest is supposed to come from efficient investment of EAI's bank balances, the "tuition" money paid by the school districts. Golle will depend on nothing more than good cash-flow management to keep his investors happy.
Ultimately, EAI's report card to the district will be both quantitative (measured by how well children perform on standardized tests) and qualitative (using information from the Quality Service Index, a questionnaire filled out quarterly by parents). In one scenario, teacher bonuses are also tied to those measurements.
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Consulting For schools not ready to hand over everything, EAI offers a consulting contract. For a fee, school districts may buy EAI's expertise -- from classroom training to cost-saving management tactics -- à la carte. Golle sees this segment as 20% of the business, producing pretax margins between 25% and 30%. "But make no mistake," he emphasizes. "This is strictly a marketing tool designed to warm customers up to the notion of entering a management partnership down the road."
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Proprietary Products In any management or consulting deal, clients also agree to buy EAI's teaching tools. So far EAI offers 15 proprietary products; many -- such as Whole Math or the Personalized Education Plan -- were created by Tesseract teachers. This business, as the final 20% of EAI's package, is expected to offer a pretax margin of 20%.
The manufacturing of these notebooks, videotapes, and books will be farmed out. EAI is also pursuing other distribution channels for its learning tools, such as trade shows and regional network distributors. Leading manufacturers, including IBM, are currently negotiating to carry the products in their educational-product lines. Big Blue has already agreed to team up with EAI, lending Tesseract schools the latest in its software and hardware arsenal in exchange for EAI's agreement to provide feedback.
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Will Golle be able to weave all this into a profitable business? And will he be able to transfer the Tesseract methods from the private-school arena to the more daunting environment of public schools? In Dade County, for example, he will enter a world very different from his suburban Minneapolis roots. More than 85% of the students are eligible under federal law for free or reduced-cost lunches. Reading scores hover well below the national average, and more than 89% of the children are minorities -- many of them recent immigrants who speak little or no English. Many of these kids go home every night to broken or poverty-stricken homes. What's the chance that a parent struggling to put food on the table can take an active role in his or her child's education -- a linchpin of the Tesseract approach?
Another question looms. In Dade, EAI will work with a new school, but in most deals EAI will be called in to turn around entrenched school systems. How will Golle deal with kids who've patterned their learning to fit report cards, not PEPs, and with teachers who've taught the same way for 20 years?
Then there are the teachers' unions to consider. How will they greet EAI's concept? As thrilled as Dade County is to welcome EAI as a partner, one official warns that relations between his district and the teachers' union are unusually cozy: "In Dade, we've worked together for years to develop a collaboration between district and union, but you'd be hard-pressed to find this consensus in other districts." Without such teamwork, teacher unions may feel threatened by EAI and refuse their support. And as this official is quick to point out: "No educational concept stands a chance without union backing."
In some ways, the question gets down to the whole notion of a business profiting from education. "It's a very touchy area," Golle admits. Which is one reason that this past April Golle took EAI public, raising $7.5 million for operating capital and debt retirement. While the initial public offering gives some of EAI's investors a long-awaited exit, Golle claims another reason as well: "For this company to be able to grow and sustain itself, there must be public disclosure detailing how we contract, how we operate." He adds, "When you're dealing with people's children, you have to be honest, open, and above suspicion."
EXECUTIVE SUMMARY
THE COMPANY
Education Alternatives Inc. (EAI), Minneapolis
Concept: To sell its management and teaching techniques to public-school districts fed up with poor student performance and cost overruns
Projections: Revenues of $2.7 million, with a pretax loss of $1.1 million in fiscal 1991; revenues of $22.6 million, with pretax profits of $1.1 million in fiscal 1993
Hurdles: Transferring its techniques to inner-city public schools where kids are handicapped by poverty and broken homes; selling the EAI concept to a variety of customers -- school boards, teachers' unions, parents, and children; providing a return to investors after four years of operating losses
THE FOUNDER
John T. Golle
Age: 47
Family: Married, with two children
Source of idea: After spending his entire career designing and selling custom educational programs, he was inspired by the negative experiences of his learning-disabled child to launch his own schools
Personal funds invested: $3 million in cash and
commitments
Equity held: 29%
Salary: $120,000 and incentives
Workweek: 60 hours
Education: B.S. in business administration from University of Minnesota
Other companies started: Golle & Holmes Cos., a designer of custom educational and training programs for Fortune 500 companies, started in 1970; its sales are now in the seven-figures
