9B16N065

WONDER KIDZ FRANCHISE

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Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-11-23

Mayank Bansal sat tensely in his office in Bhopal, the state capital of Madhya Pradesh in India. It was July
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13, 2015, and he had just had a long discussion with Rajesh Thakur, director of Delhi-based Wonder Kidz
Education Pvt. Ltd. (Wonder Kidz), about the school’s franchise model. Bansal was thinking about pursuing
an entrepreneurial venture in which he could earn additional income and fulfill his dreams with his wife,
Sharda. He pondered whether to accept the franchise proposal Wonder Kidz had offered. He did not have
much time before he needed to make his decision. Not being an expert in finance, Bansal wanted the opinion
of a consultant who could evaluate whether the project was financially sustainable. He would have to
borrow money to fund the venture, so he needed to exercise caution before taking the risk.

BANSAL’S BACKGROUND

Bansal was a prominent marketing professor with a rich teaching experience of 14 years at a leading
management institute in Indore, in Madhya Pradesh. Passionate about academics, he had always wanted to
pursue academic entrepreneurship where he could use his expertise and work alongside his wife. Sharda
was a highly qualified person in her own right, and she wanted to become involved in an activity where she
could use her expertise and knowledge in education.

One day Bansal came across a newspaper advertisement for a franchise opportunity with Delhi-based
Wonder Kidz, which operated a concept-based playschool, or preschool. He immediately felt compelled to
explore the possibilities this franchise offered. His initial research of the school’s website motivated him to
look more deeply into the franchise proposal. He was excited by the idea of the playschool and attracted to
the prospect of taking on a franchise in Indore. Bansal believed that with his academic background and his
wife’s qualifications, they could successfully operate such a school. However, because the playschool
market was highly competitive, with many big players already operating concept-based schools, Bansal
knew the path forward would not be easy.

Bansal’s two sons were already grown and living in the United States. Bansal lived in an affluent
neighbourhood in Indore, in a large house of approximately 8,000 square feet. Although the house had

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ample room in which to start the school, Bansal thought that renting premises in the nearby area would be
preferable.

PRESCHOOL MARKET IN INDIA

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An increase in family income, as well as the demand for quality education, had kindled the growth of
preschools in India. A report from Kaizen Private Equity estimated the 2014 size of the preschool market
in India at approximately US$800 million.1 Future growth of 30 per cent was expected as a result of three
key drivers: a higher level of parental awareness of the importance of early education, hectic working

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schedules of both parents, and a willingness to pay for children’s education.2 Additional potential for growth
lay in the fact that the market had limited application of technology in terms of computers and other modern

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equipment in children’s education. Also, the market was being driven by major investments from private
equity funds and venture capitalists, with a very low, or no, regulatory framework. The market was hugely
attractive because of its minimal infrastructure requirements—costs that were considerable in Tier 1 cities3
and even more significant in Tier 2 and 3 cities.

Reports suggested that the preschool market was concentrated only in metropolitan areas and Tier 1 cities.
However, experts anticipated that the market would soon begin to emerge within Tier 2 and Tier 3 cities.
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ABOUT WONDER KIDZ

Founded in 1999, Wonder Kidz was the fastest-growing chain of preschools and formal schools in India.
An ISO 9001:2008 certified company,4 Wonder Kidz had more than 1,000 franchises spread across the
country. Through its innovative and groundbreaking training and education system, the company was
committed to helping children develop into “wonder kids” by motivating them and developing their full
potential.

The company’s objectives were to help children become competent at facing the challenges of rapidly
changing modern life by providing structural learning programs based on each child’s distinct needs. The
programs used age-appropriate learning activities, developed critical-thinking skills, and fostered
awareness of diversity and multiculturalism. The founders of Wonder Kidz regarded the information age
as a time of perplexing professional choices made more challenging by tough competition from peers;
hence, every child needed to be a “wonder child” to successfully compete. Its centres offered both indoor
and outdoor activities—part of the children’s regular schedule that provided them with a congenial
environment and a positive atmosphere. The founders believed this atmosphere motivated children to attend
school regularly.
The school’s curriculum was imbued with the “learning by doing” concept, which ensured the application
of highly systematic and step-by-step processes. The unique, child-oriented curriculum was based on a core
of activities that included traditional Indian games like the tower-making game using small wooden cubes,
snakes and ladders (an ancient Indian board game), the inquisition game (an action role-playing video
game), as well as the next generation educational requirements based on the Four Cs: Curiosity, Confidence,

1
Kaizen Private Equity and INSEAD, Implication of Evolving Educational Technologies (Ed-Tech) on the Indian Market—A
PE/VC Perspective, May 2013, accessed June 25, 2016, www.kaizenpe.com/kies2014/pdf/Education-Technology-in-India-
Kaizen-INSEAD-Team-May-2013.pdf.
2
Ibid.
3
Tier 1 and 2 cities in India were classified on the basis of population: Tier 1 cities had a high population of 5 million and more,
Tier 2 cities ranged from 2 to 5 million, and so on.
4
ISO 9001:2008 certification was a method of controlling the quality of services in India.
 Page 3 9B16N065

Creativity, and Continuity. (The Four Cs concept was derived by the Wonder Kidz team to help students
learn by having fun).

The school also boasted exclusive smart classrooms in which education was provided through a projector
and a “talking pen.” The talking pen was an innovative tool used to develop inquisitiveness and motivate
children to practice listening and learning habits. The pen was included in a kit composed of a book

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containing a chip through which sentences, rhymes, and stories were recognized by the pen. The pen then
converted the information into audio, which was played through speakers built into the pen itself. Both
children and teachers expressed that this novel pen concept was an enjoyable and brilliant addition to
education.

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WONDER KIDZ FRANCHISE MODEL

Thakur, the director of Wonder Kidz, promoted the uniqueness of the franchise proposal as a minimum
investment for a maximum return. He believed that the education sector was virtually recession-proof,
meaning there was minimal risk of franchisees losing their investment. An initial investment of
approximately ₹625,0005 was required. This amount included the registration cost payable to the franchise
and the franchisee cost to initiate the centre. It did not include infrastructure costs such as land and building,
but it did include set-up costs such as classrooms, furniture, teaching and play equipment, wall designing
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(the classroom walls were decorated with paintings of cartoons and interesting characters), teacher training,
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and other ancillary expenses (see Exhibit 1). The investor was also required to have access to constructed
premises of approximately 1,200–1,600 square feet, preferably in an affluent residential area. These
premises needed to provide three to four rooms, ideally on the ground floor.

Each centre was allowed to charge a maximum of ₹20,000 per year for each registered child (see Exhibit
2). Parents could pay the fee in its entirety at the time of registration or spread their payments out over a
maximum of four instalments. Although the franchise agreement was flexible enough to provide franchisees
discretion regarding offering discounted registration fees, Thakur recommended that no discount be offered.
He strongly believed that a franchise, with little effort, could generate a profit during its first year. Thakur
provided profitability projections for the first three years of a centre’s operation; these were tentative
projections based on a franchise’s estimated expenses, which were shared with potential new franchisees
(see Exhibit 3).

The franchise proposal allowed for a centre’s premises to be used for other activities. For example, a centre
could allocate four hours in the morning for Wonder Kidz and the remaining time for other activities. These
other activities might include skill development for young as well as older children, all of which could be
conducted to increase the profitability of the centre. Activities could include abacus,6 handwriting
improvement, calligraphy, speed math, Vedic math,7 drawing and painting, dance, music, and other indoor
activities.
Beyond the attractiveness of the financial investment, the franchise model was an enticing one. According
to Indian law, no affiliation or approval whatsoever was required from regulatory authorities to open a
preschool. Wonder Kidz guaranteed that all franchisee schools would receive support for their day-to-day
activities, including a full curriculum plan and syllabus, periodic teacher training, a call centre (available
24 hours a day, 7 days a week), and a detailed operations manual with a daily operating activities chart that

5
₹ = INR = Indian rupee; all currency amounts are in ₹ unless otherwise specified; US1 = ₹64.05 on July 31, 2015.
6
An abacus was the manual calculating tool used primarily in Europe, China, and Russia.
7
Vedic math was based on Hindu cleric Bharati Krishna Tirthaji’s 1965 book about the process of mental calculations,
reputedly based on ancient Hindu scriptures known as the Vedas.
 Page 4 9B16N065

could be customized by each franchisee. The support included guidance for establishing, operating, and
managing a preschool. Moreover, at no additional cost, Wonder Kidz extended full marketing support to
help franchisees increase their enrolment.

BANSAL’S DILEMMA

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Bansal had three meetings with Thakur and was impressed with Thakur’s explanation of the franchise
model. While a large part of him was convinced that opening a franchise was a good idea, Bansal was
undecided as to whether to take the risk. Financing the venture would not be a problem, but he did not want

Purchased for Toomas Pasanen for use on the Rahoituksen perusteet 28A00110, at Aalto University School of Business.
to use his own savings. As a respected citizen, he also did not want to face a situation where he was unable
to pay back a bank loan if he borrowed the funds. Also, given his capabilities and knowledge, he feared the

Taught by Dr Peter Nyberg, from 25-Feb-2024 to 31-May-2024. CoursePack code C-5955-421488-SCH.

idea of franchise failure and what it would mean for his professional reputation.

To help ease his hesitancy, Bansal conducted a market survey in his nearby area before proceeding to
arrange for funding. As a marketing professor, he made certain his market research report answered the key
questions involved in contemplating the opening of a franchise. He found that there were many potential
customers in the area, which would allow him to start a preschool with at least 35 students in the first year.
He estimated that this number could be increased by at least 15 children in the second year and 30 in the
third year. Bansal based his calculations on the assumption that some students would leave after one year,
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but new students would enrol during the second year and beyond. Therefore, he decided to compute his
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financial projections based on 50 per cent new enrolments and 50 per cent old enrolments from the second
year onward. New enrolments paid an additional ₹2,500 as their admission and registration fee, a fee that
old enrolments were not required to pay. In the fourth and fifth years, Bansal expected that enrolment would
remain constant. While he knew that reports of the Wonder Kidz model promised lengthy sustainability, he
erred on the side of a conservative estimate of challenges he might encounter during his first five years of
operations.

By this point, Bansal had decided that if he did accept the franchise proposal, he would not use his own
savings but, instead, would borrow the required funds from multiple sources. Based on normal market
conditions, he anticipated that the average interest rate would be approximately 15 per cent per year. In
addition, he estimated that the income from the school would put him in the 20 per cent tax bracket,
according to the prevailing income tax laws in India.

Being a marketing expert, Bansal was confident about getting the minimum number of students for the next
five years, and he was determined to take on the franchise. However, some of his friends advised him that
because he had poor financial analytical skills, he should get help from a financial consultant who could do
a proper analysis; in projects such as these, the time value of money was important. Bansal decided to enlist
the help of a consultant who, on the basis of Thakur’s projections and Bansal’s own market research report,
could explain the hidden factors in the financial estimate and offer guidance on the project’s financial
feasibility.

Bansal submitted all the information to the consultant and eagerly awaited the evaluation so that he could
come to a conclusion about the franchise.
 Page 5 9B16N065

EXHIBIT 1: FRANCHISEE PLAN AND FINANCIAL INVESTMENT (FOR SET-UP OF 80 STUDENTS)

Category Fee (₹)

Affiliation fee 125,000
Set-up cost (classroom furniture, interior decoration, education
350,000
and play equipment, printing and advertising material)

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Other capital investments* 110,000
Service tax on affiliation fees (12.36%) 15,450
Training fee 24,000

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Total 624,450

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* Other capital investments included office furniture, water purifier, television, music system, etc.
Source: Summarized by the authors on the basis of costs supplied by the franchisor.

EXHIBIT 2: PROPOSED APPLICATION FEE SCHEDULE

Category Fee (₹)

One-time fees
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Form and registration fees 500

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Admission fees 2,000

Caution money* 1,500
Total one-time fees 4,000
Annual fees
Kit charges 1,300
Activity charges 2,500
Annual charges 2,500
Tuition fees 10,000
Total annual fees 16,300
Total fees 20,300
Total fees without caution money 18,800

* Caution money was refundable. It had not been considered either for the purpose of revenue or for computing expenses.
Earnings on the caution money deposit had been taken at the fixed deposit rate of the State Bank of India at 8 per cent.
Source: Summarized by the authors on the basis of costs supplied by the franchisor.
 Page 6 9B16N065

EXHIBIT 3: PROJECTED ANNUAL PROFITABILITY/CASH FLOW ANALYSIS FOR FIVE YEARS

(IN ₹)

Year 3
Year 1 Year 2
& onward
Expected number of enrolments for 5 years

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New enrolments 35 25 40
Old enrolments 0 25 40
Total expected strength in each year 35 50 80

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Expected revenue for 5 years
Fee collection from new students
18,800 18,800 18,800

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(one time + annual)
Fee collection from old students (annual) 16,300 16,300
Total fee collection (without caution money) (A)
Year 1 = 18,800 x 35
658,000 877,500 1,404,000
Year 2 = (18,800 x 25) + (16,300 x 25)
Year 3 = (18,800 x 40) + (16,300 x 40)
Anticipated expenses for 5 years
Royalty at ₹1,200 per registration payable to franchisor 42,000 60,000 96,000
Salary of one senior trainer/faculty 84,000 96,000 1,08,000
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Salary of junior faculty (two required in year 1; three required in

96,000 1,80,000 3,60,000
year 2; five required in year 3)
Salary of nanny (two nannies required in year 1 and 2; three
60,000 72,000 108,000
required in year 3)
Rent 180,000 198,000 216,000
Electricity 12,000 15,000 18,000
Office expenses 18,000 24,000 30,000
Advertising 24,000 30,000 30,000
Total expenses (B) 516,000 675,000 966,000
Operational profit (A – B) or earnings before interest & tax 142,000 202,500 438,000
Add: Interest on caution money at 8% 4,200 6,000 9,600
Less: Interest on borrowed funds at 15% 90,000 90,000 90,000
Earnings before tax 56,200 118,500 357,600
Less: Tax 20% 11,240 23,700 71,520
Earnings after tax (cash flows) 44,960 94,800 286,080

Note: Depreciation on assets was not considered in the case.

Source: Compiled by the authors.