Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Today, Rick and I have the pleasure of speaking with Caroline Matthews and Connor McCarthy, who are two successful searchers who have acquired multiple summer camps and are building a business out of outdoor activities, entertainment, and learning for children. This is an unusual path for searchers to pursue, not just because it's a business-to-consumer business, and not the more typical business-to-business enterprise that searchers buy, but because it's an area that is little explored in search. They're unusual in another way too, which is that Caroline and Connor, in addition to being partners in search, are a married couple. So, Rick and I are going to be interviewing them and learning more about both these and other aspects of their journey. Caroline and Connor, welcome aboard to Think Big, Buy Small. Rick and I are so delighted to have you here. Your journey is so interesting and the business you bought is unique in many ways in the world of search. So, we're going to learn a lot, but maybe a place to start is if each of you would just take a few minutes and talk a little bit about your background, and sort of what led you to the point of deciding to search. And, along the way, I know you'll mention what we'll mention right now, which is in addition to being partners in your search, you're married, which is uncommon in search, but not unprecedented.

Rick Ruback:

Well, we haven't asked the most important question, Royce. Are you still married?

Caroline Matthews:

We are still married. We've been married now for three years, and we actually just welcomed our first child ten weeks ago.

Rick Ruback:

Oh wow, how exciting!

Caroline Matthews:

It feels very timely to be chatting with you two because we think that actually running a search and running a business together was the ultimate vetting test to see whether we actually should get married and have a family together, so we feel like it's come full circle.

Rick Ruback:

Wow. I could never imagine searching with my spouse. I love her deeply. We've been married forty-eight years, every day better than the last, but I can't imagine searching with her, so I applaud you both.

Caroline Matthews:

Well, thank you. Imagine searching with your fiancé during COVID, and you've added a whole other element of intrigue to the experience.

Connor McCarthy:

While living at your future in-laws' house.

Caroline Matthews:

Exactly. Happy to share more about our origin stories. So, I grew up in Washington DC. Then I went to Penn undergrad, studied history. I then was at Google for over four years, first on the sales side, and then I moved over to the policy side. And during my experience at Google, towards the end of my tenure there, was spending a lot of time prepping executives before they had interviews, describing what the business was doing, to get buy-in from the public and from shareholders. During one of those prep sessions I realized, "Wow, I don't want to be the one giving advice. I want to be the one who's getting prepped." And I wanted to make that transition from being on the sidelines to a decision maker and leader. So, that prompted me to apply to Stanford. I did my MBA at Stanford and my public administration degree from Harvard Kennedy, so I did a joint degree, so I spent time on both coasts, and then joined Alpine Investors, as part of their CEO In Training program, and ran operations at one of their portfolio companies in Phoenix. Connor and I met at Stanford Business School, and I'll let him share his origin story.

Connor McCarthy:

I grew up in Mobile, Alabama, on the Gulf Coast, running around barefoot, fishing, taking out the boat. My family really cared about education. Not a lot of TV but a lot of reading and a lot of outdoor activity. I went to the University of Georgia. I started my career at McKinsey, which is a fantastic place to learn. Shipped off to Kenya for a year to do a little bit of wanderlust and exploration, and then came back to Google, where I was on the business operations team and did a little bit of M&A work there before Stanford. Also, joined the Alpine Investors CIT program. I was CEO of a company there, sold it, and timing was right for us. We didn't have a kid at that point, we didn't have a mortgage at that point, and that's where our search began.

Caroline Matthews:

One of the things that Connor and I really shared when we first started dating was a love of the great outdoors, and I think both had sort of seedlings of a desire to want to start a company. Connor started a company with a classmate of his to test out entrepreneurship while in business school, and we both sort of had that desire to move into it but weren't quite bold enough to do it right out of our MBA program. And then gained confidence through the incredible experience we both had at Alpine Investors as operators to make that big leap.

Connor McCarthy:

It was actually one of our early dates, we were going for a run around campus together, and we talked about how fun and exciting it would be to start an outdoor recreation business, and several years later, here we are.

Royce Yudkoff:

So, as you came out of your Alpine experience, it sounds like you decided to search, and maybe at the same time there was this thesis of doing something around recreation. Dive a little bit into that piece of it.

Caroline Matthews:

We really wanted to marry our interest in investing and interest in continuing being operators with also a space that we really cared about. In the early days, when we were both still operating in other companies, we went through an exercise where we put Post-It notes all over our apartment to hone in on what would be the industry that we really cared about. Some of the criteria we had was, you know, if we described this industry to our grandparents, would they understand what it was? Do we feel like it aligned with our greater love of facilitating formidable experiences in the great outdoors? Did we feel like it gave us some flexibility in terms of what that business might look like, but at the same time had some real focus around it? It felt like it was very organic, in terms of its evolution, and I think it was really helpful when we went through the process of engaging investors, because we had a real clear vision of what we wanted to be building, and were able to really kick off our search in a very focused way because we knew, "Okay, if these are the types of businesses we're looking at, or this industry, we can now really be much more thoughtful about the criteria of the individual business as we're going through the sourcing and searching process."

Royce Yudkoff:

And what kind of response did you get from investors to your thesis? Because it's different than I suspect investors hear most of the time. First of all, most searchers just numerically buy business-to-business companies. Yours is notably a business-to-consumer company, and I think describing something around education and experiences in the outdoors can't be something that a lot of prospective searchers talk to investors about. So, tell Rick and I a little bit about how investors responded to this.

Connor McCarthy:

We started our journey at the HBS Entrepreneurship Through Acquisition conference in December of 2019, and I don't think we realized that we were fundraising at the time that we started fundraising. We just wanted to understand what the dialogue was, and Caroline had set up some conversations with maybe a dozen or so investors, and we came into those conversations and shared pretty clearly, "We're looking for an outdoor recreation business that's inherently consumer. We're looking for a multi-site business because there are different outdoors experiences, really, wherever you go, and we don't want to be limited. And ideally we're focused on inorganic growth of the long-term hold." And I would say, of the ones we spoke to, all of them said something similar to what you shared, which is, "Wow, this is unique. I've never run across something like this before." I would say 80% to 90% said, "I'm interested, let's talk more." The other 10% to 20% said, "This is in my no-fly zone. Why don't you try HVACs or cold storage or something else?" We said pretty quickly, "You know, that's in our no-fly zone," and what's great about that is we got to this in the first conversation, and it's not a “no”, but it's a “no” for this go-round, right? "This isn't a fit for us, as we talk about building our cap table and finding our investing partners in this go-round, but we want to keep in touch with you."

Royce Yudkoff:

I agree. That's the mark of a high-quality discussion, that you get to a clear resolution.

Rick Ruback:

Can we take a step back? Why did you decide to do a funded search? You had careers. You were living together, that saved on expenses. No dependents. Is it just that that model is just so popular at Stanford, you just couldn't go against the grain? Could you explain that decision?

Caroline Matthews:

There was an evolution in that thought process, whether we wanted to do funded or self-funded. Initially, we were chatting with one potential investor who wanted to just fund it out completely, so we would've just been sort of bringing on a third partner, essentially, that was going to be the financial partner. As we had conversations at the HBS ETA conference, we realized, "Wow, the real value you have with your investor base is their expertise." You know, it's not just the capital. It's getting really all the lessons they've learned, in terms of backing entrepreneurs and figuring out what worked and what didn't, and what to look for, and blind spots. So, I think really the desire there was to have a team behind us that could really help us build a meaningful business, and to have real skin in the game and a desire to want to do it, because there was real alignment there.

Connor McCarthy:

I think both of us had a background as operators and we felt fairly confident in learning a business quickly and putting operational systems in place, but a core part of our model was inorganic growth and neither of us had extensive experience investing, and we wanted to be surrounded by folks who were great investors and be able to engage them throughout the process. I think, Rick, there's a second part. I had a lot of student debt and I was able to pay off a lot of it through my time at Alpine, but I still had student debt. The ability to de-risk our personal life is of value when you're raising a search round. I ended up taking time off between the time we sold our business and started our search, really to develop this thesis. Probably met with forty different business owners on the road, traveling across the country, while Caroline was still wrapping up her work at Alpine. And at that point, I didn't necessarily have the personal funds to be able to go the self-funded route.

Rick Ruback:

And that was post your African wanderlust, as you described it?

Connor McCarthy:

I've had a couple of wanderlusts in my life, and they're all very expensive.

Rick Ruback:

Got it, got it. And when you say inorganic growth, I'm interpreting that as mergers and acquisitions, is that right?

Caroline Matthews:

Acquisitions, and also standing out in new locations. The current state of the business is we currently own five summer camps, four of which have a residential element, so a real estate component. The fifth is a trip/travel program that has no corresponding real estate. And then we're, fingers crossed, going to close on our sixth camp in the next couple of weeks, which is a multi-site camp with three locations, no real estate related to it. But the real hypothesis behind growing that business is to not only continue to grow each individual current site that we own or will own, but also launching new sites, so that being a de novo play. You look at other acquisition opportunities in that same space.

Rick Ruback:

So, that's another reason to have gone the funded route, because you need investors with pockets not only deep enough to fund your initial acquisition but also the flexibility and liquidity and interest at funding the subsequent acquisitions. And it's not that you can't do that as an unfunded searcher, but it's more challenging, I think. So, that makes a lot of sense to me. And why summer camps? I mean, I know you had said outdoor recreation, but there's so many outdoor recreations. There's mountain biking, there's skiing, there's sailing, and those are just my interests. I'm sure Royce has been to an outdoor museum or two. Why summer camps? They're just so seasonal.

Caroline Matthews:

Our focus when we first launched our search was around outdoor recreation, but more specifically adventure travel. It's under-professionalized and clearly there's growing demand. This is even pre-COVID. We launched our search unofficially at the HBS conference, officially closed our fundraise in February of 2020. We did not know a month and a half later that the whole world would shut down, and we were trying to acquire experiential group businesses that relied on in-person connections, and a component of travel. So, it was an interesting first several months for our search. As Connor mentioned, we left New York, where we were searching from, and then moved into his parents' house in Mobile, Alabama, and continued to call owners, starting every phone call with, “I'm not trying to hit you when you're down on your luck. We actually are real investors who believe in this space. We believe it'll endure, it'll get through this. Please be willing to talk to us about potentially selling your business to us. Maybe not today, but at some point in the next twenty-four months." As we continued the process of calling adventure tour operators and others in that broader adventure travel space, we started looking at summer camps. Connor and I both grew up going to summer camp, going from camper to counselor in training, to junior counselor, to counselor. What's really remarkable about summer camps is that they're really enduring businesses. I mean, they're 100 plus years old, they have survived now two pandemics. They've survived two world wars, and they develop these incredibly strong relationships with families that are multi-generational. So, if we're thinking about wanting to buy and build an enduring business, summer camps felt like a real place to spend some time. So, that's how we broadened our scope from adventure travel to summer camps, all within the broader outdoor recreation space. We closed on our first deal, our first summer camp, in May 2021, bought it from the founder and owner at the time, who was also running it as the director. The camp is in West Virginia, about four hours from Washington DC, where I grew up. That really kicked us off on our journey of acquiring overnight summer camps.

Rick Ruback:

How do summer camps actually work?

Connor McCarthy:

Historically, kids used to go eight weeks, nine weeks, or ten weeks of the summer. Now there's a lot of competition from other areas, like sports or academic enrichment programming. So, kids will come. They'll stay in cabins with a group of ten or eleven or twelve other campers. Generally, two or three counselors, in there for two weeks, three weeks, four weeks at a time. Our average camper stays about two weeks, and that's across all five of our camps. We do have the one program that Caroline mentioned, where we don't have physical property but we have access to amazing permits in national parks and forests throughout the country, so we do horseback riding in Yellowstone and they sleep in tents under the stars. I went with one of the trips to Olympic National Park this summer, slept next to a river in the rainforest.

Caroline Matthews:

To the question around, okay, this is a highly seasonal business, you know, I think we can share what it looks like twelve months a year. Each of our camps has around two to three full-time team members, or for some of our bigger camps, almost five team members, year-round. And the big focus for those who are not working on facilities, for our camps that have a real estate component, is sales. Parents are deciding where their kid is going to summer camp often two years in advance, but definitely multiple seasons in advance. So, our camp directors and our teams are really focusing on the sales process, from basically the summer before throughout the whole year, to plan for the next summer. So, that's how they're spending their time. So, yes, highly intensive operations in the summer, revenue is recognized in the summer, but it's a whole twelve-month sales cycle.

Rick Ruback:

And what's the cost, typically, of a two-week stay at the summer camp?

Connor McCarthy:

Depending on the program, it could range anywhere, on the very low end, from $75 a night, to the high end of $450 a night. Our programs tend to hover around $300 a night, around $4,000 for two weeks.

Royce Yudkoff:

When you are both looking at a summer camp that you might acquire or merge into your enterprise, what are the business characteristics that make for a good summer camp?

Connor McCarthy:

One of the very first things that we look at is retention rate. These camps, as Caroline mentioned, have a pretty high degree of revenue predictability, and part of that is because they can be multi-generational. One of our camps is almost 120 years old. We have great-granddaughters going to that program now, so it's been four generations. So, revenue predictability, as measured by retention rate, is a significant one. The second thing that we really look at for the sleep-away camps, where we own the real estate, is what's the state of the facilities? Is there deferred maintenance that we're going to have to pour money into? Related to that is what is the appraised value of the real estate and can we get good financing from putting mortgage on the real estate? Which we've done so far for all four of our programs. Another thing that we look at is the team and if there's a true successor in place. These are family-owned, family-operated businesses, and we've had to pass on multiple deals, several in the last year, because there was no true succession plan in place and we didn't want to take on the risk or really the management bandwidth of finding a succession plan, potentially losing a significant amount of families who are loyal to that family who run the camp. And then, I would say the last thing that we always really look at is what the margin looks like. These businesses have a relatively high breakeven point, because they've got a high fixed cost, but once you do, there's a significant EBITDA flow-through and free cash flow-through with a relatively high contribution margin.

Royce Yudkoff:

And Connor, can I just ask you to take us back to the first comment you made, which was on recurring revenue? Rick and I, when we teach our students, teach them about a number of important things to look for in search acquisitions, and at the top of our list always is quality of revenue, by which we, like you, mean recurring revenue. I wouldn't have thought that would be the case at summer camps. I would've thought that a child might go for three or four years and then disappear, so that your starting recurring revenue would just be lower than you normally see, or if it's a multi-generational thing, the next child in the family appears every twenty-five years like a cicada coming out of the ground. Could you speak a little bit more to the recurring revenue that one would expect to see in a summer camp?

Connor McCarthy:

At the high end, a summer camp business might have 85% to 90% recurring revenue.

Royce Yudkoff:

Oh wow, that's much higher than I would've imagined.

Connor McCarthy:

And that's because these camps, you know, they run kids from six to sixteen years old, if there's a good progression of programming. So, that's the high end and that includes kids who age out. That changes based off the length of the program. So, for a one-week program, you're going to have lower retention rate than you would for necessarily an eight-week program, where parents are kind of treating it like a boarding school that they're going to send their kid to.

Royce Yudkoff:

Okay. I didn't appreciate that, possibly because when I was sent to summer camp, I spent much of the time weeping and begging to be sent home. I wasn't thinking in terms of overall recurrence rates at the time. I was thinking of escape routes.

Caroline Matthews:

We've been there and, actually, I think my parents still have letters. And then writing letters later in the week saying, "How dare you make me come home?", you know?

Royce Yudkoff:

Yeah. Well, there's that too.

Connor McCarthy:

Royce, I think that gets to a question that you asked about, the difference between a B2C business and a B2B business in the search space. And one of the reasons that we grew more comfortable with this as a B2C business is because it did have a much higher degree of revenue predictability. It's built on trust and safety, and it's an investment that families make that they're considering for multiple years in advance for all of their children. And it's not even an investment like a durable asset, like a car or a pool. This is their child that they're talking about, and so our core product, at the end of the day, it's always going to be trust and safety and the family relationships that we have.

Royce Yudkoff:

Well, that's a great underpinning to recurring revenue, where the criticality of doing the service right is paramount.

Rick Ruback:

That really distinguishes your programs from what I think about as the one-off programs, the winter camping programs, Outward Bound programs. Those kinds of programs seem to be like a one-and-done thing. People don't do them over and over again. How young do you take the children?

Caroline Matthews:

Our youngest campers are six years old.

Rick Ruback:

Okay. Six years old, and then they stay until they're high school age or beyond?

Caroline Matthews:

Through sixteen, and so part of that exercise is us figuring out, “Okay, how do we make sure that the fourteen through sixteen year olds are still as excited about the experience?” They feel like there's something they're unlocking every year to really enhance their time at camp, while also still sort of maintaining their commitment and love of sort of that space, that place. Rick, to your point, it could be that they are at residential camp for the first five years and then they decide to do one of our trip/travel programs, which is you go offsite and then you come back, to kind of enhance that experience. It feels like there's a little bit of newness to it as you get older.

Rick Ruback:

And that's something you work hard in your marketing and management, to try to evolve the program so that you can keep that retention or recurrence rate. I mean, they're not really recurring customers in the sense that there's not really high switching costs, but they are very strong repeating customers, which is just as good. Right?

Caroline Matthews:

Exactly.

Connor McCarthy:

That's right. And Caroline mentioned our trip/travel program. We're investing a lot in progression of programming and retention and communication with parents about the importance and the value of continuing to invest in their kid, sending their kid to summer camp. And in our trip/travel program, one of our considerations is that this product really works for a lot of young adults, and it works for spouses, and it works for single people. One of the areas that we're considering evolving into and have just started actively working on it is considering the family and not the camper as the customer. And how do we begin to offer this product that we already have? How do we expand upward, from an age demographic standpoint? We started that last year for the first time in offering a mother-daughter program to Olympic National Park with our campers, which was a huge success. And we're offering it again this year and we're growing it, and we are also doing a multi-generational program at one of our summer camps this year, based off the learnings from that mother-daughter program. So, part of what we're thinking about is, “How do we expand the customer lifetime that we have by continuing to offer really great products?”

Caroline Matthews:

Because at the end of the day, when we talk about having experiences for kids, it's really serving families.

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Rick Ruback:

So, Royce, this is another seasonal business. It seems like they're all around us these days.

Royce Yudkoff:

We keep running into them and you and I always have reservations about seasonal businesses. They're hard to run.

Rick Ruback:

And this is perhaps the most seasonal of a seasonal business. I mean, how do you run a summer camp in the winter? Really?

Royce Yudkoff:

The thing about it, Rick, I don't know if you reacted this way, but I was struck that Caroline and Connor seemed less frantic about the in-season, out-of-season operations of this business. The other CEOs we've talked to, when we drew them onto this topic, it was almost like they had a little bit of post-traumatic stress disorder. But Connor and Caroline, the business seemed to operate more smoothly than most seasonal businesses do. Did you feel that way as you listened to them?

Rick Ruback:

I did feel that way and what I think is remarkable about this business that I did not know is that parents commit to camp well before the summer months. I sort of imagine you made your camp decisions after ski season. You know, May comes around, the snow's melted and there's mud on the road, and you say, “Ah, what are we going to do with this kid? Let's send him to camp. Let's send her to camp.” And I guess what I learned is that people actually make the decision on camps at the beginning of the school year, so that they have much more visibility on future revenue than I would have expected. The other thing that I think is interesting is this mix between seasonal employees and seasonal customers. They're doing both and my guess is that they're able to control their variable costs in a way, for example, where Robin Kovitz couldn't because she has to order all her baskets and retain her labor long before she knows what her orders are.

Royce Yudkoff:

Right, whereas these two can do a perfect match between demand and supply because of that lead time on orders.

Rick Ruback:

The lead time on orders and it's probably the case that they get commitments from employees months ahead of time.

Royce Yudkoff:

I think your point is really important, that Robin Kovitz has dozens of gift basket SKUs and in the weeks before fourth quarter, she's getting an entirely new, unknown mix of orders, in amount and in variation, and she has to accommodate that. These people are selling one product which is, you know, X weeks in a summer camp, and they nail down supply and demand well in advance. The other thing that's different but along these same lines is if we think about Jackie Kopcho and her pool service business, of course, she knows how many pools she serves but she doesn't know when they break and, you know, when an emergency service has to be brought in. And that goes on all summer and then goes to basically zero. They don't have that problem in this summer camp business. Three hundred campers show up, they're there for X weeks, and then they go away.

Rick Ruback:

Right, I wouldn't have thought it but it is a better seasonal business.

Royce Yudkoff:

And now, let’s go back to our conversation.

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Rick Ruback:

One of the things about your model that I find really interesting is the real estate piece. Typically, when we talk with our students, we say, "If you're buying a business, you don't want to use your capital on real estate. You want to use your capital to buy the operating business and then negotiate a lease with the seller or the owner of the building that the business happens to be in, but under only very rare circumstances do you want to go ahead and buy the real estate." And those rare circumstances are where the real estate is really integrated into the business in a way that would be impossible to move it. So, is that how you think about the real estate or do you think about the real estate as like a separate asset that has huge value? Like, people are thinking about marinas because the operating business often isn't so great but the waterfront property is terrific. So, how do you think about this?

Connor McCarthy:

We think about the real estate as part of the product. It is a core part of the business itself. It doesn't have stand-alone value. And when we speak to sellers, sometimes they say, "Well, the real estate's been appraised at $10 million." And we say, "That's great, but it's been appraised at $10 million for residential sale, if you're going to chop it up into a bunch of lots. It's not been appraised at $10 million if it's going to be used as a summer camp." When we look at summer camps and when we consider the purchase price that we're willing and able to pay, it is based off the operating business itself, and that's how we've purchased our businesses to-date. The upside of the real estate is that it does offer attractive financing terms. So, we have twenty-year mortgages, which is great because that means that we get to hold onto more of our cash at the end of the day, that we can reinvest in the business, than if we were to take a five-year term loan. We also generally have lower rates than what you would see from a senior lender in a term loan.

Rick Ruback:

And I suspect no covenants. Is that right?

Connor McCarthy:

They're very, very light covenants. We've got a great bank.

Royce Yudkoff:

I have a question for you on acquiring summer camps. You know, it's almost always a very personal discussion with sellers when they sell their business. They're first-time sellers, they're typically founders, and so part of it is an economic decision, but part of it is a life decision for them. I could imagine that summer camps are the extreme form of that because the founding families’ lives are so interwoven in these camps and maybe they've extended across multiple generations. Tell us a little bit about what it's like to deal with the prospective seller of a summer camp.

Caroline Matthews:

It's definitely a very emotional process. There are moments throughout the sale process where the seller is having more and more new revelations about sort of what the experience will be like actually to close and finalize the sale. Part of that is getting their family on board. I mean, we've talked to some owners who say, "My mother and father are still alive. They used to run camp. I have to wait until they die before I sell camp because I can't face them and I can't really let them down in that way." We've had others who've had their children sign NDAs because they felt like they needed to make sure they were being really confidential and very sort of discreet about the sale process, because it's not only within their own family, but the family relationships they've developed with their customers. There's definitely that added element.

Connor McCarthy:

Or sellers not even tell their children until after the deal is closed, for the same reason.

Caroline Matthews:

It's not only the absolute amount of time commitment, love, and passion that they've poured into these businesses and that maybe their parents, their grandparents, even did too. It's also, there's a physical place, right? So, they really associate their life with this physical place they're about to hand over. We always talk about camp not just being a community, but it's also really an actual very real place. And I think that part also makes it really challenging for sellers, so we are really quick during the sale process to really ask those questions around, "Are you really serious about wanting to sell? Have you talked to your family about it? Are you worried about talking to your family about it?" We ask those questions early on in the process to see whether the owner really is looking to sell. We’ve learned that if you don't ask those soon enough, you realize that actually, emotionally, they're just not there yet, and they might not get there for a couple of years.

Connor McCarthy:

On more than one occasion, we've been brought into a family meeting and asked to…

Caroline Matthews:

…mediate.

Connor McCarthy:

Mediate, and convince some members of the family to sell and not others. And very quickly we're like, "This is not our job."

Caroline Matthews:

After playing that role once, we realized this is not our strength. Our strength is not family mediation.

Royce Yudkoff:

It's complicated. You know, Rick has made the observation a number of times to searchers that when they are trying to buy a company which has more than one owner, several partners, it just creates an order of magnitude more challenge in the sale, because everyone has their own concerns and asks. Now that you explain this, I can see that a family might be all over the place on parting with a heritage asset like this. But I could also imagine that once you've bought several summer camps, it gives you a tremendous advantage as a preferred buyer because you have reference power from prior owners that you've honored their legacy.

Connor McCarthy:

You know, it's immensely helpful. I think our first two years, we were assertive in building relationships and in sourcing potential acquisitions that fit our model. Now, almost all of the deal flow is inbound, which is really great. One of the reasons that we are able to have this amount of inbound deal flow is also because we have committed, "We're not going to touch your traditions. We're not going to touch your cultures. We're not here to change your legacy. We only buy businesses that we think are really wonderful businesses. We want them to be enduringly profitable in the future. We want to grow them and expand your legacy." And we've held true to that and I think, our first couple of years, there was some concern that we were going to do what is typical in our industry of husband-wife buyers and change the brand, fire the entire team, start everything from scratch.

Caroline Matthews:

Put our name on the dining hall.

Connor McCarthy:

But we never had any intention of doing that and we didn't see the upside of it because we were only buying great organizations to begin with.

Rick Ruback:

So, how do you increase value when you're not changing anything?

Connor McCarthy:

Good question. The concept of not changing anything is not necessarily what we've done. I think from what a family sees and experiences, in terms of the product and the program, it probably feels the same. You're going to have the same type of horseback riding, you're going to have the same type of whitewater rafting.

Rick Ruback:

Same horse, same river.

Connor McCarthy:

Right, but we have invested a significant amount in hiring and training our staff. We have, almost across the board, higher counselor-to-camper ratios than we did in the past. We've certainly invested a significant amount in our facilities and have upgraded facilities, but both the brand feel and restoring a sense of pride into one of our camps and building entirely new programming infrastructure in other places. And I think one of the areas that we've done the best in is in communication with parents. We have one person on every team whose entire job is strictly to know their campers deeply and to know the families deeply. And as new parents ourselves, who are sourcing daycares to send our child to, it's very clear to us the difference between a high touch, highly responsive childcare operation and one that is strictly in it to enroll new kids and treat kids kind of as a number. And so we have really pushed that mindset down, that this is a high-touch program and communication really matters.

Caroline Matthews:

We've really focused on enhancing the quality of the experience and have also focused on functionalizing our team, which has been a real sort of cultural transformation over the last couple of years. So, we do have a dedicated person focusing on sales and enrollment. We do have a dedicated person focusing on staffing, which has allowed us to grow these businesses individually and then reinvest in them.

Rick Ruback:

What I'm hearing is more professional management.

Caroline Matthews:

Exactly. I mean, when you two are asking, “How did investors respond to us sharing with them that we wanted to focus on this space?” And them sort of wondering, "Okay, this is out of our fairway or this is a little bit unusual for search," we made some parallels to HVAC, because we were like, "Okay, we've got to speak in some sort of similar language." And really, it is individually run, family-operated, small businesses that have, you know, one or two people doing everything. We see that in the camp space too, and so it was really further functionalizing, further professionalizing, investing in systems and processes, rolling those out, getting them adopted, so we could really then focus on growing the camps individually.

Connor McCarthy:

To give some color to this, our first year was really about like, “How do we keep the lights on?”

Rick Ruback:

It is for everybody.

Connor McCarthy:

Yeah, and thank God we did, we survived, but these companies did not have bookkeeping systems, they didn't have payroll in place, they didn't have insurance, all the basic G&A stuff. The next year was really focused on, “How do we build to scale? So, how do we acquire enough so we have a platform-sized asset?” And then this last year, we've really been focused on building out business operations infrastructure. Our frontline people managers, for the most part, had never held one-on-ones with their teams before, and so we went through a process of, "This is what good management looks like." Not a single one of them had managed to a budget before, so we went through really intensive training on making strategic decisions about money trade-offs and, “How do you invest money in the right way?” None of them had operated to real performance metrics before, so we introduced them to different concepts around retention rate, which they all knew conceptually but we went through the actual importance and the mechanics of it, and how it made their life easier and better. We introduced more concepts around value-based pricing, tons of customer and camper and family feedback, just to understand, “What products and programs do they want introduced?” So, on the note of professionalization, we've created a significant amount of structure internally in the back office. Now they all have a CRM. I think professionalization has been a core part of our focus, and we've really, really focused on it this last year, in particular.

Rick Ruback:

I don't know how long you imagine holding this asset. I know you're just in early days of acquisitions but suppose you hold it for twenty-five years, a long hold. How much of your gain do you think is going to be attributed by the increased profitability you get from professionalization and better management, generally? And, I guess the second big category would be, because you've combined and you've gotten really good scale on these assets, some multiple expansion. Are you thinking both? How are you thinking about it?

Connor McCarthy:

I think largely on the financing side, and a big part of our strategy here is to acquire enough assets or open enough new locations so we can fund any new acquisitions strictly through cash flow and debt. It's not just multiple expansion. It's also what the sources of cash are that are funding any future growth. We're not there yet, but we are on the path to getting there pretty quickly. What that also allows us to do is to build a real back-office platform that is strictly focused on opening new locations, de novo, in new cities, or opening new programs and products in new countries, particularly on the adventure side.

Rick Ruback:

Fascinating.

Royce Yudkoff:

Oh, that's interesting. You mean, taking a camp brand and then extending it to other products?

Connor McCarthy:

Yeah, yeah, but still in the outdoor recreation space.

Royce Yudkoff:

Of course. Yeah, that's a way you could sort of take a camp that might be physically limited in the number of campers it can take and expand that.

Connor McCarthy:

A way to think about it is, we have a couple thousand campers out of the DC area, and we have this amazing trip/travel program that's really for teens. So, how do we start offering trip/travel programming for those campers?

Caroline Matthews:

So, expanding our customer journey with our existing customer base but also having programs to be able to open up new segments.

Rick Ruback:

So, take them skiing during winter break?

Connor McCarthy:

Yeah, I think Caroline was looking at some spreadsheet earlier today where that was on it.

Royce Yudkoff:

Two questions I have about human relationships in this business. One is, are there key person issues frequently, when you're looking at a prospective camp for acquisition? I know that sometimes the camp head is a big personality to the children and to the parents. I don't know that that's regularly the case. Is that sort of thing an issue when you're buying a camp?

Caroline Matthews:

We definitely look at who's sitting in the camp director seat and how they're growing in that role, whether they want to continue to stay on post-acquisition with us, and also, to Connor's point, whether they've thought about their own succession planning. You have some camp directors who are at every campfire, they're leading the cheers. There's the cult of personality around them. Others are much more sort of behind the scenes, focused on the staffing elements, the less front-facing elements of camp. So, we definitely do think about that, especially the ones who've really developed the relationships with parents, to make sure that they have continued confidence to send their child to camp, even if that individual decides to leave. So, it's part of our conversation and consideration during the sale process, and then we really see it to be our responsibility to think about how to build out their succession plan, not because they might not want to stay on with us post-acquisition, but at some point they want to retire. We've got to figure out, "Okay, who's our next-in-line to stand in behind them?" We see that not only for the health of the business but also important to professional development for the teams we are building.

Royce Yudkoff:

Thank you. Here's my other question on human relationships. I'd like to come back to a topic we touched on at the very beginning, which is the fact that you're running this business together as partners and you're married. I'm sure you know many successful searchers who are in partnered searches that are not married, so the partner part is not uncommon. I suspect this will be of interest to a lot of our listeners, many of whom have some thoughts about, "Should I acquire a business with my spouse?" And maybe you could just speak to what the experience has been like. I'll just say, Rick and I have had a very successful partnership – teaching, writing, podcasting – but, you know, the difference is that when a day of teaching is done, we shake hands and each go back to our own homes. I don't turn to Rick and say, "So Rick, what are we going to have for dinner tonight?"

Rick Ruback:

"What are we having for dinner?" Right. "What are we having for dinner? How many ice cubes do you want in your scotch tonight, Royce?" I would like you to answer Royce's question by talking through a conflict. No two humans can agree on everything. There has to have been a business thing in the last few months that you've had a conflict over. Did you leave it in the office? Did it come home?

Connor McCarthy:

One of the very first things that we did was employ a RACY chart. RACY is an acronym for responsible, accountable, consulted, and informed, and we lined it up for every single function and then like every single little action item you could imagine in our company. That prevented a significant amount of conflicts because it was very clear, "This is in your scope and you're just informing me and, even if I disagree with you, it your decision, it's not mine."

Rick Ruback:

So you stay in your lane.

Connor McCarthy:

We stay in our lane but, you know, I would say even from Day One when we were doing the search, we had very clear lanes. Caroline managed all sourcing and outreach, anything before an NDA. I managed all the finance and legal, anything after an NDA.

Caroline Matthews:

And then we came back together for the sale.

Rick Ruback:

Do you manage your private lives that way too?

Caroline Matthews:

We have an alarming amount of spreadsheets and calendars. I often say this, I feel so grateful that we met in business school because we have sort of a shared language and shared framework for decision making and executing, that it's been super helpful. It probably seems very boring. And I was laughing and thinking about, you know, the biggest challenge with this RACY matrix, where we really make sure that we have individual lanes, is almost every week Connor and I have a disagreement whether we need to revisit RACY.

Connor McCarthy:

Because the business is changing so fast.

Caroline Matthews:

Because the business is growing quickly and every week it feels a little bit different, and so the disagreement would be, "Okay, are we spending too much time reviewing this matrix and not just executing?"

Connor McCarthy:

I guess the point is like we're not fighting over the specific issues. If there are arguments, it's like an argument over, “What's the framework or the process for solving this issue?” Not the outcome of the issue itself.

Rick Ruback:

I really admire the ability to stay in lanes. I, as Royce knows, am absolutely incapable of doing that. Royce, on the other hand, is a real pro at that. Maybe it's because my background is as an academic my whole life, and so we don't have any lanes. And Royce had a private equity background, where I suspect there are real lanes, but I'm terrible at staying in lanes. You guys have professionalized lane-staying. Maybe if I had gone to Stanford instead of Harvard, I would learn about lanes. I don't know. It's just drivers in Massachusetts never stay in their lanes. Maybe they do in California.

Caroline Matthews:

We often get asked, "What is it like to work with your spouse?" And I do believe that if you are doing a search, even if you're not searching with a spouse, it becomes an all-consuming family affair.

Connor McCarthy:

Totally.

Caroline Matthews:

And I think that's entrepreneurship. You know, you're going home and you're talking to your spouse about, "Gosh, I emailed 1,000 people today and I did not get one response," or, "I had a really challenging, disappointing conversation with a seller today, and I think the deal's not going to go through," or, "I had a great day, it's going to go through." And I think regardless of whether you're sitting next to each other in the same office, I think it is a total, like an all-consuming family experience, which is great and also challenging, regardless of whether it's official or not.

Connor McCarthy:

We have two cell phones. We have our personal phone and our work phone, and that way like we know if we're calling each other on the work phone, it's a work conversation, personal phone, it's a personal conversation.

Rick Ruback:

Interesting.

Connor McCarthy:

We walk to work every day. It's a twenty minute walk. There's a street halfway. It's kind of like the The Lion, The Witch, And The Wardrobe cabinet. We're not allowed to talk about work on one side. We can start talking about work on the other side.

Rick Ruback:

Oh, so there are real boundaries.

Caroline Matthews:

We also have friends. I want to be clear. We spend time with other people, besides the two of us. We have friends we probably vent with and say, "Gosh, it was a rough week at work and Connor did this and it bugged me," or vice versa. But we do have other outlets.

Connor McCarthy:

But there is a flip side of working with Caroline. Working with my spouse has meant that we have perfect alignment in all aspects of our life. If we have time off, we can both take time off together. If we're both in an intense work mode, we are super understanding of what's going on with the other person, in a way that it would be really difficult to understand if you weren't actually in the office living and breathing it with your spouse.

Rick Ruback:

So cool and so interesting. I think it is just so fascinating how everybody finds their own ways and does it so creatively. It's terrific. What you two have accomplished is really outstanding. We are out of time but before we leave, we always ask our guests if they have any questions for us.

Connor McCarthy:

It's maybe not ETA-specific but there are more and more conversations, and one of you brought this up earlier, about long-term horizons and I'm just curious, why is there this interest, and do you two have this interest? There are institutional investors and individual investors out there who are more interested in long-term horizons, and they have vehicles for it. And I'm curious how you two think about it and, you know, what's an attractive long-term style investment to you?

Rick Ruback:

That's a great question, and I bet Royce and I have similar but maybe a little different views on this. Let's go, Royce.

Royce Yudkoff:

I think two things. One is, most of the investors, either directly in search or through funds in search, are taxpaying individuals, and taxpaying individuals are responsive to long-term holds from a tax perspective, because when they're invested in a good business, they would rather keep that than sell it, pay taxes, do all the work and risk of redeploying that capital. And in this way, they're different from many of the clients in private equity funds or pension funds or sovereign wealth funds, or other companies that don't really think about taxation as part of the transaction. But that said, my long experience in PE and my lengthy experience together with Rick in ETA, is that almost always, it's the entrepreneur who prompts a sale. And the reason the entrepreneurs prompt the sale is because they get a number of years in, they're looking at their personal balance sheets, they are wildly weighted to this one enterprise, and the entrepreneurs feel like they need to sort of resort their capital, and they're different business people than they were eight, ten, twelve years earlier, when they were relatively fresh out of business school. Now they're truly seasoned CEOs and they, in some ways, want to do a different deal that reflects that level of experience and capability. And so the triggers to sales have always been the entrepreneurs, and so I find it interesting and strange that the people who are often talking up the benefits of a long-term hold are the entrepreneurs. Rick, I don't know what you'd add to that or if you feel differently on either of those points that I raised.

Rick Ruback:

Well, let me build on both of them. On the last point that Royce raised, one of the problems about being married to your business partner is your family diversification is pretty low. And I could imagine, if you had searched for different companies and, you know, Caroline bought one and, Connor, you bought another, and they weren't perfectly correlated, you would have ups and downs, as every business does, but your family portfolio would be safer than it is today, with all of your assets in one place. So, I think that, in my mind, might trigger an earlier sale. I would say, on the flip side of that, and I think this is true for searchers and investors, that it's really hard to find businesses that are a good fit, and it's really hard to find investors who are interested in a business as it's actually run, not as it was on paper or as a proposal, and are effective at managing the business and like working with the CEOs. That's kind of a magical combination and when that combination happens, I think there's a sense of trust that gets built through time, and maybe that lowers the pressure of sale. So, if you're in a world where you have all that fit right, you can do things to mitigate some of the diversification risk. You can take some money off the table, you can recapitalize the business. You can bring in outside equity investors at a different valuation that might give you some liquidity along the way. There's lots of things you can do if you still, ten years from now, are still thrilled with running the business, it's become part of you and your life and your family, and you want to keep it up.

Connor McCarthy:

You know, we've seen the studies that indicate that oftentimes the second owner group sees an even greater return than the first owner group, and my assumption was that that was always what was driving this interest from investors. And I'm sure that that's part of it as well, but interesting responses from both of you on that. Thank you.

Rick Ruback:

You know, one of the things, Connor, that's really hard is that if you look in the ten or twelve years since search has become very popular, we have one pass at the economy, one pass of demographics, and we take COVID out as being two years of real weirdness maybe, and then look at the remaining decade and say, "Wow, that was all pretty good." And a bunch of businesses in the small space did really well, sold, and then did even better on the second round. But look, in the choice between luck and skill, I'll take both – but they were really lucky. The timing was excellent. They had the wisdom to buy at that point, so I'm not diminishing those accomplishments. I'm just saying that I think it's really hard to draw statistical inferences.

Royce Yudkoff:

That's a really interesting point you're making, Rick. You know, now that I'm listening to you say this again, because I've heard you say it a few times, I think back to my prior experience in private equity, which was about a twenty-five year span, and I would've characterized the sort of value creation in most businesses as they go up for a while, they flat-line for a while as management tries to either invest for or figure out the next path upward, and then they go up for a while and then they go flat for a while. And of course, part of the art of being an entrepreneur or investor is to sort of leave as you're approaching the end of the vertical rise and not stick around for the flat part of it. And if you had asked me to reflect on that period, that would've been my description, not that if you keep hanging on, you keep doing better, so it's really consistent with what you said, which is that maybe if you look over a longer stretch, you see that it's not all the time or most of the time that the business just keeps going up in value.

Rick Ruback:

Right, because the seller might fear this flattening, but the buyer does due diligence, and if the buyer thinks the flattening is about to happen, that's going to be reflected in the price.

Connor McCarthy:

So, Rick, you're saying that the moment in time was, I imagine multiple factors, but largely due to interest rates, probably some due to…

Caroline Matthews:

…industry advancements.

Connor McCarthy:

In tech and in SaaS, in particular.

Rick Ruback:

And really the changing demographics of our country, right? The notion of what is the typical path for a young family has really changed. People have really just changed a lot over my seventy years of life. So, my guess is that all those things work together. Low interest rates, pretty vibrant economy, a period of relative peace, with some big exceptions, obviously, all those things. Who knows? Look, you don't have to look at small firms. You can just plot the S&P. Anyway, this was so much fun.

Caroline Matthews:

Thank you for having us. This was great.

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Royce Yudkoff:

Rick, we see many search ideas that are following established paths, like buying HVAC businesses or vet businesses. And we see a lot of them where the searcher has, through a very thorough search, happenstance-ically come upon a really interesting niche business that no one knew about. But this is in a rare category where people came up with a thesis that feels like a genuinely new idea - summer camps!

Rick Ruback:

Yeah, such a new idea and what I thought was very special about the conversation is when we probed them on that, they use the language that we're really comfortable with. And you've made this point in other podcasts, that we don't look so much at what the business actually does, the service or product it provides, but we look beyond that to say, “Is it enduringly profitable? Does it have high revenue quality? What's the churn rate?” And they used almost the same language - enduringly profitable businesses, low churn, high customer retention. So, they too did what you like to do, which is went beyond the name or the service and into the economic characteristics of the business. And when they did that, it didn't seem like a strange business at all.

Royce Yudkoff:

No, it seemed very familiar to us, didn't it?

Rick Ruback:

It really did, except for the real estate. I don't know what proportion of the purchase price is due to the real estate versus the operating business and I think it's very hard to tell in practice when you have a business where the real estate is so closely integrated.

Royce Yudkoff:

Right. Yeah, you can't run the business without the real estate.

Rick Ruback:

You can't run the business without the real estate so it's like a wool and mutton problem. I can't tell how much of the animal is valued for its wool or its meat. I can't tell that. But it is this big operating leverage thing that is very different.

Royce Yudkoff:

One thing about their idea that I really like – and this is a feature that I rarely see in businesses, although it's often talked about – is I think they've created a first mover advantage. And I think they've created it because now that they have four or five camps that they've acquired, they have happy sellers. And this is clearly such a deeply personal decision for a family to part with a summer camp, that being the only one who can answer, “Yes, we've bought multiple summer camps. Here are the names of the sellers. Please talk to them and ask them, ‘Did Caroline and Connor do everything they promised or not?’” I think that is a gigantic purchasing advantage over someone coming new into this industry and trying to follow them.

Rick Ruback:

I think that's right. I think a great reputation is a fabulous asset in sourcing. And what I think is often underestimated is that if you're the buyer of choice, the world is just a happier place for you. You get the first look at every available target. You can't ask for more than that.

Royce Yudkoff:

That’s right. I agree. What a fascinating conversation with Connor and Caroline, Rick. I enjoyed it. And next week, we're speaking with Kent Weaver. He's one of the long-time investors in search. He's seen so many things. I know you and I always enjoy speaking to Kent and we'll have that privilege of sharing him with our audience in our next episode.

Rick Ruback:

Yeah, it’s always so much fun to talk to him. It'll be a great conversation. Royce, do you remember last season?

Royce Yudkoff:

I loved last season and I loved best our final episode.

Rick Ruback:

That’s right, and we’re going to do it again. We’re going to take questions from our listeners once again…

Royce Yudkoff:

…and then you and I are going to answer the questions they’re sending in.

Rick Ruback:

We’re going to try anyway. The best way for them to get the questions to us…

Royce Yudkoff:

…rickandroyce, as if it’s one word, at hbs dot edu.

Rick Ruback:

Because we’re really one team.

Royce Yudkoff:

Almost one person.

Rick Ruback:

Hardly of one mind on most things but that’s what makes it fun.

Royce Yudkoff:

You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Craig McDonald is our audio engineer. If you have any questions, comments, thoughts, feel free to just e-mail us, rickandroyce, all one word, at hbs dot edu.

Royce Yudkoff:

We’ll be back next week with another episode of Think Big, Buy Small.