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:

In today's episode, Rick and I host Jeff Homer, who is the CEO of Ensemble Performing Arts. Jeff, we're just delighted to have you here and follow your journey through search and building up a sizable business.

Rick Ruback:

I’m looking forward to our conversation.

Jeff Homer:

Likewise. Thanks for having me.

Royce Yudkoff:

Maybe a good place to start, Jeff, is by asking if you would just tell us a little bit about where you grew up, what your family was like, your own family now, and a little bit about your professional career leading up to Ensemble?

Jeff Homer:

Sure. I grew up in Calgary, Canada, oldest of three kids. My dad was a lawyer who struck out on his own and my mom was a special education teacher who, early in my life, ended up tutoring for herself. So, I was the child of two professional services entrepreneurs. I moved to the United States to attend undergrad. I was Harvard Class of '13. I studied economics and, out of school, I went and worked for Bain Capital's credit fund, and then I spent a couple of years in New York City, working for Reservoir Capital, which is a $5 billion AUM middle market private equity shop. I liked working there. I hated living in New York City. I found my way out of New York by way of a family office opportunity in Denver, Colorado, which is where I live now. And it was while I was at the family office in Denver that I started my ETA journey. I actually did both for a significant period of time, which I know you try to dissuade listeners from trying to do, but I had some success with it. I'm not married, and that's given me a lot of time to invest in building the business. I've spent a lot of the last six years traveling four out of five days. I think that might've been a difficult thing to do if my family situation had been otherwise.

Rick Ruback:

Do you have a dog?

Jeff Homer:

I do not. It would be a really unfortunate life for the dog. They'd spend a lot of time at a boarding arrangement.

Rick Ruback:

I see, okay. Jeff, one of the things I found really interesting about your journey is, as I learned about your business, what I learned was that this began as a passion project for you. That is, you really, really love music. It's really interesting for Royce and I because we have a few of our classes in our MBA program where that is the topic of discussion – do you really need to love your business or is it even good to love your business? So, tell us a little bit about that piece.

Jeff Homer:

First of all, I do really value the fact that what I wake up every day to further is music and dance education for kids. I think it's something that has value to society in a way that I'm not sure that my prior professional financial services occupations advanced, you know, society meaningfully. I do think that every business is more interesting once you get under the hood than it appears from the outside. And one of my favorite things about the investing profession was exactly that, picking up a new business every day, trying to understand how it works, how it makes money. But I really do think that there is value in loving what you do and being able to participate. You know, I think so many times searchers end up in services businesses where they're not the service provider. You know, I do play in some of our performance opportunities and adult recitals and that sort of thing, and it's fun to be able to participate in the business in that way. And it gave me a leg up in being relatable to the staff and teachers of the schools that we acquired in the early days. But the thing that is, I think, most unusual about my ETA journey is that it started as a side hustle, right? I had a day job working for a family office. It was a great seat and it was one I intended to hold for a long time. And the reason I thought a music school was an attractive purchase for me was that it was a nights and weekends business. It's an after-school program, so the business actually operated outside of market hours here in Colorado, and it really seemed like something I could do alongside a day job. I had come from the New York private equity world, where the balance expectations were such as they are, and in Denver I found myself with some time on my hands and apparently not enough hobbies. I thought the music school would be an opportunity to get some operating experience; to get out from behind the spreadsheet that I was sort of hidden behind in my, you know, public markets long-short equity role. I expected to make an attractive financial return on my time, but I also imagined really enjoying the time I would spend at the school.

Rick Ruback:

And what instruments do you play?

Jeff Homer:

I'm a pianist by background – and, to be clear, like not an exceptional one. I play at a high school level, but definitely passably. I've taken a couple of years of drum lessons but achieved much less progress on the instrument than might be evident. And I was also in my high school and college choirs.

Rick Ruback:

I find it intriguing that not only you but most of your senior leadership also has a real tie to music. You have a professional drummer in your leadership team. You have lots of people that have passion for music. Is that part of what you recruit for or do they find you?

Jeff Homer:

We've absolutely selected for it. And one of the reasons why I think the performing arts were not overrun with searchers, I think there's a presumption that the performing arts are kind of a nonprofit space and, as a result, you know, it doesn't attract the business world or the finance-minded in quite the same way. Your local, you know, civic orchestra requires donations to continue to exist. It's not a going concern on the basis of its own revenue. These music schools, I think they're great businesses and sort of underappreciated because of that presumption that we and I made, you know, when I first thought about it. But I think absolutely it attracts not someone that's looking to get really rich and to earn a top dollar compensation, but someone that's passionate about the fact that we provide a valuable service to students and children.

Rick Ruback:

And could you give us an example where there's a decision that you made that you perhaps would not have made had you not had the passion for your business?

Jeff Homer:

That's a really interesting question. The most important moment of any ETA journey, I think, is the transition and introducing yourself to a new staff as the owner and getting buy-in for your leadership and your vision for the business. And I think the fact that I was able to say to a teacher, "I'm not a professional and I can't do what you do, but I understand the value of the product or service you're delivering. I've been the student in this classroom and music has enhanced my life.” Absent that, I would've been this Harvard private equity guy coming into an arts business and I think there would've been a lot of suspicion – and there was a base level of suspicion around that.

Rick Ruback:

Because you were actually a Harvard-trained private equity guy when you went in there.

Jeff Homer:

Correct. And I think my ability to diffuse that is primarily driven by the fact that I could relate to, you know, these folks that have that background and at least sort of share my own experience with it.

Royce Yudkoff:

Jeff, I'd like to go back to the moment where you were working at this family office and you bought a music school as a side hustle. Were you thinking about finding a way to be an entrepreneur or was this just ignited by this specific side hustle in an area that kind of interested you, and you backed into being an entrepreneur?

Jeff Homer:

Yeah, so this is my second entrepreneurial venture. At the tail end of my time in New York, I worked really hard at trying to stand up a shared savings financing vehicle for energy efficiency projects, so like LED lighting retrofits and other things. I got really far down that path, including recruiting some technical co-founders and people that knew more about the operations of that than I did. I was going to be the finance guy on that platform. And I got the call for this family office gig that I thought was really interesting, and so I put a stake in it and I moved out to Colorado and I took the job instead. But I was really motivated by an entrepreneurial opportunity, and I feel this is common with many folks that choose ETA. I really wasn't a great employee. I didn't love working for other people. I was sort of consistently grating against management and leadership in a way that was, you know, maybe unbecoming of a twenty-something, early in one's career. And so I often spent a lot of time at my desk daydreaming about ways that I could own my time and bet on myself, you know, financially and otherwise. And, you know, ETA was much less well-publicized, and I think the two of you are responsible for much of the success of that message changing over the last six or seven years, where it's become so much more visible. But, you know, 2018 was sort of where I became aware of ETA as a concept. I was sort of thinking to myself, “Okay, so there are small businesses for sale. You can pay three, four, five times for most of them.” And the starting thesis that I had was very naive, but it was basically to say that I really think that there is less correlation between price and quality at this size of the market, where in the public markets, in large cap private equity, a good business trades for two to three times the multiple of a poor business. In lower markets, it's just not the case. I mean, maybe a great business trades for four times instead of three times, but the difference in price is not nearly as significant. And so my whole plan was to go out and start using the brokerage search channel to see a variety of different businesses that might be for sale and see if any piqued my interest intellectually, operationally, financially. One of the early opportunities I came across was a music school that was for sale. It just stood out to me right away.

Rick Ruback:

I just find this so intriguing. Would you have bought the music school if you anticipated not making any money out of the transaction?

Jeff Homer:

I put up six figures of my own money to buy the school. I had to have some expectation of return.

Royce Yudkoff:

Tell Rick and me what it is about the music school business that makes it a high-quality business, because that's clearly where you're pointing us.

Jeff Homer:

So, when I was a kid I took piano lessons and I had the same piano teacher for eleven years. So, right away I'm thinking, “Hey, this is a really sticky, long-lived customer relationship that's driven by a passionate student and their personal connection to a teacher that serves as their guide over their journey through music.” And certainly not everyone sticks with it for a decade but, you know, it didn't take a lot of digging to figure out that the average student life at the school was a couple of years. So, month-over-month retention for the business was 95% to 97%. These are high-value students. The customer lifetime value is high. The revenue relationship with the parents is a monthly auto debit, so you pay on the first of the month every month, so there's a recurring revenue element that's very present. Most of the challenge that the business has is related to the fact that the operator or founder is an immensely talented teacher, in most cases, but not someone that really cared about building a scalable business. And so the person who started the business was a service provider and got out of providing that service in order to administer the business but isn't especially good at administration. This first opportunity that I came across, it was largely a pen and paper business. You know, "Hey Rick, here's your schedule for the week. Please place a check mark next to each student you see. We'll use our index finger to count up the check marks that are on the page and we'll cut you a check at the end of the week." That was a lot of how the business was administered. And I'm thinking like, “There's got to be vertical SaaS software and scheduling and CRM and digital marketing” and all these opportunities that are present but, underlying all that, I thought the business model was really attractive for the reasons I mentioned.

Rick Ruback:

Primarily because you think it's sticky?

Jeff Homer:

And there's data to support that. It is a very sticky, highly recurring, high lifetime value relationship with the customer.

Rick Ruback:

Does the success of the student impact the stickiness? If they're playing chopsticks for seven years, they're unlikely to continue, right?

Jeff Homer:

Yeah. I think, as with anything – whether it's sport, whether it's music, whether it's dance – I think one of the things that fuels engagement is progress. Parents and kids want to see evidence of progress, and progress begets more progress because it's motivating to continue to sit down and practice because you can see yourself making progress. I didn't mention it in my background but I was a pretty competitive track and field athlete. What I liked about the sport was not the enjoyment of pushing myself to the physical limit. It was the sense of tangible progress that I was able to see as I got faster, as I progressed in the sport.

Royce Yudkoff:

Tell us a little bit about the journey of the company. You started with one music school in Denver, Colorado and you've built it up - would love to hear more about that.

Jeff Homer:

Sure. I bought the first school and my honest-to-goodness intention was that that would be a one of one, it would be a side project, it'd be something I did in the nights and weekends alongside my day job. Having gotten into the business, I learned two things. One, I really enjoyed being out in the field and in the operator seat. I enjoyed that interaction with the real world and getting out from behind the spreadsheet. And some of the improvements we deployed, in terms of, you know, the technology and the digital marketing elements, were actually really impactful in moving the business forward in a relatively short amount of time. And my conclusion from that was that there were probably many other schools out there that had this exact pattern of challenges, and that they were really great at serving students in the classroom and didn't do a very good job of building a business around that. And so having created this tech stack and solved this challenge once, it seemed intuitive to me that we could do that on a programmatic basis, that we could go out and acquire other studios and sort of put in place many of the same systems and processes we built for the first one. Only about four months later, which is a timeline that still sounds incredibly aggressive, in retrospect, I closed on a second acquisition, and it was in Las Vegas.

Royce Yudkoff:

Was this still a part-time gig for you?

Jeff Homer:

Yes, I kept my day job through five schools – I know that you don't advise that. I spent about a year owning an increasing number of schools with increasing levels of friction with my day job. And at a certain point I had to fess up to what I was doing.

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Royce Yudkoff:

Rick, Jeff's example is an interesting one for us. It's rare to see a part-time search work. And that's, of course, because searching is a time-consuming activity, and to have a shot at success, you need to source a lot of deals, you need to filter them, you need to talk to a lot of people. Most successful searchers say it's been a full-time job, and so we just think the odds are reduced by doing this nights and weekends. It also takes a very special kind of job to allow you to search on the side, the kind of job where you sort of have private spaces and private times to take phone calls from sellers or to leave your office and visit a seller. You really can't do that if you're in a job where a bunch of people are going to want to know where you are at any particular moment. Seems like Jeff cracked the code here for himself. What do you think?

Rick Ruback:

I also think the nature of his first couple acquisitions were really important. He's a musician. He understands this business, so the due diligence tasks were probably less daunting to him than it would be to you or I, who do not have that background. In addition, he self-financed it, so a lot of the work that normally goes into an acquisition probably was less for him. So, I can imagine that if you're buying a business that you know a lot about, that you're interested in, that is small and straightforward, it's a pretty easy business to buy on the side.

Royce Yudkoff:

That's a good distinction. I agree with that. That made this practical to do.

Rick Ruback:

Right. Whereas a broader search, where you're not sure if you're going to buy a landscaper or a physician's practice, it's much harder to do that part-time.

Royce Yudkoff:

Agreed.

Rick Ruback:

Let’s go back and see what our guest thinks about this issue.

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Jeff Homer:

The second acquisition was in Vegas, and it was out-of-state on purpose because it was a test of whether I could run one of these remotely and, you know, show up a couple of days a month. If that didn't work, the proof of concept would fail. Basically, that would be a negative test for this idea, “Is a roll-up possible in this vertical?” If we can't do it remotely, then it won’t work and we won't pursue it. So, I bought a small school in Las Vegas four months after the first one. I funded it both a hundred percent with equity and a hundred percent out of my own pocket, and it was a test to see whether this had legs. When it worked, I started to think a lot bigger about what was possible. I went out and raised typical self-funded equity from friends and co-workers. And I got a bank involved that was not using the SBA program because the velocity of transactions we were envisioning was going to be too high for the SBA. So, we got regular-way, commercial debt in place and with the existing schools as collateral, they were willing to lend us about two thirds of our purchase price on a go-forward basis. Then, you know, it sounds aggressive, but we went out and we bought a school a month for the next thirty-six months and ended 2022 with forty music schools under our ownership.

Royce Yudkoff:

Wow.

Rick Ruback:

Wow. Congratulations.

Royce Yudkoff:

Jeff, so I'm imagining that pretty quick after you bought that first school, you were thinking about, “This could be a roll-up.” You're moving so fast and you've referenced that you had a short stint in private equity.

Jeff Homer:

I found that I really liked it. I thought that the industry presented an attractive level of fragmentation and also returns to scale, where I felt that a larger platform would win in this space. Rick, I was recently listening to an episode from your back catalog where you were talking about roll-ups and whether there's value in merely aggregating…

Rick Ruback:

You're reading my mind right this very minute because you knew what my next question was going to be – like, I get the fragmentation, that's keeping the price low, but where's the gain from the roll-up?

Jeff Homer:

It's really that you're replacing an entrepreneur who, again, is wonderfully talented and is exactly the type of person you would want in the studio with your child, and you're replacing them with a national-scale back office that is actually good at the functions they're actually responsible for performing in the business, in terms of marketing being the biggest lever. The lifetime value, LTV, to customer acquisition cost, CAC – the LTV to CAC ratio in the business is very attractive and so are the incremental margins in the business. So, a music or dance school might have a four wall EBITDA margin of high teens, low twenties, but the gross margin in the business is over fifty. So, the incremental margin is really high and so adding to the student base is really accretive. And our ability to out-market a music teacher / dance teacher is a relatively low bar to step over, in terms of improving performance on a go-forward basis. And then finance and accounting and payroll and tax and compliance are just things that we're going to do dramatically better than a solo-preneur was going to be doing it. The contention I would make to you about why roll-ups in a lower market create value is that businesses exist on a continuum from jobs to purely passive financial assets, like shares of public companies. And there's a dividing line between things that are institutionally investable and things that are not. Lower market roll-ups, a lot of the value is just about moving things far enough along that continuum to where they become institutionally investable such that the supply-demand for the equity changes meaningfully. I believe that we do add a lot of value in integrating and bringing these things together and putting them in the background. But even if we did not, I think there would still be a lot of diversification benefit in terms of, at one school, you know, one key teacher or one key administrator, their departure would be a significant event for the business. In the context of owning forty schools, it's not. And so there is a diversification of risk and a reduction in, I think, what is a rational cost of capital for that small firm. I think it's rational that that does create value.

Rick Ruback:

I think that makes a lot of sense but let's dig into that a little bit more. So, the back office stuff makes perfect sense to me, the compliance stuff, the financing stuff. That is a mostly fixed cost task, and you can just amortize it over more and more students and schools, and that makes clear sense. But I wouldn't think that would be a big percentage of the cost structure, but maybe I'm wrong. The marketing piece is really intriguing. So, do you rebrand the schools when you buy them?

Jeff Homer:

We do not. And it's a really important part of our strategy. It's one that came to us accidentally because the first five schools we bought were not co-located, so we didn't change the names because there was no reason to. What we learned from that was two things. One, our sellers view that as being sort of tangible evidence of our preservation of their legacy. And that's, I think, one of the things small business owners care most about, is how the business and their contributions to it will be, you know, treated and preserved post-closing. We've really found that to be valuable. And it’s also not a consumer product in which bigger is perceived as being better. I think parents value the idea that this is a boutique, local service, and aren't looking for McMusic or McDance experiences. And so the illusion that this is still their beloved twenty-five years in the community local business is really valuable to us from a marketing perspective. And we can “Control, Find”, “Control, Replace” the name of the school in our phone script, in our digital marketing tactics, in bringing data to the table to target consumers and basically help with discovery. That’s really what we’re doing, is we believe that these are fantastic places to come and learn music or dance. We're just helping consumers find them over other options that they might have in those communities.

Rick Ruback:

OK, so what we do is we have marketing technology which is at-scale because we're rolling it out in different locations, but what we're not doing is rebranding. We're not trying to create a national brand name.

Jeff Homer:

Think of it sort of like we run a couple of different agencies inside of Ensemble that serve our schools. So, we run a marketing agency that is much better than the type of marketing agency a school would be able to afford on their own. We run a PEO – professional employer organization – that's much better than the PEO they'd be able to afford on their own. We're sort of productizing those shared services and rolling them out to the school. But part of the innovation, if you're willing to let me call it such, is actually spending any money on customer acquisition at all. Most of these schools are built on really strong word-of-mouth, and the most common marketing budget for a school pre-acquisition is zero. So, just getting to a level of understanding where we can have the thought process of the lifetime value of the customer is multiples of our customer acquisition cost, and therefore we should spend an unlimited amount of money on acquiring customers until that gap starts to get closer together. That thought process doesn't exist for, you know, many of the entrepreneurs that we're buying from, and so we're just able to improve capacity utilization in the school through that change.

Rick Ruback:

And are you changing what the teachers do in their studios when they're with the students?

Jeff Homer:

No, we think that diversity among our teacher population and methods is really beneficial to our students. So, one of the roles that the front desk of a music or dance schools plays is helping the student get to the right classroom environment for what their goals and what their personality traits are. And finding a really great match between a student and teacher, the likelihood of that is enhanced if the teachers are different from one another. There's more options available to the student if there's diversity there.

Rick Ruback:

You don't roll out a common curriculum?

Jeff Homer:

We have curricular options that are available but we don't mandate them.

Rick Ruback:

I see. Okay. So, pretty much what happens inside the studio is unchanged upon acquisition, but what happens is the back office changes and the marketing changes. Am I oversimplifying?

Jeff Homer:

No. My goal is that the student is blissfully unaware that there's a change of ownership that's taken place. So, they should walk in, they see the same sign on the door, they see the same person at the front desk, their lesson's with the same teacher and everything looks and feels the same to the consumer. But behind the scenes, we've done an extensive amount of consolidation and the staff feels like they work for Ensemble.

Rick Ruback:

Do the teachers feel like they work for Ensemble or do they feel like they still work for the local company?

Jeff Homer:

They get what I view as being the best of both. They get the local studio feel, but they get things like benefits that were not previously available to them as an employee of a small local business. We're offering things like a 401k to every employee, whether you work one hour or forty hours a week with us, which is not something that's common in the gig work paradigm that many of our teachers find themselves in. Most of our teachers don't work full-time. They do a couple of other things to make ends meet, and most of those things don't offer benefits. And so the fact that we offer health benefits, starting at thirty hours, and have the 401k, and are able to use our marketing muscle to fill their schedule and ensure that they make the most productive use of the time that they allocate to the school, in terms of serving students, those are the benefits that we offer from the Ensemble side. Then they get the wonderful local community that they have, you know, chosen to be part of for many years pre-acquisition, and hopefully many years post-acquisition as well.

Rick Ruback:

And they're getting to do what they love, which is play music, teach music, interact with young people and get them enthusiastic about the thing they're enthusiastic about. Whereas billing, not so much; chasing down bad debt, processing credit card payments, not as much fun as playing the trombone, really.

Jeff Homer:

Show up and do what you love. That's exactly our pitch.

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Rick Ruback:

Royce, one of the things I find so interesting about roll-ups, generally, is sometimes they roll up and build a national brand and other times they roll up and hide the national brand. And we've seen really good examples of both. We've seen, for example, Craig McCaw rolling up cellular service into McCaw Cellular, one of the greatest roll-ups of all time. He was very much trying to build a national footprint with a single brand because that was important, to have no roaming charges and the like. And then we've seen funeral home roll-ups that try very hard to keep that acquisition secret so that people imagine they're always dealing with their neighborhood funeral home, even though it's owned by a multi-billion-dollar international company. So, it's interesting. Why do you think some choose to brand and some choose not to brand?

Royce Yudkoff:

An essential dividing point is if the customer gets value from the fact that the company has locations all over the country. Craig McCaw – they're not only getting service in their home city but when they fly to Chicago, they're getting service again. Uniting that under one brand with one brand promise is really meaningful to the customer. In the funeral business, of course, that's not the case.

Rick Ruback:

You only die once, as they say.

Royce Yudkoff:

You only die once, exactly.

Rick Ruback:

You hope. You hope.

Royce Yudkoff:

So, one division is that. Is it obvious that the customer gets a benefit from the same brand promise everywhere or is it not? What's so interesting about your question is that when you go down the path of the customer doesn't derive benefit from that, you still see roll-up executors dividing on that issue. In other words, there are businesses that are intensely local and some are rebranded and some are not – and so we're still left with this question.

Rick Ruback:

Yeah, it's like I get that I want to roam on my cell phone service. I get that when I go to a restaurant that's franchise, that there's a consistent quality in the restaurant. But I don't get that if I'm going to go to my local veterinary practice in Boston that I care what the veterinary practice is like in Pittsburgh. Who owns that? Why would I care? If I associate the delivery of service with a particular veterinarian, then the national branding is neutral.

Royce Yudkoff:

Right.

Rick Ruback:

But I think what the branding is trying to do is transfer the customer from the individual vet to the practice.

Royce Yudkoff:

That sounds right, that you're trying to fill the customer with a sense of confidence in the practice to protect against the retirement or the departure of the individual veterinarian.

Rick Ruback:

But that would again seem to be something very local.

Royce Yudkoff:

Yeah. I scratch my head on it. I don’t quite understand the rebranding of inherently local businesses. I get that a nationwide business, where customers buy nationwide, there's value in that. For example, you see this a lot in B2B businesses. There's a company called Will Scott that is a roller-up business of mobile storage units, and they acquire mobile storage companies across the country, and they have a bunch of regional and national customers, so uniting it in a brand makes sense because the single customer may be renting in multiple markets. But the decision on music schools versus veterinarians, I don't know why they go one way and not the other. It's a puzzler.

Rick Ruback:

Yeah. It may be that it either doesn't matter or that we don't really know yet, that there's no one right answer. And there could be no one right answer for really two reasons. One is that it doesn't create a lot of value or destroy a lot of value.

Royce Yudkoff:

Right.

Rick Ruback:

Or it could be that there's pluses and minuses, and the dust just hasn't settled.

Royce Yudkoff:

I think it's fair to say that, in our experience, it is more common that local businesses have their name kept than translated to an acquisition.

Rick Ruback:

Royce, let’s get back to the conversation.

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Royce Yudkoff:

So, Jeff, you had said you started out with brokered searches. I'm imagining that evolved as you accumulated five, ten, fifteen schools. Talk to us a little bit about sourcing.

Jeff Homer:

Sure. You know, today, sourcing is one of the existential challenges and activities that the business undertakes. So, our first five acquisitions were through a broker channel, so there was an existing broker involved, someone was actively motivated to sell. Five was sort of enough where the flywheel started to turn, where we started to get some inbound referrals. So, someone that had sold to us would get on their Facebook and they would say, "I'm so happy to announce that I've sold my studio and I'm retired and I'm moving to Florida." And many of their friends and peers are people that own music schools. And they would say, "Oh my goodness, who did you sell to? And can you put me in touch?" And so we started to get some inbounds. For music and dance studio entrepreneurs, there are coaching groups, there are accounting and professional services firms that serve this industry primarily. And so we started to integrate ourselves with some of those service providers and congregation points such that we started to develop a decent amount of inbound funnel. We did outbound sourcing in two steps. We first retained a buy-side broker, who did some of this work for us, and then we brought that in-house about a year later. And today there's three people at Ensemble who, all they do is outbound sourcing to achieve the type of velocity that we have. We're up to seventy-five schools owned and operated now. And our target rate of acquisition is one to two a month, so there's a big sourcing engine that's needed to power that. Our proprietary outreach was really driven around credibility. We're going out and saying, "Hey, we are a large operator in the space. We grew up in music and dance schools just like yours. We know what this business is about. What we offer is stewardship, first and foremost. So, we will preserve and protect your relationships with your students and with your teachers. You won't be seen as having sold out or put them in a negative position post-sale. We'll pay you a fair price for the business, and you'll be able to come back some years in the future and see the business that you've built largely intact." And one of the things that's a corollary of the attractive stickiness of the customer is that in a music school or dance school, every student is a regular. And so the studio owner really cares about what's going to happen to them. I view credibility as being point number one and price as being point number two, from a seller's perspective, when we're pitching what we're doing. Today we run a full-fledged B2B sourcing operation, ranging from outbound e-mails and cold calls to content marketing, we have a podcast, we speak at industry events. You know, if there's a way of getting in front of a studio owner, we're out there trying it.

Royce Yudkoff:

Could you speak to us a little more personally about how your job has changed? You know, what was it like when you were operating one or two schools, you're up to seventy-five schools now. What is the difference in the job of the CEO, of your job, then and now?

Jeff Homer:

It's a really interesting question and one that I think should guide more searchers’ thought process around what size of business they're looking to acquire, because the CEO job for a $5 million revenue business versus a $50 million revenue business is vastly different. In the early days, other than customer service – where we had great front desk people that were the primary point of contact for parents and scheduling and phone calls – I was really doing everything. So, I processed payments, I processed payroll, I set up the marketing campaigns, I set up the website, like, I was part of the selection process and implementation team for the CRM and scheduling software and kind of all the improvements we talked about, I personally did all those things. I think it gave me a really good understanding of how the business works at a unit level that I think still serves me today, as I'm now indirectly responsible for managing seventy plus of these. You go from being a key individual contributor in the business to being a little bit of a player-coach, and at some point you end up being more of a coach than a player. I've been through that process. The intermediate phase for me was, I was really wearing three hats for a period of time. I was a regional manager in the business – we have seven regional managers in our business today. I was the Head of M&A. Today we proudly employ one of your former HBS students in that capacity. And then I sit in the CEO seat. And thinking about right-person-right-seat, mediating and motivating a team towards an objective, setting strategy, and then also being responsible for capital allocation, those are the things that I think of as being key parts of my job today, especially capital allocation being especially important given that we are putting a lot of it out the door for M&A. And today we employ something like 1,600 people. Being CEO of that business is very different than the one I started with. I think this is also usually one of the most challenging parts of the journey for searchers whose background is finance, right? So, I was a deal guy. I was interested in this because it looked great in Excel. Now I've spent the last six years having to manage people and continually sell, and I haven't had my original Excel model out in a long time, I guess is sort of how I would frame that, that it's really been about operating and not so much about the initial underwriting.

Royce Yudkoff:

And sort of aligning different people around the vision for Ensemble?

Jeff Homer:

Yeah, yeah. And having to recruit. Leadership is sales, right? It's about selling someone about why joining forces – whether they're a customer or an employee, senior leader or seller of a business – why joining forces is going to be in their interest in addition to in your interest.

Royce Yudkoff:

Jeff, what's next for the company? What do you see ahead for Ensemble?

Jeff Homer:

We're really passionate about expanding our footprint. In 2023, we looked at what we had built in music and said, "You know, I bet that that would be applicable to a dance studio, for many of the same reasons. They face many of the same challenges.” We recruited some folks that were going to be credible in dance, because I'm certainly not. We've built a really exciting practice around that. We're starting to vertically integrate around our ecosystem a little bit, so we own some things that are not schools but are useful to our students in the context of their lesson experience. We've made some investments in a software platform that we use to manage our schools, in a curricular product that we think is really attractive to some of our teachers, in a coaching business, in a performing opportunity, a competition business. And for me personally, I'm really enjoying running the business, and I'm still spending the overwhelming majority of my time doing that. But I've also started to invest in other search deals, and in particular in consolidation strategies, because people look at my background and say, "Oh, if I was pursuing a consolidation, maybe that would be a value-add background to have on my board or as an investor." And so I've sort of scratched that investor itch to look at new and exciting businesses through the search and ETA investing world.

Royce Yudkoff:

That sounds like a great evolution. In the last couple of years, a number of our former students have gone off to do roll-ups in youth enrichment programs, of which music and dance are one of many categories in that. Have you started to see more roll-up competition today than you did three, four, five years ago?

Jeff Homer:

Certainly, a little bit more – and I view that as actually being a positive. My view is that mature consolidating industries end up with two levels of consolidators: folks that buy onesies and twosies and package them into tens and twenties. And then there are larger groups that buy tens and twenties. It would be delightful to do a larger transaction and buy ten schools at a time. The first seventy-five, we bought one at a time, and so I think that this actually represents a really positive development for Ensemble, and one that we hope will help us continue to grow at an accelerating rate. I could go buy ones at three times, but I would be glad to pay six times for ten of them, and I do see value in someone having done that work for me, so I'm actually putting my money where my mouth is on that.

Rick Ruback:

I would imagine as the velocity of acquisitions increases, the complexity of financing increases. I'm guessing you're not funding them all out of cash flow.

Jeff Homer:

Correct. We have funded the parent company, which I think is sort of standard for how this works. I think the dividing line here is sort of three to five million of EBITDA. Above that level, there are going to be really interesting private credit opportunities available that are incredibly flexible. You know, we have a large, delayed-draw facility where we basically get pre-approved for an underwriting box, and as long as what we're bringing forward fits within the box, we can draw on a line of credit with relatively little advance notice or underwriting approval. That part has actually gotten easier. We have access to significantly more and better financing than we did in the early days, and we've also attracted a lot of support on the equity front as well.

Rick Ruback:

But do you have to re-price as you go through? How does that work? My question is somewhat specific. We have seen people who are launching their roll-up strategy and what they try to do is raise a pretty large pool of committed capital. And I will just say, it's really hard to say, “I'm committing a big bucket of money to somebody who's run nothing and has acquired nothing.” It's different than doing committed capital to an existing private equity organization, right? I get why they do that, because they don't want to have to re-price, but I also get that there are a lot of investors who are going to take pause at this idea, that we're going to pre-fund a roll-up that hasn't even gotten off the ground yet.

Jeff Homer:

Yeah.

Rick Ruback:

So, you didn't do that because you funded it initially out of your own equity and then you had some debt. And now, as you've pointed out, you've become much more efficient in getting to lower cost-of-debt sources, which is just wonderful and one of the great benefits of size. But what about the equity size?

Jeff Homer:

First of all, I've seen the same thing that you're describing and I've had fits of jealousy at folks that have been able to raise tens of millions of dollars off of a shiny MBA.

Rick Ruback:

They're probably paying a pretty high cost of capital, in terms of implicit upside that they're giving up to get that.

Jeff Homer:

Sure. And look, my ownership of the business today is much more because I scraped and clawed every time, you know, I retained a lot more of it, but I have some gray hairs that are…

Rick Ruback:

Well, at least you have hair, right? This is a real advantage.

Jeff Homer:

Yeah. So, I raised equity in a couple of different tranches. So, I told you about the late 2019 friends and family round. It was priced and we sold about 15% of the business at that time. Did the same thing in 2021, we brought in an institutional growth equity partner for the first time. We did a priced round that was at a premium to the first round. And then, you know, 2023, we did a large round. 2024, we did a smaller round. We've done five priced rounds at incrementally higher valuations, reflecting the growth of the business, and I diluted myself much less through that process because I didn't sell a hundred percent of the business up front. I sold it in pieces. I got much better economics but, you know, I spent a lot of the early days oscillating between frantically trying to find money and frantically trying to find deals, and sort of oscillating back and forth between those things. The idea of permanently resolving one of them does sound really attractive, and so these committed capital vehicles, again, I've had a fit of envy when I've seen folks…

Rick Ruback:

But don't you think it's a correct analogy to think about an unfunded searcher getting the benefit of the deal versus a funded searcher? In what you've done, as your company got better, you got the benefit of that improvement, as opposed to if you had signed up a set of committed capital, the capital providers would've got that. So, I think you've been true to your colors all the way through.

Jeff Homer:

I agree. There's no question that it worked. I mean, it went better than I had any right to hope or expect. There were some high stakes moments along the way where we really needed something to come through, and in the end it did.

Royce Yudkoff:

Right, but if you're willing to put up, as you were, with this sort of anxiety of, “Can I raise the next round of money on the time I need it?”, and the extra work of going back and forth between deals and capital raising, you get a reward for it. You end up selling these tranches of equity at higher and higher prices.

Jeff Homer:

Absolutely. The caveat is that the first couple have got to go really well.

Rick Ruback:

Yeah, nothing succeeds like success. If you're successful, it's so much easier to be successful after that.

Royce Yudkoff:

Right. And I think you've both hit this on the head, which is a lot of these roll-up searchers, in raising a large amount of equity at a base price, are really trying to buy an insurance policy in case the first few deals don't go well, that they live to fight another day.

Rick Ruback:

Well, that's interesting, I hadn't thought about it that way.

Royce Yudkoff:

And as we all know about insurance, it charges a premium.

Jeff Homer:

I think that's a very good way of characterizing it.

Rick Ruback:

As you've gotten bigger, have you noticed that your SG&A percentages are getting higher and higher and higher? I have seen in other businesses that SG&A gets to be very hard to control as you grow. Has that been a challenge?

Jeff Homer:

It has been a challenge. We've been successful with it. One of the first rejections I got from an investor was from a college classmate of mine who had a very successful veterinary roll-up and has now done other roll-up things. He looked at my deal and said, "Your units are too small. You won't be able to manage them efficiently at scale." And, you know, while I was disappointed, I took that feedback to heart and I felt like that was going to be a really important metric for us to manage against and be successful with, was “What is the platform cost as a percentage of the four wall EBITDA in the field?” Basically, for every dollar our schools make, how much overhead do we spend? And we've managed that ratio to about 35%, which benchmarking against other roll-ups, I think is quite good. And when you think about the effective acquisition multiple, if you're buying a dollar of cash flow in the field and you're paying something like three times for it, and it's actually 65 cents to you fully burdened for corporate, the effective acquisition multiple is still under five times. And so you're creating the business for five times. And we're fortunate that youth enrichment is really in vogue, as you mentioned, and we've been able to raise equity at double-digit multiples.

Rick Ruback:

I would say though, one difference between you and particularly that veterinary roll-up, is if you imagine this business consolidating – so, in five years there's a firm that owns three hundred or five hundred dance and music schools – you imagine being that consolidator. And I think, particularly in some of the very fashionable roll-ups, and I'll put dental and veterinary in those buckets, I think they were very much trying to get to the twenty or thirty and then sell to the people who were going to be the surviving consolidators. And so I think your long-term vision affects your business model. 

Jeff Homer:

Yeah, that makes sense. Dental roll-ups were the hot thing of the day when I was raising money for this the first time. I put a side-by-side comparison together where I said, “Our biggest disadvantage is size and our biggest advantage is provider concentration.” So, you buy a dental practice, there's two dentists, and you're going to write them a check for $3 million and then hope they show up to work the next day to make money for you. Even a small music or dance school has twenty part-time teachers, and they all really need that work to survive. And so I viewed that as being, you know, our biggest advantage relative to folks that were excited about, you know, the DSO/MSO/VSO consolidation strategies.

Rick Ruback:

Yeah, I think it is intriguing and so compelling to take people who are good at what they do – music teachers, dance teachers, physicians, veterinarians – and separate the part of their job that they're not trained for – the entrepreneurial side, managing the business, finding the customers, collecting, making sure the facility is in compliance with regulatory requirements – I find that separation to be so sensible. I love it. And I wouldn't have thought about it in your industry, but I think it's the same story.

Jeff Homer:

People ask me often, “What industry should I go roll-up?” And my advice is always look for the service provider that's been forced into the entrepreneur or operator seat and would really prefer to be in the service provider role.

Rick Ruback:

Yeah. Jeff, we always end our podcast with asking you, our guest, whether they have any questions for Royce and I.

Jeff Homer:

I view the two of you as having this really wonderful working relationship. I think often that it would've been more fun to build this business with a partner, and I'm curious how you advise your students thinking about solo versus partnered search.

Rick Ruback:

This is a really interesting thing. That's why I asked you at the outset whether you had a dog, because I always tell our students that if they want a partner for emotional support, they should have a dog because dogs provide enormous amount of emotional support and they only want biscuits as treats. They don't want half your carry. So, first of all, I think you have to ask why you want a partner. Do you want a partner just for emotional support? I find that…

Royce Yudkoff:

It's expensive.

Rick Ruback:

…expensive. I also think that, in your instance, you were pursuing a passion of yours, so you have to find somebody with a similar passion and a level of financial sophistication and willingness to be hard-nosed about the economics. And I think that's an unusual combination. I think it might've been more fun, but it might've been close to impossible to find.

Jeff Homer:

Interesting.

Rick Ruback:

I will tell you, the advantage of a partner is your velocity could be higher.

Royce Yudkoff:

On that point, Rick, I would note, most small firm roll-ups that we see have two partners, right? Usually a point-of-the-spear business development person and then someone integrating and operating. So, Jeff is in the minority in that way too.

Rick Ruback:

Right. So, the advantage is the velocity but you can hire somebody who can do your business development, who can help you grow, help you integrate, and you don't have to pay them half your wealth, half your carry. So, from an economic side, I think if you reflect on it, it's hard to imagine that you would've been better off financially or the business would somehow be sturdier with a partner. But I think the thing that you have done better than other people, and I applaud it, is you've hired people along the way that are high-quality people, willing to pay them, and recognizing that since there's one of you, you really do need to have high-quality people on your management bench. And not everybody recognizes that.

Jeff Homer:

Interesting.

Royce Yudkoff:

We're very appreciative.

Rick Ruback:

I'm so impressed with what you've done and the business you've built.

Royce Yudkoff:

Me too. This is going to do a lot of good.

Rick Ruback:

It's so cool, and we wish you all the luck for growth.

Jeff Homer:

Thank you.

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Royce Yudkoff:

Rick, you and I see lots of examples of searchers buying fine businesses and making them larger, better, more profitable. And one of the catalysts always seems to be that a deeply expert provider of some service has gradually become a business administrator, and that really isn't their training, strength, maybe even not their preference. And you bring in an energetic, trained manager and they are better suited to the business at that stage of its development. And we see it doesn't just have to be in a passion-driven business, like music. What's your reaction to that?

Rick Ruback:

I think that's exactly right. I think we can imagine almost any business where the business has started because the entrepreneur is good at the business. So, imagine you're really good at making bagels and next thing you know, your bagels become very popular. And now you have to hire employees to help you cook all the bagels, and sell them, and get them in the right bins, and put them in bags. And so now, suddenly, you're not just Royce's Bagels anymore. You're Royce's Bagels with a half dozen employees. And you know what? You're really good at making bagels. You might not be very good at managing a half dozen people. And then when you open your second bagel store, now you've got to manage real estate and perhaps some external financing and another workforce remotely. And it's a whole different set of skills than making bagels. And so I think it's exactly right that whether it's a bagel maker or a plumber or an electrician or a musician or a physician, these things all seem to be true, that people go into their chosen field because they're good at it, and then eventually they end up doing something that they weren't trained for. They're not in the professions that they began in. And so I think that's one of the virtues of search. You're taking a business where the entrepreneur has figured out the model for delivery of service and then you're bringing it to a higher stage of efficiency and hopefully profitability.

Royce Yudkoff:

And I think that this is something that's unique to small business because in big businesses, where you typically have an investor-controlled board and the business outgrows the CEO, the board taps the CEO on the shoulder and replaces them with someone who can run a larger business. In a small founder-owned business, that doesn't happen until the founder is ready to retire, and so the catalyst is released by the search and acquisition.

Rick Ruback:

Right.

Royce Yudkoff:

Rick, what a great conversation we've had with Jeff Homer. I think you and I and our audience have learned a lot about creating value in a roll-up and also finding creative niches in the marketplace to roll-up, like Jeff's pursuit of music schools. Next week, you and I are hosting Will Smith, the host of the podcast “Acquiring Minds” and a long-time observer and commentator on search funds and ETA. That's going to be a really interesting conversation that takes a full view of the marketplace. Next week, Will Smith on our podcast.

Rick Ruback:

I’m looking forward to it.

Royce Yudkoff:

Rick, we end each season with a very special episode where we ask our listeners to e-mail us and offer questions they have after listening to our episodes or after their experiences in search. We pull out the questions and you and I discuss them.

Rick Ruback:

You know how much fun that can be.

Royce Yudkoff:

It’s a favorite of ours and a favorite of a lot of our listeners. So, listeners, shoot us an e-mail at rickandroyce at hbs dot edu and we’ll put them in the bunch we go through and answer them in our final episode of Season Three. We’re looking forward to it. 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.