Host: Dana V Music was a little music school outside Denver. Fifteen part time teachers, seeing 250 kids a week. The business brought in $500,000 a year in revenue so small and today's guest Jeff Homer bought it, but not necessarily with grand ambitions. A music school resonated with his own experience as a kid who took 10 years of piano lessons. It was affordable enough that even buying it in cash downside was limited. It seemed fun, low risk and different than the cerebral spreadsheet powered world of his professional life. Well, he quickly found two things as new owner. First, he loved being at the school and he wanted to spend more time there. Second, a few operational tweaks resulted in material immediate improvements to the business. A roll up was born. This is the story of an unlikely but spectacular acquisition spree that saw Jeff buy 39 more music schools across America over the next four years, then exit to private equity. You're going to enjoy this. Here's Jeff Homer, founder of Ensemble Performing Arts. Big announcement everyone. I'm thrilled to finally Launch Smith List. Smithlist.com this is a platform for business owners to find operators and for would be operators to find amazing opportunities to lead a small business. To put it more succinctly, it's a job board for operators of small businesses. Why? Well, regular listeners of Acquiring Minds know that a business buyer's journey likely eventually entails hiring an operator or general manager or president or CEO. The title varies, the scope of that role varies, but the core concept is the same. Someone capable, ambitious, strategic to run your business alongside you or for you. Now that part's obvious. The less obvious bit is why I'd be promoting a job board on a podcast about entrepreneurship and becoming your own boss. And it's because not every one of you wants to acquire your own business. You listen to Acquiring Minds because you're attracted to the scrappy, dynamic world that is covered here episode after episode. You want in. You love the idea of leading and operating one of these businesses, but not as an owner necessarily. For whatever reason, you're not going to do a search and an acquisition. Maybe the timing isn't right. Maybe you don't like the idea of the deal making part of search. You just want to operate and lead a team. Maybe the personal guarantee is too much risk for you or your family. Maybe you don't have the Runway to conduct a search. Maybe you want to buy your own business someday, but you want experience in small business operations first. I've learned, because I hear from you, that there are many reasons people are attracted to the world. Acquiring Minds shows them it's not solely about becoming an owner. So back to Smith List. There are really big opportunities jobs that owners in the Acquiring Minds ecosystem have available. For example, an entrepreneur needs an operator for a $5 million business they're under loi on. Or a current owner wants to change their role at the business they bought seven years ago and needs a president to take the reins. Or a sponsor is doing a roll up and needs someone to lead the platform business or private equity shop who buys businesses in the lower middle market and is always seeking talent to run those businesses, etc. These compelling opportunities abound, but they've been hard to find in one place and so SmithList will be that place. Go to the site to sign up for job alerts and starting next week you'll hear me announce new roles as they're posted on the site on smithlist.com I'm really excited about the potential of this. There's a lot of value for all parties to helping owners and operators find each other. As always, I welcome your feedback, your ideas, and if you're hiring for an operator role, reach out willmithlist.com okay, on to today's episode. Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs, and on this podcast I talk to the people who do it. What do the following Acquiring Minds guests all have in common? Doug Johns, Morley Desai, Tim Erickson, Chirag Shah, Shane Ursum they all went through the Acquisition Lab, the accelerator in community for people serious about buying a business. But they represent just a sliver of the Lab's success stories. The number of deals across the lab's cohorts now stands at over 120, with over $300 million in aggregate transaction value. The Acquisition Lab was founded by Walker Deibel, author of Buy, Then Build, the book that introduced so many of you to the very idea of buying a business. The Lab offers a month long, intensive, almost daily Q and A sessions with advisors, live deal reviews with Walker, Deal team introductions, and an active community of serious searchers. Check out acquisitionlab.com, link in the notes or email the lab's co founder, Chelsea Wood. Chelseauythenbuild.com Jeff Homer welcome to Acquiring Minds.

[6:17] Guest: Morning. Thanks for having me Jeff.

Host: Another searcher had met you and thought your story, what they'd heard of it, seemed super cool and actually wanted to hear the whole thing. So he put us together so he could hear it when I got just A taste of your story. I similarly wanted to hear more. Thought it sounded really cool. You rolled up music schools. So that is what we are going to learn about today. Let's get right into it. Start us off with some background on you, please Jeff.

Guest: Sure. So I have a pretty traditional sort of private equity finance background. So I went to Harvard out of school. I worked for Bain Capital's credit fund in Boston, did a couple of years at a New York City privately firm called Reservoir Capital. And it was around that time that I started to get sort of introduced to the ETA space. It was that time mid zero interest rate phenomenon where multiples for large cap businesses started to really expand private equity started to pay mid teens to high teens multiples for businesses and sort of started to wonder how we were going to create value and make money from such a high starting point. And it was right around that time that I started to get introduced to the world of the lower market where businesses were still for sale for, you know, three to five times. And I started to dabble with that. It was right around the time that I moved to Denver in 2018. I actually came here to join a family office. I was running a long, short public equity strategy for a family office here and I got introduced to a woman who owned a music school. And you know, I thought that would be sort of a fun and interesting side project, but very much a side project. I was envisioning that being something that I did on the nights and weekends. It was perfect for that because it's an after school program so it's primarily happening outside of typical work hours. And yeah, it just seemed like a really fun and interesting community based opportunity to do something tangible that exists in the real world. Trading stocks and doing investing can sometimes seem a little abstract and you know, spreadsheet based at times divorced from the real world. So it seemed like an opportunity, something kind of in my community, but very.

Host: Let me, let me stop you there because I got some follow ups to your background. The low interest rate environment. It often seems like when people come out of school and they get their first job or their first five or ten years of their career, that kind of. They assume that's what normal is. But you just finished telling us that it obviously having zero interest rates or very, very low interest rates for so long was a very unusual environment. Do you. But it also seems like you actually have that perspective. Even though those were kind of your formative professional years. You, you understand how aberrant that was. Do you think it has had an influence on you, I mean, just say react to that.

[9:09] Guest: Yeah, I mean I think I was sort of the frog being boiled, you know, you know, like so especially sitting on the credit side of things, you're looking at leverage levels for businesses creeping up to all time highs. I remember when you could get a second lien bank deal done that would have six turns of leverage on it and maybe a hold co pick note sitting behind that, going to seven times leverage. These were new structures that were created to reflect the fact that private equity firms that we were backing were paying more for the businesses they were acquiring. So it was actually somewhat easy to observe it happening in real time and actually changing. And the impact was, you know, it wasn't like rates went to zero and all of a sudden multiples went to 14. It was, it was a, it was an incremental process whereby, you know, leverage was added to the system and hey, that didn't work that badly. Let's go even further and let's go even further. And I think, you know, I was working during that time at a relatively conservative shop that was pretty mindful of what was happening both in the present context and in the context of history. And so I think to your point about, you know, at 26, you know, how did I have that insider observation? It was because I had, you know, people around me that had a lot more experience with, you know, decades of investing across cycles telling me that this was pretty unusual.

Host: Okay, and you've just given us a few examples of multiples that you were seeing first at six, then into the teens. Many.

Guest: You're comparing debt and equity multiples. I was talking about debt leverage taking up past six to seven turns of leveraged finance for a private equity buyout and the private equity firm is paying the difference between the debt at 7 and the actual equity purchase at 14 or 16 times.

Host: Gotcha. Okay, 14 or. Okay, well there's the multiple I was looking for, The EBITDA multiple. 14 or 16.

Guest: Correct.

Host: Okay. So a lot of people that I've interviewed who come from finance backgrounds are, have been exposed to multiples that in the public markets or in large cap private equity or what have you. And then they see the kind of three and four number down here and their eyes go wide. So what is, maybe you've just answered the question, what are the multiples that people who come from institutional finance used to seeing that three is just unbelievable. 14, 15.

Guest: Yeah, I mean I think a, a reasonably high growth, high quality business of the type that like if you took the, the target profile of a traditional search, you know, enterprise SaaS, recurring revenue like the, you know, all the things that you want to see in a, in a traditional search business and you made that business 10 times larger, it would trade for 15 to 20 times I think generally.

Host: Okay, great. So 15 to 20 versus three. Three looks nice. On the pre call you also made a really interesting observation about down here in the lower, lower, lower middle market. Not just about multiples but about risk premium. Do you recall?

[12:11] Guest: Yeah. And just that there is less heterogeneity in valuation in the lower market. So you know, in, in, in the public markets, in, in large cap private equity, if you have a high quality business, it might trade at two to three times the multiple of a business with perceived lower quality. So the difference between traditional low quality business, some kind of junior miner speculative thing and a Google, Facebook, Amazon, the difference in multiples between those is several times different. Whereas in the lower market maybe this spread is two to three times for a lower quality business and five to six at the very high end for a higher quality business. And I think that, you know, that shows that there is not as much of a premium on quality. And that was sort of the starting place for my very, very naive beginning to a self funded search was just to say, hey, down here in the lower market there are probably some high quality businesses. They are not going to be priced at nearly as much of a premium as they would in other, you know, in, in larger capital markets. So I'm going to just take the first initial approach of trying to see a bunch of volume, you know, go look at a bunch of businesses with the hopes of finding a couple of things that, you know, that might fall into that higher quality bucket with the confidence that, you know, if I'm successful in finding them, they're not going to be priced at a premium to the other lower quality stuff I'm looking at. And that was, you know, that was truly the starting point for my journey in eta.

Host: Well, I'm impressed that it was your starting point because I don't feel like I've had that observation made to me yet after 200 plus interviews and it had never quite crystallized to me until you said it. That's why I wanted to call it out and, and indulge me while I just kind of repeat it back to the audience because I think it's so profound. The band of multiples that we see down here is at the very low end, two and a half. And you'll see here the random story of somebody paying less than that. But let's call it 275 up to 4.25. So many of my, the vast majority of my guests have paid in that range. And yet there's also, as you said, a ton of heterogeneity there, a ton of variety and quality of business. So the idea that you might just pay 4x for a business that's much higher quality than a business that's trading at 2.75x, that difference of 1.25, when you compare it to public markets or large cap private equity is really, really, really not much. So you're getting a much better business without having to pay much more for it. And that's a unique feature of our market and an attractive feature of our market. Does that sound right?

Guest: Yeah, that's exactly right. And I would even go one step further than that, which is, you know, the, the end of the ensemble story, which, you know, we're going to get into is part of our value creation play was as we got to be a larger business. I mean, ensemble today does about 65 million in revenue. As we got to be a larger business, we climbed up that value creation curve where, you know, now we're a middle market business and we're trading, you know, we probably should trade in that, you know, mid teens kind of range from, you know, from our starting point. And so the value creation opportunity for a higher quality business as you scale from lower market to middle market is really profound. And I think that's, you know, that's part of the ensemble story, you know, in terms of why the lower market roll up. It's one of the levers you have in a lower market roll up that, that really is powerful relative to a, you know, single, single business, you know, buy and build organically story.

[15:44] Host: Well, and so what I, what I just heard you say is that basically you, you enjoyed multiple arbitrage. If you can assemble these really small businesses into larger ones, the multiples that you're that are paid for, the, the group, as opposed to an individual business starts going up and, and the audience will be familiar with that phenomenon. But you made it seem like there's something specific to multiple arbitrage down here. But I thought, I thought basically no matter how high you go, you can continue to realize multiple arbitrage. So even if you assemble two, what we would consider businesses, there's multiple arbitrage to be gained above that. Is there something different down here like the multiple arbitrage? There's, there's kind of a curve and it's Steeper down here and you can see better. Multiple arbitrage, faster sort of thing.

Guest: Yeah, I think it's, it's the steepness of it. Right. So I think if you're talking about again, just that quality premium being absent in the lower market, you know, the spread between what you pay for it. When you're, you know, you're buying a business with less than a million of SD versus what you can realize at, you know, 10 million of EBITDA. That spread is larger than, you know, if you're buying a $5 million EBITDA business and rolling it into $100 million EBITDA business.

Host: Ah, okay. So you were about to tell us the, about the business that you found. But before we get into that, give us a picture of how your search, what your search looked like.

Guest: Yeah, Again, I want to be, you know, totally upfront that I embarked on this with a very naive thesis. Right. And just sort of talking about exactly what I said before, which is, hey, let's go meet a lot of businesses and let's hope to find something that sort of is really interesting among this kind of. I just went digging through the haystack, like looking for needles was really my approach. So I'd love to biz by, sell

Host: or talk to local accountants sort of thing.

Guest: Yeah, yeah, local business brokers, biz by, sell, the whole bit. I was just looking to get in front of folks in my local market that had a business for sale. And I was, you know, I was hoping to learn a bit through that process and maybe get a bit more refined over time. And I just had the extraordinary good fortune of kind of finding something through that initial work that actually worked for me. But I would love to tell you that I did a wonderful kind of top down analysis of the US economy and identified music and dance schools as being this sort of pristine roll up opportunity that had yet been untouched. But that's just not how it happened. I mean, I was out there meeting with folks and it was pretty early on that I came across again this listing for a music school. It sort of connected with my personal background. I have a personal background in music. I took about 10 years of piano lessons as a kid. I was in my high school and college choirs. I took drum lessons for a few years when I was living in New York. I've lived that student journey and kind of the original thing that clicked for me was, hey, I had the same piano teacher when I was a kid for like 10 years. And I don't think that's an unusual experience. This is a very sticky, long lived customer relationship that is, you know, at its core between a student and a teacher. And it's, you know, that's a really unique relationship in a child's life. It's often sort of the first non school teacher, non parent, adult friend that a child has. And so for that reason it's a really sticky, you know, powerful relationship. And yeah, you know, as we dug in, you know, there were other things to like about the business. It's a recurring revenue business model. The parents pay on the 1st of the month, every month. It's credit card, auto debit. You know, you actually pay, the parents pay in advance, you pay your teachers in arrears. So there's a, there's a modest negative working capital cycle that's present in the business. There are lots of things that are, you know, that are to like about how this business operates. And you know, one major drawback, which is that the majority of operators in this space, their passion and their background and their focus is music education. So they're really focused on the product and the student experience and they're not really focused or maybe even interested in the operation side of their business. And so they're not, you know, they're, they're just not doing the, what I call the 10pm tasks right there. You know, they're often teaching during the day, the students are there in the afternoon, you know, after the students go home for the day and the staff goes home for the day. You know, that's when, you know, payroll gets taken care of and other things of that nature. And it's just not their focus and not, you know, something that lots of them have, lots of operatives in the space, have experience with prior to owning and operating their small business. So it's often just not done very well.

[20:05] Host: Right. You said that's something not to like, but in fact that was the opportunity. So sure, it means it makes the businesses maybe lesser quality than they could be. But of course that was a, that was in the pro column as you analyze the business.

Guest: Yeah, I think in terms of like why, why are these not higher quality business as a starting point? You know, that's generally why. And the ones that have been most successful generally are kind of husband, wife pairs where one party is bringing the, you know, the music or dance education experience and one party is bringing in more of a commercial background to the table.

Host: Most business buyers acquire their target company using an asset purchase, which means that you've got a brand new legal entity that needs to be ready on day one to properly employ your new team. Payroll, HR documents, tax accounts, workers comp, benefit plans like medical and 401k. You need to make sure all of that is transferred or set up on day one. Aspen HR understands this challenge and the delicate timing that searchers have to juggle. Led by a successful former searcher, Mark Sinatra, Aspen HR can assist searchers to ensure a seamless transition for the employees. If you are structuring an asset purchase, contact Aspen HR for a free consultation. They'll walk you through their proprietary checklist for asset purchases that assesses your readiness for HR, payroll and benefits. Check out aspenhr.com or contact Mark directly@markspenhr.com Jeff One other thing to push back on is the longtime relationship, as you put it, between student and teacher and as we might put it in our clinical way, lifetime value. The lifetime value of a customer. Right long time. On the other hand, I would imagine in this world there's an enormous amount of churn. How many of you know, for every, for every one student that becomes a 10 year long relationship, 20 have gone to a lesson or two in churn after, you know, a single lesson or six months. I mean not every kid is, is, is committed. In fact, probably the few are committed and the majority are churn and burn. So when you look at the true median or mean or whatever, it's going to be lower than that, than that ten year example. Fair.

[22:32] Guest: That's fair, of course, but one of the advantages we have is that many of the students that are not committed have an external factor driving their participation which is their parent deciding that they should, that this is something that they should be doing. So you know, there's some, some amount of, you know, the parent signs their kid up for lessons, kid takes a while to figure out if they like it or not. You know our, I mean this is, we're, you know, we're at the beginning of the story. This isn't information I had access to during due diligence, but today, you know, I can tell you with confidence that the average life of our enrollment is over two years.

Host: Oh wow.

Guest: So that's, that's true on an average basis. And the, the child that comes in for two lessons is practically non existent unless there's really a mismatch between the student and teacher, in which case they're more likely to go to somebody else as opposed to leave entirely.

Host: Well, and you also might, for a student who comes up for literally a single lesson or two, you might not even count that as an actual customer. But just kind of a customer acquisition cost where. Trial.

Guest: Yeah, part of our trial conversion. Yeah, yeah.

Host: The. Before we get off of your search and into more about the business, you were doing this on the side, correct?

Guest: Yeah.

Host: In the pre call you had recommended that maybe more people also do do it on the side. Say. Say what you told me, please.

Guest: Yeah. This is a dangerous thing to put on the record, but my, my observation here is that the difference the level of time and effort it takes to be a high performer, which I expect is, you know, typical of most of the folks that are interested in ETA and interested in sort of making this bet on themselves. The level of time and effort that you are used to putting into your job versus the level of time and effort that will get you fired is, you know, more than enough time to run a search in. And yeah, that's now out there in the world for everyone to hear. Okay.

[24:17] Host: All right. And I appreciate that. So you are taking a rather informal approach to your search and you find this music school, was it called Ensemble or was that a later brand?

Guest: No. So Ensemble is something we came up with after the fact. The school was called Dana V Music, named for the founder, based in Lewisville, Colorado, which is a suburb of Boulder.

Host: Great. Okay. And can you give us some numbers about Dana V Music students, revenue, et cetera, all the bullet points?

Guest: Sure. Yeah. So doing about 200 to 250 lessons a week. So that's the number, that's the enrollment. School would have had about 15 or 18 part time teachers at that time was only doing about half a million dollars of revenue. And margins were kind of in the low double digit range, not a high margin business.

Host: But the insight, just to distill what you said earlier, was long lifetime value and probably a lot of opportunity to better to improve the operations of the business. Because maybe not Dana, but in general, a business owner in this category is more focused on delivering a great product that is Music lessons than they are digital marketing, let's say.

Guest: Yeah, I mean there were really two digital transformation opportunities that were present in this business from the beginning. One was operational, so the business was sort of run on Google sheets and pen and paper. Sort of a mix of those two things from a scheduling perspective. And there like everywhere there were vertical SaaS solutions that cater to appointment based businesses and even music schools as a subset of that. So there are opportunities to operate the business a little more efficiently, save some office staff time and then hopefully reinvest that in marketing. I think one of the things that we observe in the Vast, vast majority of the schools that we acquire is they're not full, meaning they are not sold out from, you know, 3:30 to 7:30, Monday to Thursday kind of prime time. And they're not even close to full, you know, outside of that prime window. And you know, the, the historical marketing budget at Dana V was probably in the, I don't know, 0.5% of revenue range. And when you think about the unit economics and the lifetime value of a customer that stays for two years, as we discussed earlier, their lifetime value measured in gross profit, not even measured in revenue, is in the thousands of dollars. And we expect our customer acquisition cost to be in the 200 to 300 range. And there are not a lot of opportunities in the world to get that kind of LTV to cac. And the reason it exists is because this school wasn't marketing itself. And this school is a well above average school in the context of music schools and music teachers. And so there's just not a lot of competition for that, you know, piano lessons near me kind of keyword. It's a three to six dollars click on Google. You know, we can convert that at a reasonable percentage and that's where we get to that kind of couple hundred dollar customer acquisition, acquisition cost. So you know, those were the two opportunities we saw was, was, you know, save some operational time using some, you know, using $200 a month worth of software, reinvest that in marketing and deploy a marketing budget. And you mentioned earlier that the starting margin profile of the business was not very high, but the incremental margin is very good because your gross margin, meaning the difference between what you charge your student and pay your teacher is in the low 50s. So every dollar you add minus a little bit of additional operating cost or variable costs below the COGS line is coming in, you know, at 45, 50%. And so there's opportunity as you do marketing and you grow the business to actually grow margin significantly. So that was kind of an opportunity that we saw that tied to that, that digital marketing opportunity.

[28:07] Host: So should, should we all run to Google now and see what other services quote service near me has a three to six dollar CPC and start buying

Guest: those businesses, especially if it, you know, if it has a high lifetime value. I mean, I think that's, you know, that's the other side of this that was, that was attractive. But, but yes.

Host: Yeah.

Guest: And you know, like just to make the point which I'm sure will be intuitive to many people that are listening, I mean this was, this thesis is pretty Similar to folks that rolled up veterinary medicine and dental clinics and you know, all sorts of places where you have a specialized service provider that, you know, is sort of forced into business ownership in order to provide their service. And there's been a lot of success of sort of divorcing those two things and having somebody operate the business and letting the vet, letting the dentist, letting the music teacher, letting the dance teacher just focus on teaching lessons. And both parties are happier in that arrangement for the most part. And the business is much more successful. And I think that's again, sort of looking at searching on Google to find things to industries to focus on. You know, this was sort of something that rhymed with, with a thesis that was pretty well tried and true at that point. Just sort of hadn't found its way to, to this market in particular.

Host: And to your point about kind of bringing in a pro business attitude to just running the business as opposed to kind of it just being artists who are in business because they have to be that, that just happens to be the way they deliver services. You got to have some sort of business entity there. Was there any cultural friction there, you business guy coming in and, and making things more, you know, more efficient and more operationalized, or is it like, no, fine, like help me do my job better. I'm now speaking both the owner reacting to you this way as well as the teachers.

[30:00] Guest: Yeah, it's a great and very insightful question because there is absolutely a negative predisposition to all kind of business or commercial activities for many artists. Right. So growth is not intrinsically good. Lots of the things that we want to be doing, they're subject to immediate suspicion and sort of guilty until proven innocent from an implementation perspective. So I had to do two things to be successful. One, I had to really sand down the elements of my personality that were like Harvard, New York, Finance, you know, like these. No, I was like, no, hey, I'm a pianist. Like that's, that's going to be my identity when I'm in this building. You know, I'm a pianist who knows some stuff about running a music school or that I think would be applicable in running a music school. I'm not a private equity guy kind of coming in from the outside. And yeah, I think that's, I think that's a journey that a lot of searchers, especially searchers with, you know, pedigreed backgrounds that end up in, you know, blue collar or kind of blue collar adjacent fields have to go through. You know, this is obviously different, but I had to you know, I had to really work on, on that. And then also trying to put myself in the shoes of the teacher and sort of identify like, what, what of what we're doing is relevant to you. And you know, really it comes down to, hey, like, do you like filling out a paper time card? Do you, you know, like, do you like having to look after this thing for the week and like, place check marks and you know, not get real time email updates if one of your students cancels so that you can come in later if that's your first student of the day? So that seems good for you, right? There's a time savings and an ease of use here where you're going to have an iPhone app and you can check in your students right there and that's all you have to do. And you'll get an email if they cancel. And that seems like a benefit to the teacher. And then the other obvious one is our teachers are all paid by the hour, right? So if they don't have a student, they're not getting paid. And so our efforts to market the business and grow our student count are going to go directly into their paychecks. And so those are kind of the two core value propositions that we offer for teachers are, hey, we're going to basically make it easy for you to show up, teach, and leave with a minimum of administrative overhead. So, you know, do what you love, don't do what you don't like to do. And, you know, we're going to give you the maximum earning opportunity that you can fit into whatever time you would like to dedicate to, you know, to being here as a teacher, and make sure that your time is full and that your paycheck grows accordingly.

Host: It's a pretty compelling value prop and I imagine particularly to artists, the basically increasing their paycheck, specifically that category of person of professional artists, because being an artist is notoriously a difficult way to make a living. So they're probably much more enticed by, you know, being paid more than, than maybe plumbers who can pretty easily get a job at the, you know, the plumbing shop down the street, if that's the business that you bought. Really, enabling artists to support themselves by teaching or at least supplement their income in a, in a, in a material way is probably really, really appealing to them.

[33:15] Guest: Yeah, I mean, this ends up being sort of the low beta part of their earnings portfolio. And then they have, you know, some sort of performing or composing project on the side, you know, for the most part. So, you know, they're in their band and they're, you know, they're out there gigging and working and having fun playing. And then, you know, Monday to Thursday afternoon, which are not, you know, big nights for gigs. You know, they're coming in and they're teaching the next generation, which can be really fun and rewarding for them, but also is sort of the stable part of their, of their earning portfolio across, you know, two to four different jobs, you know, to try to make ends meet. Which is an unfortunate statement about, you know, how arts are remunerated in our, you know, in our society. But that's, that's a topic for another time.

Host: Okay, and then give us a visual. Paint a picture of what this business looks like. It's a physical location where the students are taught. So what does that look like?

Guest: Yeah, so it's kind of a honeycomb of a bunch of private lesson rooms with a front desk. So, you know, typical layout for, you know, for one of our schools, which is, you know, kind of approximately true of Dana V is you sort of walk in, you have a waiting area, there's a front desk, there's somebody there to greet you. And that person is doing kind of schedule and administration. It's, you know, if you called the business, that's the person who would pick up the phone, phone and talk to you about lessons and scheduling. And then there's eight to 12, in Danny V's case, 11 private lesson rooms. So it's a room with a piano and a music stand and a mirror and a bunch of books and space for a teacher and a student and a parent. And yeah, it's loud in a really fun and positive way. There's music leaking out of every practice room. And that was one of the things I really liked about the business actually was it was very immersive. It felt really fun to be there. The space is designed to be engaging and exciting to an 8 year old. So it's bright, it's loud, it's fun, and it's so different than the kind of sterile corporate finance environments that I'd been in previously. And being there actually motivated me to practice more and to get back in front of the instrument. And I'd bring my piano books and I'd play at the end of the day when the rooms were empty. And it was really fun for me. And I think that's part of, you know, sort of advancing the story a little bit. This is sort of how this became, you know, more than a side hustle for me and more of something I knew I wanted to focus on was sort of the combination of two things. One, I got really immersed in it and I really enjoyed being there and I wanted to spend more time in that space relative to the other things that I had going on. And you know, the things that we talked about as being kind of low hanging fruit improvements had success and had impact. You know, right away to the point where I started to feel like, hey, this is probably not a one off opportunity. There are probably other schools out there that have this profile of outstanding product and student experience and sort of opportunities for operational improvement and, you know, we can probably create a platform to go do this again. Back to that, you know, vet dental, specialty medical consolidation thesis, you know, started. That started to ring true for me. And that's where this turned from being a neighborhood music school that I was going to be involved with on the side of my day job working at a family office to yeah, I think this is a full time national consolidation roll up opportunity.

[36:28] Host: And just to be clear that I got the improvements that you made. It was better Google advertising, basically, piano lessons near me, and it was out with the pen and paper, in with whatever SAS tool can run a music school. Were there other levers that I missed?

Guest: They would fall under those two buckets. Right. So you know, payroll software and getting rid of paper checks and you know, like as, you know, investment in SEO, SEM, Facebook, things outside of Google in particular. But yeah, sort of digital transformation and digital marketing would be, you know, two of the largest levers that we pulled there.

Host: Great. And just a little bit more because there's an interesting history here on why this opportunity continued to exist. Yes, we understand that the profile of somebody who starts a music school is probably not somebody who's thinking in terms of private equity or roll up or giant, you know, building an empire of these. They're going to be a teacher. First and foremost. There are private equity people and searchers now in the, over the last five and 10 years looking for opportunities like this. That's kind of what this podcast is about. So I still wonder why this has been totally overlooked, why somebody else hadn't had made the observation that you had and really maybe what. So I want to hear a little bit of the history here because I'm not saying that people are going to go out and go after music schools, which is kind of now being done, but what abstract principles might we learn from your case to find other industries with maybe similar characteristics or similar history? Yeah, so maybe a little bit of history on music schools.

Guest: So I Mean, I think there's two factors that are relevant here. One is, you know, industry structure, and I'll come to that. Second, but the first is just sort of there's a natural predisposition to associate kind of arts businesses with nonprofits. Right. So there's sort of a blurring of that line that exists where.

Host: Yes.

Guest: When you think, you know, when you think music and performing arts, you think nonprofits in a lot of cases and you know, charity and fundraiser and, you know, the need to support the arts in a way that they appear in many cases to not to sustain themselves on their own merit.

Host: Yes.

Guest: So I think there's that predisposition where. And I certainly, I faced a lot of. It's easy in hindsight to be like, oh, well, we own 65 music and dance schools and this is a, you know, this is a large enterprise for people to say, okay, well that, you know, that seems obvious in retrospect, but when I had five schools or one school, it was preposterous that this is what I was, you know, that's what I was doing when I told my friends and family that I'm quitting my hedge fund job to, you know, to go, you know, to go continue a roll up that, you know, at the time had about 2 million of revenue. But yeah, so I think there's a natural kind of predisposition there where, you know, you think arts, you think artists and, and again, back to the level of operatorship in the space, there hadn't been great examples of people that had done this really well. And you know, even the ones that were successful, you know, these were people that were making a good living in their community. You know, we see schools that gross maybe as much as two to two and a half million of kind of four wall revenue in their neighborhood. Maybe they're making four or 500k off that. That's a great living. But it's not interesting to a private equity story. The other piece goes back a little bit further, which is sort of the prevalence of music in our society has kind of been on a steady decline for 100 years. And every home used to have a piano in it. That used to be kind of a primary source of entertainment. Everybody could play. That was sort of a universal principle of, you know, kind of pre radio society was that, that was, you know, that was where your entertainment would come from, would be you'd have a piano in the home. You know, you get around you singing, you know, that. That would be how it would, you know, that was a lot of, of, of again pre radio entertainment. So you know, every, every, every community had a music store in it to you know, to meet those needs and fulfill that. And it was during the kind of, you know, 70s, 80s, 90s big box transformation that you know, guitar centers and music and arts kind of sprung up and started to, you know, very Walmart esque, started to set up, you know, next to the community music store and you know, offered big box prices and big box selection and you know, sort of gradually put those music school music stores, you know, kind of out of business. And generally speaking, the ones that survived were the ones that made a successful transition from offering retail which was now, you know, being done at the big box level and then further, you know, ended up being done on the Internet, made a transition from retail to lessons. And so your, your local music store became a music school and sort of, you know, hacked off the back thousand square feet of their building and built a few lesson rooms. And you know, over time that 15% of their square feet generated 50 plus percent of their revenue and often a lot of their, a lot of their profit. So that's, you know, that's kind of where we are today. And, and it's interesting to actually see Guitar center now starting to offer lessons. Like they're now on that arc themselves where yeah, they, they, they've done exactly the same thing. They, you know, a lot of their stores now have lessons. They've built these lessons off to the side. They didn't used to be there, you know, so they're sort of coming down that path. But yeah, that's, that's sort of the history of the industry is, you know, used to have a lot of, of community music retail. It was substituted first in at the big box level and then on the Internet. And a lot of those folks either, you know, went out of business entirely, which unfortunately was a pretty common know story at that time, or pivoted to offering you know, lessons as a, as a, as a complimentary service and also one where you then own that student relationship and you can, you know, it's a lot easier to do retail if your students coming into your store every week for a lesson because now you're a convenience factor. Right. If, if they need strings, they need a book, they need to, you know, read for their instrument, like especially on the accessory level, you know, they're already there. You're faster than Amazon at that point because they're, you know, they're in the building already.

[42:18] Host: Right, sure. Well, it's why when I go get My hair cut, I'm always offered some shampoo or other product to put in my hair. That was a great history lesson. Thank you for that, Jeff. And give us now what did the terms of your deal on this first business, this forced $500,000 revenue business look like? Can you share that?

Guest: Sure. So we bought 90% of the business. We did not use the SBA, so we didn't have, we did not have limitations around equity rollover. So there were two, there were two owners of the business, both of whom were sort of key teachers. One was, you know, looking to, you know, one was pretty motivated to leave, one was open to staying and sort of being involved on a go forward basis. So that second individual, her name's Dana Batrajani, she ended up rolling about 10% of that stake and, you know, is still involved in the business today. She's, you know, she's helping us to ensure that we have, you know, great resources available for our teachers now. You know, we have 1200 teachers today. You know, she's still in charge of making sure that those folks have access to professional development opportunities and networking opportunities within our portfolio. So, you know, fast forwarding a bit that, that ended up working out great. But so she, you know, we bought 90%, she rolled 10%, we funded it 100% in equity, you know, sort of cash off of our personal balance sheets and sort of, we're going to, planning to use it as a learning experience. It's a small business. It wasn't something we needed to finance. It seemed like something we could finance in the future if that made sense. So I think the 100% equity structure is not something that you're going to see very often. But I think it was sort of the right thing for me and for this business in terms of being able to get in there and really learn about it before having to go out and pitch this to a lender.

Host: Yeah, well, yet another difference between our market, what can be done here at our market, and much bigger businesses. You can buy a business outright. What you paid for the business was typical multiples that we'd hear three to four. And so we already heard what margins were on this business. So we can do some napkin math to arrive at a number that's 1, 2, $300,000 sort of thing.

Guest: Yeah, we paid, we probably paid in the high twos, just below three times. Yeah.

Host: Okay. All right. And side project, how long is it a side project? You're putting in these, you're putting in place these changes. You're loving being at the place like this, this kind of opportunity is, continues to expand and excite you. But you are working your day job, so when does it become your. The, your sole focus?

[45:01] Guest: I did both until we had five schools. So we bought the first business January of 2019. I quit my day job February of 2020, which turned out to be auspicious timing, if you, if you remember.

Host: We were.

Guest: But yeah, and also, I mean, the part that sounds kind of dizzying in retrospect is it was only about four months from closing on the first deal to closing on the second one. And that still sounds incorrect to me. I don't know how we managed to do that, but we did. The second one was more of a, it was more of a test balloon for the roll up. So it was based in Las Vegas. It was a smaller school even than the first one, which was small, you know, to begin with. And it was really intended to be a test of whether we could run one of these businesses remotely and whether it would, you know, burn to the ground either figuratively or literally if we didn't go check on it, you know, every day. Which is kind of what I was doing at Dany View Music. I was, I was there pretty often because it was in my, it was in my backyard. So we bought this business in Vegas and it was really intended to be a test of is this going to work on a, you know, sort of national semi. You know, semi absentee is not the right word, but you know what I mean in terms of we're not going to be there every day and we're not going to be able to drive over if there's a problem on site. Is that going to, you know, is that going to be a successful operating model?

Host: It's a, it's a question of not only can it be done remotely, but can this scale? I mean, you are, you as the entrepreneur are in the business every day. So is there, is there some way that this can scale without your attention and presence? You said that doing, going from deal one to deal two in about 4ish months and that that was dizzying. And you still kind of marvel at how quickly that happened. One thing that, that tells me is just how decisively proved your thesis was. I mean, you must have just had a lot of confidence. You were like, wow, that really works well. So well, let's do it again. You know, I just kind of feel like the speed there is an indication of bolstered confidence. Do you?

Guest: Yeah, I think that has to be true. And also, you know, just Sort of some of the work that I had done during the search process actually generated that second opportunity. So it's sort of like a latent thing that kind of like washed across my desk. I was like, oh, like that could really work. And you know, you start to see the upside where you say, hey, like you know, if this works then, you know, then we have something for real here. And so, you know, it's worth, it's worth trying, you know, for that reason. And you know, the risk was very manageable relative to, you know, I'm still employed at a, you know, at a good job and I'm, you know, I'm, I'm doing fine if this, you know, if this check is a zero, which is very unlikely since we're buying a profitable business, but if this check is a total zero, you know, I'm going to be okay. And you know, there's like, this is so different than a, you know, multi million dollar SBA personal guarantee kind of. You know, this was a, this was a trial balloon and it was sort of sized appropriately.

Host: Man, I feel like the more guests I have, the, the stronger the argument to buy very small becomes. You know, we, we, we generally the conventional wisdom is not to buy small. Buy as big as you can. Million dollars of SDE is kind of the coveted number. But you're, I don't know, the fourth story in just a couple of months where it was like buying really small had all this merit. Namely in your case, it was very little downside, tons of potential upside, which is in fact what happened and we're going to hear, but very little downside. If this thing went to zero, as you said, you could absorb that.

[48:26] Guest: Yeah, look, you need a path to getting to multiple millions of sde, right? So for me, buying these two music schools, if that was to be my full time living, like that wasn't going to work for me. So there needed to be a path to something different. That's part of why I held onto the job as long as I did, was I wasn't buying something that could replace that. Even if I was willing to take a pretty significant, even if I was willing to meaningfully downsize my expectations from a lifestyle perspective. So I think you need a path to getting out of buying a job and into buying something that has enterprise value that you can get compound over time. And I think if you're going to buy one, it's got to be big. But I do think that the lower market roll up opportunity is really, really interesting. And this is fast forwarding to the end. But I'm spending a lot of time now talking to searchers and prospective searchers about exactly that, which is, hey, you can go buy a million dollars of SDE in four transactions instead of in one transaction. And there are lots of great reasons to do that, but you need reasonable confidence that you can actually go find for, you know, four deals that are going to total to that level. If you buy one, you're in a really unhappy position, you know, sort of on. On an extended basis.

Host: Yeah.

Guest: Yep.

Host: Well, I want to return to that in just a second, but one question first. Just about the framework of owner and operator. So you kept your W2, which meant that you had, I guess, Dana in the business operating it for you. Dana and. And the front desk person and whomever. Give us a picture of that.

Guest: Yeah. So our partnership at that time and also, you know, at most of the businesses we've acquired in the future in, in, you know, further down the road is. Is generally not with the owner. So. And Dana's motivation for selling the business at that time, she had, among other things, two kids under five. You know, she wanted to focus on being a mom. She wanted to go back to teaching as her primary activity as opposed to administrating the business. So she was looking to step out of, you know, running the business in that. In. In the way that she had been and focus her time in different areas. So it was really a partnership with the front desk person who we elevated to being, you know, true general manager of the business. And she was the one who was really working hard on implementing, you know, software changes and a lot of the things that we wanted to be doing. So, you know, Dana was present and her presence was really valuable because she had, you know, all the experience in running the business and lots of ideas and opinions about, you know, what we were doing well, what we could be doing better. She wasn't implementing. And so it was really. It was really myself and Chelsea, the general manager, you know, who were responsible for a lot of that transformation. And that's typical of the majority of the situations we have where either the owner is leaving entirely. And, you know, that's just because they've, you know, they've sort of, by the time they're talking to us about selling the business, they're good and ready to leave. You know, selling is not celebrated in, you know, back to. Back to sort of predispositions in the artistic world. You know, selling is almost sort of like defeat in some circles and sort of, you know, I understand why? Yeah.

[51:44] Host: Isn't that where the phrase comes from? From like musicians, maybe?

Guest: You sold out. Yeah, you sold out. So, yeah, I think we're trying to reposition that as being a really, you know, a really exciting and milestone for a business to have that grow to a level where it can stand on its own and sort of outlive your personal involvement and continue to serve your community. And we have a lot of messaging around, around that in our B2B marketing to sellers. But yeah, so. So the, the majority of the time the owner is either leaving entirely or focusing on teaching, which was their original passion. Right. That's what they got into the business to do is what they love to do. Very, very, very infrequently have we had owners that have truly operated the business post closing. And if they did, it was mostly because they were sort of on the fringe of retirement and they wanted to sort of sell the business now, be able to quit their job at some point in the future, sort of retain their, their income.

Host: And.

Guest: And as the platform grew, we gave them the opportunity to kind of narrow their scope of responsibility to just sort of, hey, lead the community, welcome the students, you know, be part of the faculty. We'll do payroll, marketing, finance, accounting, tax, HR for you. Those are the things you don't like about the business. So we've offered folks, as we've. As we've become more of a mature consolidation platform that's been part of our value proposition for certain sellers has been, hey, sell the business to us and let us, you know, do the unfund things and you can just do what you like to do. But for Dana, you know, she was in that second category of, hey, I'm a teacher at heart. I want to be in the classroom with my students. I don't want to be in the office taking phone calls and dealing with customer complaints or worse, implementing software changes that I, in my 15 years of owning the business, didn't feel like were worth my time to do. So I definitely am not going to do it for your benefit. But yeah, so it was myself and the general manager there. And that's typical again, of our structure where we really rely on those general managers to lead those communities and be responsible for that on the ground. Implementation at a lot of levels.

Host: Well, speaking of scale and figuring out if it could work in using Vegas as a test balloon to figure out if this could work across the country and beyond the market where Jeff lives, this question of having competent general managers or elevating somebody who's at the Business to general manager. This too is, is, is kind of the entire project hinges upon your being able to successfully do this. So I don't know if you want to speak generally about that. You, you kind of just did give us a picture or just in the case of this first school where you elevated Chelsea, she was front office. Maybe. Maybe that would be the direct question. How did you, what did you see in this front office person that you thought they could be general manager? And I'll just add some color to the question. I feel like most many of my guests, if anything, they fumble there where they feel like they've identified somebody in the business that they can elevate to general manager and then learn the hard way that, oh, actually being general manager is a very different job profile than the one that this person I'm promoting had before. And it's. They don't. And it, they don't necessarily do well as the general manager. Did you get lucky with Chelsea or was there some special sauce there that you could share with the audience?

[54:49] Guest: I don't think we got lucky because we've been successful at this 55 to 60 times in a row. So I think we've had a lot of success. Being able to take either a front desk administrator or even a tenured faculty member that has been part of the community for some time is going to have the respect of their peers and the folks inside the building and elevating them into a general manager role. I think looking at school number one, all we had access to was my personal services, right? There was no infrastructure beyond the fact that I was going to be there and I was going to support it. But as the story advanced, we now have infrastructure set up where we're doing a lot of things on behalf of our general managers to the point where we've simplified the job to take care of the people that walk through the door. So your students, your parents, your teachers, make sure that they have what they need to be successful and make sure that the trains kind of run on time. From an administration perspective, if you can do those two things, you'll be successful as a, as a general manager because we will take what you've done there and sort of facilitating the interaction between our clients and our service providers. And we will run the rest of the business, right? So we will do payroll, we will do marketing, we will do hr, we will do, you know, tax and compliance and like all these other things. And that job is, is not easy by any stretch of the imagination, but it's, it's Doable and someone who cares about the business, which, you know, the biggest advantage that we have in our, in our staff is without, you know, with very, very few exceptions, they truly care about performing arts education and the experiences that our students are having in the classroom. They want those to be, to be good. They're passionate about it. And it's not just a, it's not just a punch of the clock kind of corporate job. It's not, you know, it's, they can be making a lot more money at other places, but they, they value the fact that this is, this is music, this is dance, this is something that they're, that they're personally excited about and you know, enjoy that environment. As much as I told you that I enjoyed being in that environment. So, yeah, we've really, we have had success taking that general manager, wrapping them with, you know, in the early days, my personal services in the later days. You know, sort of a community of people. You know, today our, what we call our shared services function is like 35 people. So those folks are working to support those schools and giving them lots of support and lots of specialists in each of these areas that they need help with. But we're trying to make that job again just like a, if you can be a competent administrator and a great customer service person and leader of that community, you can be successful as a gm. And that's probably not true of being GM of a larger business like the ones you're talking about. Maybe having difficulty with that transition.

[57:42] Host: Jeff, one more question before we bang through about 20 acquisitions that you're perched to do. The. You said when we were talking about size, buying small versus buying a million dollars of se. You need to see a path to multi million dollars of ste. You need to see some sort of consolidation possibility, add more color to that. Maybe in your own case, what, what did the market opportunity look like to you? You said to yourself, if we can buy and integrate these, then the market opportunity looks like what?

Guest: Yeah, I mean there are probably three to five thousand music schools in the country. And on top of that there's, you know, tens of thousands of individual teachers teaching out of their living rooms or out of small studios. It's a large market, it's very fragmented. There are very few multi site operators. There are very, you know, there's a couple of franchise systems that serve the space. You know, School of Rock is top of mind. There's also a smaller program called Bach to Rock. School of Rock only has about 300 US locations. Right. So their market share is below 1% and they're by far the largest operator in the space. And interestingly there are very few multi site operators within that franchise system. So this is not like the McDonald's or Wendy's franchise system where you have folks that are operating hundreds of units. These are largely mom and pop operators within these franchise systems as well. So it's a very fragmented, very mom and pop space. My original pitch to, to investors, sort of, you know, friends and folks that I worked with was that we would, we would consolidate 40 schools. That would get us to, you know, something on the order of 20 million of revenue and 3 million of EBITDA and that that would be enough to where the business was, you know, could be exited for, you know, a, we could counter some of that multiple arbitrage and maybe would trade for you know, six, maybe eight. Um, that was sort of the original pitch. And so we would kind of, you know, you'd be creating kind of two to three times multiple accretion, you know, from three to three to six or eight or nine. And you know, we would have organic growth opportunities within the portfolio as we went. So hopefully that would be, you know, that would add to that, you know, to that we'd have cash flow in the interim. But that was my pitch was let's go buy 40 of these. It's going to take two to three years. And you know, there's a, there's a really interesting kind of threshold we're going to cross around that level where we're going to become, we're knocking on the door within kind of throwing striking distance of kind of what is middle market in institutional finance land.

[1:00:22] Host: Jeff, the number that jumps out to me most in your plan there, your pitch is the two years. I mean that's a lot of acquisition activity to be signing up for. You said let's get to 40 schools in two years. Is that what you said?

Guest: Yeah, I said two to three years. Maybe I should say three to four instead. But look, from the beginning, I mean we, if you look back at our history, we've, we've executed on about an acquisition a month. You know, obviously there's some acceleration in that period of time, but we've done a deal a month for five years and you know, that's how we, that's how we turned a bunch of little, you know, small businesses into a decent sized opportunity was yeah, just doing it one at a time really consistently over a longer period of time. And, and you know, compounding, you know, had, has had its effect over that over that period.

Host: And so kudos for having been able to do that. But still, as you bring this pitch to me, your prospective investor not having done it, I'm going to say that that's. That that seems like too high a frequency. So I guess one question would be integration. So to realize frequency at that level, one a month, one every two months all over the country, the integration needs are pretty low.

Guest: They're really templatized. Right. So these businesses are highly similar, you know, and so we have the ability to, you know, to do a good job of integrating in a repetitive system, you know, sort of programmatic way. So there's not a lot of range of starting points in terms of what we see in terms of folks that are farther along on the digitization or operational path. That's only work that we don't have to do when we get in there. So you're either starting at the beginning and we run the whole playbook, or you've done certain portions of it and we can do pieces of it. But yeah, I mean, I think I had the good fortune of having worked in finance. I had lots of peers that were now 10 years into their journey, had money, knew me, had seen roll ups work. I got a very friendly reception, which I'm very grateful for. But they sort of saw the thesis and sort of said, I've seen this work in other spaces. I'm sure you'll figure it out. And I'm going to invest an amount that's not super personally meaningful. Personally meaningful to me. Good luck and let me know how it goes.

Host: Okay. All right. And so after acquisition number what, you went out looking for growth equity. This was after Vegas, your number two acquisition or had you?

[1:03:02] Guest: Yeah, so we raised equity around sort of concurrently with our third and fourth acquisition. So October of 2019, we did two deals. One was in Tampa, one was in Boston, and we closed on our equity round that same month. So that was sort of, to me, that's when this becomes, you know, sort of a real commercial venture, you know, in its own right. And yeah, I think, you know, if I can offer just sort of a couple of milestones from there in terms of where, you know, where we went. So, you know, so we raised some friends and family money in October of 2019 for, you know, for, for schools three and four, sort of concurrently with schools three and four. We got a local bank involved called First Western Trust here in Colorado. They were really, they were really creative given our size. Right. In terms of sort of giving us an underwriting box and Saying, we get what you're doing. We've seen, you know, we've seen five opportunities of this type. We're not going to give you any back leverage, meaning you know, you know, you've funded the equity in the business that you funded. But we'll give you leverage on a go forward basis at around two times. So you can, you know, we got, we were able to meaningfully sort of start to scale our equity dollars from that point forward. In January 2021, at 12 schools, we raised our first tranche of institutional equity from a growth equity firm called Newground Ventures. Pretty tight connection with a guy there who was a founding partner there, whom I'd worked with at Reservoir. He was a managing director when I was an associate. We worked on a few things together. He was out on his own doing growth equity deals and he thought the ensemble story was interesting. Again, kind of back to this kind of tried and true roll up thesis. Seen it work in a lot of spaces. Hey, you're now at 12 schools. That seems like a good amount of traction. There's some really good case studies that we can, that we can dive through. You know, it's 2021. You've survived Covid, you know, good job. Let's keep doing, you know, let's keep doing what you're doing. And then we, you know, we got, we did, we did get to 40 schools in January, in I guess about the 40th in October of 2022. So pretty much exactly three years from when we raised the initial tranche of equity. So we did what we said we were going to do, and we also did what we said we were going to do in terms of actually looking to sell the business and taking on a single majority financial sponsor at that time that was more appropriate to the size of business that we'd built at that moment in time. And rather than, my friends, getting a real institutional sponsor that was capable of supporting the business at its current size and taking it to where we thought we could go, go in the future, which is sort of taking that initial goal of 40 schools and saying, hey, this is really working. We've got a lot of momentum. This is fun. The space is still really fragmented and our market share is still zero. So let's take what we've built and sort of run an institutional volume of capital through it with the goal of getting to maybe like two or 300 schools. And so that was January 2023. We closed on that transaction. I sort of view it as being two separate things. I feel like I Sold the business and I got rehired as its CEO in sort of two different transactions, you know, to continue doing more.

[1:06:14] Host: Jeff, why is that? Not kind of a typical seller, stays on to run the business, roll some equity. Why is this? Why? It sounds very kind of conventional to me, but you're making it seem like it's a little different.

Guest: No, I agree with that. I just feel like in terms of mentally how I. So maybe like, I think this is of interest to your audience, but like, I got into ETA for the personal freedom. Right. I was like, I want to bet on myself. I want to be my own boss. I want to have absolute control over my time. Like, these were some of the things that I was, you know, motivated by as I got into the space.

Host: Sure.

Guest: And I gave up all of those things in the course of taking on a majority investor and a board and a, you know, and a sponsor and, you know, so I viewed it as getting hired again. And then that's specifically what I mean. It's like I took the job of CEO and yeah, I'm a, you know, I still have a material equity stake in the company. It's still really important to me. I'm, I'm super motivated and, and focus on it every day. But I have a job again and, you know, my job is to be CEO of this business that is of. Of now of a very different scale than the one that we started in 2019 that was, you know, maybe more typical of like an ETA size business. So, yeah, it was a really interesting professional opportunity for me to go be CEO of a, you know, eight figure and growing, you know, mid market business. But that's a different value proposition than the one that I took on when I was like, hey, I want to quit my job and be my own boss and kind of run. Run my own thing.

Host: It's not like you just took a job. You did get a paycheck, like a payday, have a really big payday when

Guest: you sold your business.

Host: But I take your point, Jeff. I want to hear just a little bit about the two moments where you got debt and then equity, because we hear a lot on this podcast about what the terms of a first deal of a first acquisition look like. Like we spent some time on Euros. Typically it's an SBA deal, not always, but the. So let's do the first, the debt with that local bank that you talked about and then growth equity from the person who'd been the managing director at. What was the name of your previous firm?

Guest: Reservoir.

Host: Reservoir. So the Debt assume not a, not a ton of knowledge about, about the non SBA debt. You said they offered it at two times. What did you mean? Just walk us real slowly through that.

Guest: Yeah, so, so basically what, what the bank said was we think what you're doing is interesting and you know, we've done this five times now. We can see the merit of the strategy. We are not willing to give you back leverage on your portfolio, meaning, you know, we're not going to loan you against what you've built so far, but we'd love to support you going forward in your future acquisitions. So basically, you know, for school number six, we said, hey, you know, it's making X. And the bank said, great, we'll pay you, you know, we'll loan you 2x against that. And so from the bank's perspective, 2x is a reasonable threshold to advance on any business. But they also have the coverage of the portfolio so they have some equity coverage behind them. And then of course this is regional bank debt, so this is fully personally guaranteed. So they have me on the hook behind that. So I think it was, I don't think the bank took an extraordinary risk or anything in doing that. But nonetheless it was a very creative structure for a bank to, to take, particularly given that the business was like a $2 million revenue business. It was a small business at that time. I think that's one of the great things about the banking ecosystem is there are so many small and medium sized regional, local banks in this country. It's just a numbers game. If you go talk to enough people, if you have a reasonable business propositions, you'll find the right bank that's willing to do it. And we were fortunate that we got in touch with which, with First Western Trust. And they're great to work with. But that was sort of how that structure worked was it was a facility for funding go forward acquisitions where they said, we get what you're doing, we get that you're going to do it a bunch more times. We're not going to ask you to sort of take us from the beginning every time that you're doing it. We're going to take the cushion that exists in the business and we're going to use that as the basis for giving you kind of a programmatic delayed draw facility. So you know, here's a cap that you can draw against, you know, up to that cap, as long as it meets this criteria, just like email us and we'll, you know, we'll advance you the money.

[1:10:41] Host: And so let's let's, let's play with some easy numbers as an example. So say acquisition number nine had $100,000 of cash flow and you were going to buy the school for $300,000. They, what they would give, they would give you a check for 200. 200, right. Because it's cash flowing. 100. They'd give you twice what it's cash flowing. So they basically give you 66% of. And then you. And then the remaining 33% you'd bring from your cash flow from the existing business.

Guest: Correct.

Host: Okay, gotcha. And you had enough cash flow to do that again? I mean, you had to bring 33% basically for every acquisition. You had enough cash flow coming out of your acquisitions to do another, however many it was. Well, I guess that's why you had to go get the growth equity there, right?

Guest: Exactly. Yeah. So, yeah, we, we raised, I mean, we, we did. I mean, cash flow was a meaningful portion of that, of that story as well. But yes, we, you know, we raised, we raised three tranches of equity over five years to get to where we are today.

Host: And so can you give us a sense of what growth, the growth equity, what a growth equity deal looks like? Again, assuming here that a lot of folks, including me, don't really understand what a typical growth equity structure looks like. What does it look like?

Guest: Yeah, the first two deals were structured in a similar way to a venture series A financing. So you basically set a mark for the business and say it's worth X today and we're investing Y and as a result, we're going to own Y over X percent of the business when all is said and done here. So we did two deals of that sort where we basically said, hey, there's a business that exists here. Let's value it. There's capital coming in, you know, that's, you know, it's worth what it's worth as a percentage of that on a Post Money basis. And so we basically sold to, you know, 15 to 20% stakes in the business in succession. So, yeah, that's how we got there. And you know, the first one was, was a really friendly, you know, kind of, like I said, sort of friends and colleagues kind of, you know, kind of deal. And the second one was, was very institutional in nature, but they had fundamentally the same structure which was value the business, decide how much capital is needed. From there, the math is easy in terms of what percentage you own. There's some negotiation around what rights you're getting beyond that in terms of liquidation, preference and Board rights and governance and controls and what can management do and not do with the money that you've put in the company? But it's exactly like a venture or growth equity series A term sheet is kind of the nature of what we did.

[1:13:20] Host: I keep coming back to this because it's such a spectacular story and people are just going to be listening to this and being like, oh, how can I go do what Jeff did in. In some and somewhere else have you seen. And you probably won't want to share what it is other industries where you're like oh, I could go do what I did here in that industry if I weren't CEO. If I hadn't taken on the CEO role and you know, your hands are full or do you feel like you really found something that is quite unique and it would be hard to find something like this again?

Guest: I think both are true. So one of the reasons why I tell people I'm still really excited and motivated about the opportunity that's in front of us is I don't think that I could sell the business, spend the obligatory six months on the beach and come back and find something that was as interesting and also as personally meaningful to me as the performing arts is. But I definitely think that there's lots of opportunities that are out there. I think even if all you want to do is use the lens of specialty service provider and folks that end up owning small and medium sized businesses because they are trying to provide a service and not because they're trying to run a business, I think there's tons of examples of that out there. And we've done music and dance, but gymnastics, tumbling cheer is fully rolled up. Varsity, which is a vein capital portfolio company is the more than 800 pound gorilla in that space. And so there's another example of what this kind of looks like immaturity. But chiropractic, physical therapy, wellness centers, med spas are really attractive roll up opportunity right now that lots of people are doing professional services, accounting firms, consulting firms that are kind of subscale and part of that kind of roll up ecosystem. There's tons of examples of. And you know some of those I know because I've talked to people that are doing them and sometimes some of them I, you know, just sort of have in the back of my mind. But I think there's a, there's a, there's a lot of white space out there still.

[1:15:18] Host: Great. Jeff, anything that we didn't get to that Searchers should know about your story should understand?

Guest: Well, I mean the Big. The last incremental shift in the businesses is when we expanded from music into dance. Right. So that's not a. That's not a small leap in terms of, you know, those things are adjacent, but they're. They're pretty different.

Host: Yep.

Guest: So. And it required bringing in, you know, folks that would be more authentic in dance world than I am. I mean, I took a couple of dance classes as a young boy, but, you know, certainly not the same level of personal experience with it that I have with music. And so, yeah, we had to kind of retool our leadership team to make, you know, to make dance a priority and a realistic possibility within the business. So that was a 2023 project. Was, you know, kind of after, you know, one of the things that I credit our new partner and sponsor with was, you know, pushing us to get into dance sooner and in a more. In a larger way than we probably would have on our own. I kind of always felt like dance was a natural adjacency, but it was just sort of out there and we'd get to it eventually. And they said, no, it's, let's do it now before somebody else does. To your question from a few minutes ago. So I think that's the other big change in the business is we had a really large high velocity opportunity in front of us in music that was working. And we actually sort of stood up a second vertical to kind of mirror that and leverage what we were doing in music and then figuring out the incremental pieces that we needed to do, do dance well and going out and finding those and standing them up so that we now have kind of twice the service opportunity. And whereas now we're now doing two acquisitions a month. So, you know, it's kind of helped us from a velocity perspective to have that additional surface area. But yeah, totally kind of transformed the business.

Host: Yeah, let's compare and contrast a little bit. So. So starting with what is the bigger market, just crudely, are more kids doing dance or more kids, I assume, are doing musical instruments? I assume dance is a smaller market.

Guest: Dance is a larger market. And in some ways that's because a lot of what you're thinking of as being music is happening in public schools. So it's not part of the tam. So I can't do school band, which is a meaningful portion of musical instrument participation in the United States. So private dance is bigger than private music. And the biggest difference in the two business models is dance is primarily taught in a group setting and music is primarily taught in a Private lesson setting. And there, there are big pros and cons there. So private lessons, really sticky, one to one relationship, high customer, lifetime value, lower margin. Dance group lessons, less connection between a student and teacher, much higher margin. But the margins vary. You know, the incremental and decremental margins are very large. Right. The, the ninth student you put in a class is nearly 100% profit. And so the coefficient of profit to revenue is really high. And so taking a school from break even to 20 to 25% margins is a matter of growing revenue by 10%. But the reverse is also true. So you have this super high beta product in your portfolio where, you know, when times are good, they're really good and you know, when times are less good, you know, it can be a bit of a challenge.

[1:18:56] Host: And what about the footprint? A music, a dance studio takes a lot of space, whereas if you, as you described it in a, in a music center, it's kind of a honeycomb and you've got, you know, basically two chairs and a music stand. That's all you need for to deliver a lesson.

Guest: Yeah, our music schools are probably 3,000 square feet on average. Dance schools, you know, five to eight. So, you know, twice, twice as big on average.

Host: Really interesting, Jeff. And so by the way, since at every stage you were kind of talking about what the goal was and where once you reached a certain threshold, what the liquidity event would be for the business, is that also something that you're the institutional buyer who acquired you and now you're the CEO of the business for that they have a goal and plan for? I mean, does it go public or is it to sell to yet another larger private equity concern?

Guest: Yeah, I think public is not a realistic expectation for business in this space. So yeah, I think it's really just sort of will be privately held and will be kind of traded amongst financial sponsors for the remainder of, of my time here? Yeah, I just think, you know, the minimum size and growth opportunity for being a public company has meaningfully increased over the years and there's, there's lots of reasons why that's actually not, you know, not very desirable, just from a compliance perspective. So, no, I think, I think we're a private company and you know, we'll, we've grown the business to a point where we don't actually need to,

Host: we

Guest: will not be significant. The business will not be impacted by who owns it to a large extent. And that's part of, in terms of what is the value creation that searchers are doing in the lower Market it is taking jobs and turning them into financial assets. So that's the scale up process that you're doing is you're going in and you're buying a business that previously was somebody's full time job or you know, or less depending on how kind of lifestyle oriented it was. But it was a job for them and you know, you're turning it into something that can be, they can be invested in at an institutional scale. And that's where the, that's the driver of multiple arbitrage is why it exists. And you know, we've now crested that and we are now a financial asset. And you know, on the investment side.

[1:21:23] Host: Is that what you tell your music teachers?

Guest: Well, I was going to say exactly that. Which is like my job is to insulate them from that at the, you know, at the operating level, but at the ownership level, you know, that's definitely true. And so yeah, we, you know, our business exists to provide, you know, outstanding classroom experiences to tens of thousands of students each week. And that's how we, you know, that's how we create value at the student, customer and you know, societal level. But you know, at the institutional equity. In the world of institutional equity, you know, what we've done is we've sort of taken a space that was previously incredibly fragmented and sub institutional and turned it into something that they could get access to. And by the way, the kids extracurricular sort of youth enrichment space is all the rage right now. So we sort of benefited from a kind of thesis evolution that happened independent of us where people are really excited about that space and sort of just believe that parents will spend any amount of money on their kids and their experiences which to a first approximation we've seen to be true.

Host: You've seen that to be true and that trend will continue because I feel like.

Guest: Sure hope so.

Host: As a father of a young daughter myself, I feel like there's grumblings among parents that you know, we're going to do it differently. We're not going to be schlepping our kids all over the suburbs to this practice and that game and that whatever extracurricular to the end of our days. So. But maybe every parent grumbles about that and they do it anyway sort of thing. Any so personal question but personal interest here? No, no, no slowdown in sight for that sort of culture of extracurriculars?

Guest: No, not, not that we've seen so far. That's great, Jeff.

Host: I think that is it. If people want to get in touch with you, how would you prefer they reach out. Do you like LinkedIn?

Guest: Yeah, LinkedIn. I'm on there. Jeff Homer. Ensemble Music schools. And yeah, I mean, I'm actively looking to connect with folks that are interested in eta. I'm in the sort of dispensing free advice phase of things with the hopes of connecting with folks that have kind of interesting theses and interesting opportunities that might align with kind of what we've done. And you know, I am looking to, to reinvest some of those proceeds back in the search space. So eager to hear from folks.

Host: Careful, Jeff, you might, you might get barraged with that. That was a, a very open and generous invitation. So take him up on that, everyone. Jeff, if I, if I search piano lessons near me, I mean, how many schools do you guys have now in the portfolio?

[1:24:00] Guest: We have 65 music schools and five dance schools.

Host: 65 music schools and five dance schools. So are you in kind of all the major markets and then some states?

Guest: Yeah, look, there's some big places. We don't have a presence like Dallas, but, you know, but you'll get there. We're in, yeah, we're in. We're in the majority of other kind of top 15 markets.

Host: Great. I'm so curious to just kind of Google around and see, see your, your local outfit here in the D.C. area. D.C. area?

Guest: Yeah. Middlesea Music, Kent School of Music.

Host: Okay, great. I'll check it out. Jeff Homer, what a. What a story. Fascinating. Very educational for us. Thanks for walking me through a bunch of the finer points and congratulations on this, on this outcome.

Guest: Thanks. I mean, it's been super fun. So appreciate, appreciate you having me on and happy to chat more about it.

Host: Thanks, Jeff.

Guest: Sam.