Jeff Homer – Music Schools and Consolidation Tactics – EP.238

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(00:02:48) – Ensemble and Jeff’s career

(00:06:39) – What is the process of buying and overhauling a school?

(00:13:43) – How have sources of funding for you changed?

(00:19:01) – Where do you feel like you’ve improved the most on this journey?

(00:22:11) – Is there a characteristic or culture you’re looking to complement when hiring?

(00:24:13) – What skill must you improve to grow to hundreds of schools?

(00:28:09) – What is your consolidation thesis?

(00:30:44) – Are there other industries you’ve considered when acquiring?

(00:34:21) – What early mistakes can people avoid in consolidations?

(00:36:29) – Brand integrations

(00:43:11) – What are ancillary services you’re looking for?

(00:47:19) – What flywheels are you thinking about within the business?

(00:50:05) – How have you streamlined your processes?

(00:53:58) – Valuations in lower middle markets vs. larger markets

(00:57:55) – What are other ways to drive value in Ensemble?

(01:00:03) – Do you own the RE of schools you acquire?

Alex Bridgeman: Well, Jeff, good to see you. Thanks for coming on the podcast and chatting through all things like music schools and everything else. Can you start by just walking through like what Ensemble is and the progress you’ve made to date? It was fun to hear about it a couple of years ago and you wrote an article in the Operator’s Handbook, that print magazine I ran for a little while, so that was a lot of fun. But yeah, can you walk through kind of what the business looks like previously and then today? 

Jeff Homer: Sure. So, first of all, thanks for having me. It’s fun to finally have a live, recorded conversation after having talked many times over the years. So Ensemble started as a side hustle. So, I bought one music school outside of Denver, Colorado, in 2019. And my full intention at that time was to manage that business on top of my day job. I had a job that I liked working at a family investment office. I thought it was a pretty unique seat to be in. I thought it would be something I did for a long time. But I’d moved from New York to Denver and had gone from working Wall Street hours to Denver family office hours, and I guess I don’t have enough hobbies because I felt like I had some time on my hands and I needed a side project of some kind. So, I was looking for a small business to own and operate. I thought it’d be fun and interesting to have an operating experience and to get out from behind the spreadsheet and get into a business that was active in my community. So, I bought a music school. And it was really in getting into that business that I developed a bit more of a roll-up or consolidation thesis that became Ensemble Music Schools and now Ensemble Performing Arts. So, moving through that pretty quickly, hopefully. The first business we bought is very representative of where the business headed as a roll-up, which is we bought the school from a really talented teacher whose background and passion was students and their in-classroom education and didn’t have a lot of experience building a business or setting up systems or processes to scale that business. And so, once it got to a point where they were doing 500,000-ish of revenue and had 20 employees, it became a lot to manage. And when I met this entrepreneur in 2018, the business was primarily run on pen and paper. So not a lot of digital investment, and yet a really strong and stable base of students. There were about 250 students that came weekly at least to come get their music lessons. The business was attractive to me because of that recurring high customer lifetime value sticky relationship between the student and teacher. I took piano lessons as a kid. I had the same teacher for like 10 years and I don’t think that’s an unusual experience, so that was the lens that I looked at when I was getting into it. Once we were inside the business and I was operating, there was so much low-hanging fruit, and it was really fun for two reasons. One, it was fun to be in a music environment. It was so different than the corporate finance experience that I’d had previously. It was fun to see the kids coming in and having a great time. It was also fun to make progress and to just clean up some of this low-hanging fruit, do some easy digitization and digital marketing work to help grow the business. It felt like we had a lot of early momentum. It sounds crazy in retrospect, but it’s actually only four months from buying school number one as a side hustle to buying school number two as a full on roll up with a view of let’s go consolidate maybe as many as 40 of these. We reached that 40 school target about four years in, in 2023. At that time, did a bit of a recap, sold a majority stake in the business to an investor group that we’re still working with. They, I think, very presciently in retrospect, pushed us to expand from music into dance, where I had always viewed that as being a bit of an adjacency, but maybe a someday maybe kind of project. And they thought it was highly synergistic with what we were doing and something we should do right away before somebody else figured that out. So today, Ensemble is 72 locations, 65 music schools and seven dance schools, and then a handful of ancillary investments that we view as being complementary to those classroom experiences where we’ve invested in things like retail or rental or curricular products that we use in our classrooms. 

Alex Bridgeman: Can you talk through some of the iterations of the process of buying a new school, overhauling certain systems, and maybe recruiting, marketing? Can you talk through- I’m sure the way that you overhauled music school number three is different than 70. Were there a couple noticeable iterations to your process as you went along? 

Jeff Homer: Yeah, I think the biggest change is who was doing all that work. Because for the first 25 schools, it was me. Over time, as we built more of a team, that’s become a core competency of the organization as opposed to my personal skill set. Today, we own schools that I’ve never been to. That would have been a crazy thing to say just a couple of years ago. I think the benefit of the consolidation thesis that we’re pursuing is these schools are generally, they’re highly similar to one another. And so, from a due diligence perspective, we’re able to really understand the businesses that we’re looking at. We can use a couple of data points to really triangulate to what revenue should be, what margin should be, how profitable the business should be with a high degree of accuracy based on not only the financials, but just a few KPIs in terms of what’s your enrollment, what’s your teacher pricing, what’s your lesson pricing, what’s your teacher pay, that sort of thing. I think the piece that has changed the most is really that integration and onboarding process. So, when we bought a school early on, I would go there for a week and I would sit down with every teacher individually and say, hey, we’ve bought this business, we’ve acquired it because we really like what your founder and former owner was doing. We like the direction of the business. We’re here to sustain and support that. So, there aren’t going to be big changes to the direction, but we are here to support the business from an operations perspective. And speaking to a teacher, the primary thing that you can offer them is, these are all part-time folks paid hourly for teaching, marketing support is really valuable to them because more students means more money in their pocket. And so, the idea that we’re going to be able to do a better job of customer acquisition is really desirable. And so that was sort of the message to our teaching staff was nothing’s going to change. I’m certainly not qualified to tell you how to teach music or dance. There’s going to be no changes to that side of things. But we are going to help you fill your schedule and make sure that this is as much of an earning opportunity for you as you would like. So, in the early days, I would go for a week. Today, we have an M&A resource that is making a lot of those site visits. We have regional management staff that’s going out and saying, hey, I’ve been through this several times, and I’m not the owner kind of here shilling this to you. My school was acquired. That’s how I became part of Ensemble, and I’ve now been promoted into these roles, and there’s been a real career path for me, and I can vouch for that. And so, as our organization has grown, I think it’s been helpful to start sending, I don’t know of a better word to use than kind of disciples in terms of people that grew up in our organization, came into it through the same sort of acquisition channel, had good experiences, and then are now able to go tell new members of our community about what that was like and why we should get the benefit of the doubt as they’re evaluating our performance during the onboarding process. 

Alex Bridgeman: What moments did you start building out that team, that kind of support level team for regional support, M&A support? When did that start to happen? 

Jeff Homer: Pretty late in the process. I’ve always been really focused as a roll-up operator on the cost of our platform as a percentage of our four-wall EBITDA in the field, so thinking about what’s our overhead as a percentage of our school’s profitability in the aggregate, and trying to manage that ratio to like 30 to 40%. And so, we had to run pretty lean, especially when the business was small because individual people are chunky in the context of that scale. So, I did a lot of that right up through 2022, which would have been about 23 schools. I was doing substantially all of that work. I mean, at that point, we would have had some payroll staff and that kind of thing that would have been helping to onboard employees. But other than financial plumbing, I would have been doing a lot of the work. As we started into 2023, we started to promote folks into these regional management roles, which have been really great in terms of providing not only resources to our existing schools and making my phone ring a lot less often for things like my AC is broken and my printer doesn’t work. So, we’ve been able to absorb a lot of that, but being able to deploy those folks in new acquisitions has been really beneficial. And then our first M&A sort of corporate development resource joined the company just in October of last year. So that’s been a big benefit and a huge step forward in terms of our organization’s ability to manage the process, the M&A process from prospecting through due diligence and the LOI and execution phase into integration and onboarding. Martin’s now overseeing a lot of that work and has been really additive to our ability to do school M&A on kind of a programmatic basis, where, again, we now own schools I never went to, in some cases didn’t talk to the seller, and I think that’s a big step forward for the business. 

Alex Bridgeman: What have you found are the few key metrics or key must-have diligence items for any new school? Like, what are the few things that matter in any new possible acquisition for you? 

Jeff Homer: Yeah, so I would say size is a big one. So, return on time is important. So, we just have to have a minimum size threshold. The other is, and this is common with really any search or SMB type acquisition, is what is the owner doing in the business and do we have capacity to replace it? So, we’re looking for owners that have managed themselves out of the classroom over time. So, they’re not the main teacher or they’re not the reason why people are coming to the business. And they’re also generally not the front desk. They’re not who people are used to seeing and communicating with when they come into the school or when they email or call to make administrative inquiries. So, we want that because we obviously want the owner to be substitutable in the business. So, we want to see that we have teachers other than the owner, we have administrative staff other than the owner that people are going to be able to continue to interact with and not view that as being a discontinuity in their experience when we acquire and take over operating the business. So, I think if it’s big enough, if the product is high quality, which in this industry, it overwhelmingly is. These are almost always founded by people who are really passionate about music and dance education, and that’s their background and strength and primary passion. So, we need that, but it’s almost always there as a baseline. So, I think size from a return on effort perspective and the owner’s role in the business and whether we can step into those shoes with the services that we provide to the schools are the things that we really focus on. 

Alex Bridgeman: So, you mentioned kind of doing most of this yourself with your own cash in the early days. How did kind of sources of funding change over time? You said debt, outside equity, your own, how did that mix evolve too? 

Jeff Homer: Yeah, so the first four acquisitions were done sort of out of pocket. In October of 2019, I sort of had a proof of concept. So, we have four schools, there’s a thesis, there’s some proof of concept that exists. And I went to my friends and people I’d worked with and asked them to contribute to support the thesis going forward, and I’m very grateful to say that I got what I was looking for. We also were fortunate at that time to get involved with a community bank called First Western Trust here in Denver. They were really supportive of the business at a very early stage. I mean, in 2019, the business did less than a million dollars of revenue, so well below what you would typically think of for commercial bank funding, and especially outside of the SBA context. So, they gave us what I think is a very creative structure, which is they basically gave us a delayed draw term loan where they said, we get what you’re doing, and we understand the thesis. If you make future acquisitions of this type, we’ll basically loan you two times debt to EBITDA, and we’ll get the benefit of your existing portfolio as collateral. So, there’s no back leverage. So, the four schools we owned outright basically became part of their collateral and they were willing to lend us two times debt to EBITDA on a go-forward basis. But of course, we’re buying these schools for like three times EBITDA or SDE. And so, we were actually getting sort of two-thirds debt to cost, which was a big turbocharger in terms of the equity that we had raised. Fast forwarding from there, we took on an institutional growth equity partner in 2021 when we would have had about 12 schools starting out. And that was helpful because it was a much larger equity check and allowed us to continue doing what we were doing. And then we sort of outgrew my friends and former colleagues as capital partners heading into 2023 and decided to take on a more traditional financial sponsor in 2023. So, we sold a majority stake in the business to them, cleaned up the cap table. I rolled a bunch of equity but took some as well. And I’m still managing the business as CEO today. 

Alex Bridgeman: What were you excited to see with the new capital partner in terms of certain expertise or ways to go faster or do things bigger? In your mind, what was the most pressing need or exciting thing that they brought to you? 

Jeff Homer: The most pressing need in the business at that time was executive leadership. So, I was there, we had a COO, but this was on its way to being a $30 or 40 million revenue business that didn’t have a true CFO, didn’t have a really senior person in the finance function. At that time, we didn’t have the M&A resource that I mentioned earlier, and we needed to continue to build out that regional management infrastructure. So, all of that was investment in overhead. And so, they were supportive of doing that with a vision of building a much larger business. And so, I think the biggest thing we got was support for taking where we were, moving the goalposts out much farther. Remember that my initial pitch to my friends was, we’re going to buy 40 schools and then flip it. Well, we did actually have 40 schools at that time, and we did end up selling the business to this new sponsor. But now it’s time to move the goalpost forward and say, hey, we got to 40. This is really working. We can probably get to hundreds of schools if we continue to operate the infrastructure that we’ve built. Let’s start building towards that objective and get more serious about having some other senior leaders in the business that can help pull us towards that objective. I think the other thing was it was helpful to have peers within the portfolio. So, by virtue of becoming part of a control group, we started to have portfolio company conferences and other portfolio company CEOs that I could draw on as I was 32 years old running a $40 million revenue business for the first time with frankly not a lot of management experience other than what I had in the business up to that point. So, to be able to tap into other operators, other CEOs in the portfolio, principals within the family office even, all of that expertise was really helpful in terms of accelerating my learning and getting more and better guidance on how to build the business going forward. 

Alex Bridgeman: Were there any specific lessons or things you learned from that cohort or peer group of CEOs that has stuck with you? 

Jeff Homer: Well, I’m fortunate to be part of a group where we have a handful of multi-site operators in the group. So, this idea of running a bunch of physical locations spread out through the country away from a headquarters of any kind, that’s the hardest part of our business is the geographic dispertness of it. And we have a couple of peer companies where that is also the structure and the challenge. And so, we’ve been able to go to them when we were building out the regional manager network, for instance, and say, should our regions be markets? And if so, what happens with the ones and twos that are outside of points of concentration? Or should our regions be regions, and should our regional managers travel? And if so, how do you structure that, and how often should they be there? And we asked lots of those questions and got some really interesting perspectives on how to set up that type of business. 

Alex Bridgeman: What do you feel like you personally have gotten better at in the last, like since that recap? Is there any- if you compare, if you talk to yourself, like after the fourth school versus today, what do you think the biggest differences would be? 

Jeff Homer: Well, the business is almost one order of magnitude larger than it was when we started, not quite, but close. And the change in what the business needs from a CEO is really dramatic over that period of time. So, at 10 million in revenue, it’s totally fine to be, and probably even desirable, to be more of an individual contributor, more in the weeds, really player coaching inside the business. At 100 million in revenue, which we haven’t reached yet but are approaching, the business needs a CEO. And anything that the CEO is doing as an individual contributor is a bottleneck either in terms of time, just in terms of not being able to get to things fast enough, or in terms of preventing the organization from growing and actually developing that capacity at lower levels of the business. So, I think I’ve had to hand off… Two years ago, I wore three hats within the business. I was its CEO so much as a $10 million revenue business needs a CEO, I was wearing that hat. I was also head of M&A, and I was also the regional manager for a substantial portion of our school portfolio. And having handed off the regional manager hat to many people and the head of M&A hat to one very talented person, I’m spending a lot more time in the CEO role, which is, as a roll up, capital allocation is our number one thing. So, where are we spending our acquisition capital and are we getting good returns on that? And are we doing appropriate diligence to ensure that we’ve underwritten what we’re buying? But then getting the right people in the right seats, headed in the right direction, both from a strategy perspective and from a team-building perspective, is a lot of what the CEO of a larger organization needs to do. And I have no experience with any of those things. I mean, I came to this from the private equity world where I was a spreadsheet monkey, for lack of a more glamorous way of describing my experience. And learning how to manage people, how to develop an organization has been challenging and has required a lot of growth on my part. I’m certainly not, I’m not all the way there, but having some of these peer mentor resources has been really great. I also joined YPO for the same reason. So, I’ve really enjoyed being part of that peer group and having access to some people that I’m super impressed with and excited to learn from on a daily basis. So yeah, I’ve just tried to seek out opportunities to get better at leading this organization, because it’s now 1,400 people, and it needs a lot of leadership in a different way than when it was 40 people and I could talk to each one of them individually about where we were going. 

Alex Bridgeman: 1,400 people, that’s impressive, that’s a lot.

Jeff Homer: I should caveat by saying that a lot of those folks are part-time teachers, so they’re not 1,400 FTEs, but it is a lot of human beings, and it’s pretty wild to think about. 

Alex Bridgeman: The executive hiring piece is really interesting and one I think about a lot. Is there a particular kind of characteristic or culture that you’re looking to compliment in many of these hires? 

Jeff Homer: Yeah, one of our core values is the idea that we are stagehands, so we’re not the stars of our show. Our students are at the center of what we do and we need to be in the background…

Alex Bridgeman: There’s so many music puns that you could add into this business, it’s unbelievable. 

Jeff Homer: No, we’re working hard. I mean, even the name Ensemble, there’s a double entendre going on there in terms of the portfolio of schools. But yeah, I think this idea that we need to be sort of servant leaders on behalf of businesses is embedded in the culture all the way from this is a remote business with no gleaming corporate headquarters anywhere. Like if we have real estate, we have a school and that’s a place where we serve students. But also, I spend a lot of time harping with our shared services staff about the fact that none of us teach lessons, and therefore we don’t make money for the business. And our only job is to support teachers and their students and having great outcomes. And obviously, we need to do that in different ways that might involve running payroll or doing marketing or anything else that’s not teaching a student, but ultimately the end goal is helping a student have a great experience in one of our classrooms. So yeah, I think people that, the people we’ve had the most success with are people that have some kind of personal experience with music or dance and understand the mission and are drawn to being part of building a really sustainable performing arts organization. And those things don’t often go together. We think about our local civic orchestra as needing charity to sustain itself. And so, the arts sort of has this perception of not being a viable business model or not being self-sustaining in its own right. And so, I think people have been, in my experience, really drawn to the idea that we’re going to run profitable schools, and by virtue of being profitable, we’re going to be sustainable in terms of being able to have staying power to provide some of these experiences in these communities long term.

Alex Bridgeman: What do you feel like is the skill or thing you need to improve on to get to hundreds of schools? What about you and your role today do you think is going to change the most once you get to another order of magnitude? 

Jeff Homer: The change from being a two-layer organization to being a three-layer organization in terms of inserting middle management was really challenging from a cultural transformation perspective. It was obvious in the present and even in the lead-up to it that it would be something we would need to do just from a numbers perspective. There was no further subdividing of my time that was going to allow me to support an infinite number of schools. Even so, it was a challenging hurdle for the business to disintermediate a bunch of people that I had long-time personal- The general manager of school number four was used to getting a lot of my time, and telling that person, hey, sorry, you’re going to now report to somebody, one of your former peers that has been promoted and elevated into this role above you, having those conversations times 25 or 30 was a delicate moment in the organization. And I think getting people to buy in around that was a big moment. That’s going to happen again around hundreds of schools. We’re going to have a fourth layer where if we think a regional manager can reasonably support 8, 10, 12 schools, when we start to have 10 regional managers, we’re going to get to a point where we have too many of those to support them on a one-to-one basis, and we’re going to need super regional managers or whatever we’re going to call them. And so, we’ll have to go through that again at the RM level and have conversations with folks about, yes, you were one of the stars that got promoted early on, and now you’ve had a relationship with senior management for a long time, and now you’re not going to. And it’s going to be another really delicate transition that we’re going to have to go through. But I think one of the keys we had to getting buy-in the first time was doing an open application process. So, we asked our location managers who wanted to be considered. Those that didn’t want to be considered actually got to be part of the selection process for regional managers. So, we’re trying to put more agency further down in the organization to get some buy-in around some of the choices we were trying to make. 

Alex Bridgeman: That reminds me of this acquisition report. Have you seen this deep dive into acquisition-driven compounders? It’s like a 330-page slide deck. I’m guessing someone or… 

Jeff Homer: I’m going to need you to send this to me because I don’t think I’ve seen it. 

Alex Bridgeman: Okay, I figured four or five people would have sent it to you. But there’s a great discussion point with Constellation Software and their org chart, which the chart looks like a circle with all the portfolio companies dotted around the edge of the circle. And then, like an org chart like lines to smaller groups of people and each circumference into the center of the circle. And they’d done some studies showing that they could, the maximum number of companies they think they could acquire with their org structure was like 250 or 300 or something like that. But they used to think it was only 200, so they keep raising the number. But that kind of made me think of like, what is the maximum number? Is there like a size that it becomes prohibitive to continue growing? But it seems like even some of these other folks who were talking about that in this report like over time found ways to continue growing. So, I’m not sure if you feel any of that pressure or that strain. 

Jeff Homer: Not yet. I mean, hopefully between 70 schools and 250 schools, we’ll learn some more things that will allow us to push past that number if we get there. 

Alex Bridgeman: You’ve done some or perhaps quite a bit of work with others looking at consolidation strategies in similar type industries with maybe similar dynamics. Is there anything you look for in a consolidation thesis? You’ve mentioned music schools before was kind of like almost a happy accident that you stumbled into this actually pretty great industry. But in hindsight, what would you look for in similar industries? 

Jeff Homer: Yeah, I think two things need to be present to have a successful roll-up strategy. I think you’re looking for multiple arbitrage. That’s generally the driver of roll-up returns. And there are industries that don’t have multiple arbitrage available because scaled businesses in those industries don’t trade for premium multiples. So, heavy industrial, construction, manufacturing industries, even large companies in those spaces might trade for five to six times. And so, it’s hard to envision getting a ton of multiple arbitrage in those industries versus capital light, youth enrichment businesses might trade for 15 times. And so, it’s pretty clear where the multiple arbitrage is going to come from as you start to move through different company lifecycle stages. And I think the ability to create that kind of value, multiples of your investment value, simply through aggregation and competent operatorship is a really big tailwind relative to even sort of a buy and build organic strategy. The second piece that I think is really important is you need returns to scale. So there needs to be some reason why larger companies are going to outperform smaller ones. We like to think of marketing as being one of our biggest advantages, whereas a $100 million revenue business, we can do marketing on a national scale and deploy that on a fractional basis to our individual schools at a level that an individual owner operator is just never going to be able to access. And so, we view that as being a pretty significant competitive advantage and customer acquisition advantage. But there are industries where there may not be returns to scale. And the flip side of fragmentation is a question I sometimes ask searchers is why are there not large businesses in the space today? And there are reasons there were not large music businesses and we’ve built one. But sometimes the answer is that this is fundamentally a personal service and that this can’t be aggregated or scaled in some way. So, I think returns to scale and multiple arbitrage or valuation arbitrage potential are two things I would be pretty focused on when looking at a new industry. 

Alex Bridgeman: What industries have you looked at and spent time around that, for one reason or the other, like maybe one of these two or something else that you decided these aren’t worth pursuing or spending a lot of time around, just for some examples?

Jeff Homer: Yeah, I talked to somebody recently, I apologize for outing you on this podcast, but it was looking at a roll-up of childcare placement agencies. So, the idea was they had gone through a childcare placement agency to find childcare for their own household. They’re like, wow, the economics of that seem pretty attractive. Maybe I should consider buying one of these or buying several of these. And I think the thing that we realized was there’s this tremendous disintermediation risk between the childcare provider and the agency where after the child care provider has been in the home for two weeks, the child care provider and the household can look at each other and say, hey, why don’t we just cut out this middleman and I’ll just pay you directly. So you’ll save some, I’ll get more money. We face the same disintermediation risk with our music and dance teachers, but we have the benefit of providing them both a physical space to perform their service but also a diverse portfolio of students. So, we’re giving them 40 students on a weekly basis and some of those are coming in and coming out of the pipeline all the time. So they’re depending on us to kind of continually top up the bucket in terms of keeping their schedule full. Whereas with the childcare provider, they’re going to be in one home for two years or three years. So, there’s no incentive for them to stick with the agency. So, I just felt like in that case, it was really a personal service that the person was providing in terms of matchmaking, but it wasn’t something you could roll up at scale without getting sort of disintermediated frequently between the family and the childcare provider. 

Alex Bridgeman: Yeah, it makes a lot of sense too on the local locations. I looked at some healthcare industries that were more clinic focused, and it didn’t seem like there was a benefit for one clinic in Omaha having a location in Detroit. Like they probably, there’s some national marketing or recruiting, but it was just was more limited benefit wise between the two locations, between one location being a part of a larger portfolio versus just being independently owned. It didn’t seem like there was a ton of value to being a part of a larger group. So, I’ve noticed that before and I definitely agree with you there. What others, like, you probably don’t want to share anything, I mean, I don’t know if it’s worth diving into others that you’re looking at, but are there any… 

Jeff Homer: I think thematically, something that I’m interested in is situations where you have an entrepreneur that would really prefer to be a service provider, but where they’ve been forced into business ownership or entrepreneurship in order to provide the service. So music teacher, dance teacher, veterinarian, dentist, specialty medical, accounting practice, physiotherapy, chiropractic, lots of these businesses have that characteristic where the owner-founder really just wanted to be a dentist, be a doctor, provide a service, but ended up being a small business owner and may be really happy to hand off the operational side of their business to a roll up while continuing to provide their service and just spend time seeing clients and doing what they actually love to do. So, I think that thesis, not that it’s novel, and there’s lots of mature, some of the industries I just mentioned are very mature from a consolidation perspective, but I think that theme is a good one to be looking for as we look further out on the spectrum of industries that haven’t had that level of scrutiny yet. 

Alex Bridgeman: What are some- as you’ve met other folks trying out or attempting to try different consolidation theses, are there early mistakes that you’re able to avoid either in terms of like the team you build or first couple acquisitions? It seems like that first acquisition generally is really important. Like what are some things to avoid there in terms of size, location, whatnot? 

Jeff Homer: Yeah, I think the common pitfalls there would be buying a first location that is too small, which is a hilarious thing for me to say because the first school I bought was 500,000 in revenue and less than 100,000 in SDE. So, I’ve personally learned that, lived and learned that lesson. But yeah, I think making sure that you can have a first acquisition that can be the start of a platform as opposed to really require your personal services. But at the same time, I think some folks come into this with, okay, I’m going to build something really big and this is my long-term target, and so this is the team I need today, but then also want to use debt funding to get there. And those things are not well suited for each other. So, if we’re trying to use debt funding to fund a lot of the acquisition strategy, we need cashflow. And that means being really economical when it comes to building out the team. And it’s going to require being pretty gritty and hands-on from an operator perspective in the early years before you can really sort of start to build that team and bring on some high-pired folks. So yeah, I think in some of those cases, the operator should be better off to partner with somebody to bring on some of those skills with more of an equity and less of a cash need as opposed to trying to hire for those types of roles. So, I think those would be two things I see pretty often, not starting big enough and then over-investing in platform costs relative to initial portfolio size. But I also see things that just don’t meet either of the two criteria we talked about earlier in terms of it’s not clear why this space should be rolled up, and even if it can be rolled up, whether there’ll be financial returns to doing so. 

Alex Bridgeman: One kind of interesting dynamic that I’m curious your take on is brand integration or not. With music schools, like the local brand, the local name of the school is pretty important and it’s valuable to have that continue. But for some industries, it’s fine or maybe sometimes preferred to keep a single brand for all the companies that are acquired. In what cases do each make sense in your mind? 

Jeff Homer: Yeah, it’s a really good question. It’s one that, it’s often the first thing people notice about our business is that we don’t do business as Ensemble anywhere. Ensemble is a brand that exists solely to face sellers. Again, we came to that not through deliberate thought and foresight, but because our first five school acquisitions were Denver, Las Vegas, Tampa, Boston, and Chicago. And there weren’t any geographic synergies there or any reasons to do rebranding at a local level. And so, we just went with what we had. And we found a couple of things. One, our parents really liked the idea that they go to a local boutique school, even if that becomes a little bit more of an illusion rather than a strict statement of fact under our ownership. But they’re not looking for McMusic or McDance type experiences. They’re looking for something fun and local. In a lot of cases, we’re buying businesses that have been in their community for 20 years. So, to come in and sort of paint over that with an Ensemble brand that doesn’t mean something in that community yet. One, it is disruptive and sort of signals our arrival in a way that we actually try not to. We try as much as possible for the transition of ownership to be invisible to the clients and for them to find out about it months afterward, typically when somebody else gets up to speak at the performance opportunity. Like, oh, what happened to Miss So-and-so, the former owner? Oh, she retired months ago. At that point, their presumption is, well, I didn’t notice, so it must be fine. Versus if you announced it up front, all of a sudden, their antenna is up and the next customer service failure of a garden variety becomes the fault of the acquirer and because everything is now terrible and you’ve ruined my experience at this school, even if this was something that was just going to happen anyway. So we try to be really quiet about that. The unexpected benefit but maybe obvious in hindsight is sellers really value this. So we’ve actually won deals away from acquirers that would have been more kind of franchise operators and would have rebranded the locations where the sellers really value the idea that this name that they’ve spent 15, 20 years to build is going to stay on the business and that they can come back in three to five years and recognize the business that they built and see the same people there having great experiences at their school that they’ve helped to build. So, I think today that’s a really core part of our strategy. I think to answer the question about where does that make sense and where does it not is to sort of ask yourself whether your customer prefers- whether size is an indicator of quality in your market. Because in some places, it is, in some places, it’s not. In the performing arts, there’s an inherent skepticism of anything that seems large or successful. So, any amount of money making must mean that it’s not authentic. There’s like this whole idea of selling out, like that any amount of financial success inherently compromises artistic integrity. And so, we really lean into the local brand and go so far as to obscure a little bit our ownership of some of these schools. Conversely, there’s lots of places where bigger is better. And I do have a presumption that if there’s a big brand standing behind a service promise, then I’m more likely to get the service that I’m looking for, especially in things like home services where I think that makes a lot of sense. And you buy the business, you get the career, you just sort of fold in the team. You keep the old phone number and website active maybe, but it wrote to the new call center and it just sort of is a lead gen business. So yeah, I think the question to ask is, is bigger better in your industry? There will be some where it’s not, there will be some where it is. And I think that’s a helpful starting point in terms of whether rebranding is going to be the right path.

Alex Bridgeman: You mentioned that like in a local market, you actually don’t want to announce your presence there by changing the brand to Ensemble. Can you talk a little bit more about that and what kind of dynamics you’re trying to navigate there? 

Jeff Homer: Sure. So, I think if we were to walk into one of our schools on the day of closing and tell them that a business from halfway across the country run by some Harvard private equity guy had bought their beloved local music school, I think their reaction would initially be very negative. And maybe we would have the opportunity to build back from that standpoint in terms of no, we do this a lot, we’ve had a lot of success, we’re not here to change anything, we’re going to really just give you better opportunities to schedule online and interact with this business in a digital way like you are used to interacting with other businesses, wouldn’t that be so great? But we’re going to face that initial knee-jerk reaction of that sounds terrible. So I think we’re just trying to avoid that and especially avoid it up front. Again, if they find out that the business has sold six months after the fact, the temperature is going to be much lower in terms of they’re going to have that length of time to say, okay, well, I interacted with the business under current ownership, it wasn’t really that different, I guess it’s fine, and they’ll sort of wave it through. But to announce it up front is just to invite scrutiny of everything that happens within the business for the next six months, especially if there’s a problem from a transition perspective. So yeah, and I think we’ve had some pretty- to contrast dance and music for a second, our music parents tend to be a lot less invested in the school than our dance parents, and that’s because of frequency. So, our most dedicated dance students are at the studio several days a week for several hours take eight, ten, twelve classes a week, whereas our best music students might take two or three. The result is that the parents are spending a lot of time in the studio, and they start to feel like they own the place. And they feel like they really have a vested interest in decision-making and operations and how the school is run. And especially those folks would be really challenging to deal with if we told them up front kind of what the plan was as opposed to let them experience the continuity and then come to the realization that this has been a neutral thing for them. It doesn’t have to be a positive, as long as it’s not something that they’re screaming mad about. 

Alex Bridgeman: Yeah, talk about the ancillary services piece. We kind of touched on it, but not in much depth. I’m curious about that because you could start in one industry with one particular product or service and expand to similar complementary ones that maybe serve the same customer base or are often bundled together. Can you talk about that in the context of Ensemble going after different services, but also in terms of consolidation strategies you look at and kind of where possible expansion points might be? 

Jeff Homer: Sure. So, there’s always a tension in any business, but especially in an inquisitive business around sort of a question between focus and surface area for great things to happen and sort of opportunities for there to be good luck within the business. So, we initially were laser focused on music schools; that was all we did for four and a half years. Over time, we’ve pivoted to doing dance, and we’ve now sort of built this complimentary ecosystem that you’re referring to. The way that I think that came to be was we started to look at what do our students spend money on in advance of coming to their lessons? So, if they’re enrolling in class but they need either an outfit or an instrument or a book or something else that’s complementary to their lesson experience, how do we help serve them both from a convenience perspective but also from a wallet share perspective. And then as we started to have success with some of those, we also wanted to almost Amazonify what we were doing in terms of making our internal services face the marketplace and therefore be better for us by virtue of having to compete for business. So, like if we own a curricular product that we use in our classrooms, it’s helpful if that curricular product has to meet the standards of the marketplace in terms of being sold to other studio owners independently who compare it against competitive curricular products and say, yes, that’s something I’d like to use as well. It makes sure that our curriculum keeps up with the marketplace in terms of having to be competitive for the marginal studio’s dollar. The flywheel starts to turn when a curricular product that we’re using gets sold to a studio owner on a third-party basis whom we then develop a relationship with and we ultimately then end up acquiring their studio. So there’s sort of this flywheel that gets built where we’re using best-in-class products in our schools, we’re offering those products and services to the marketplace and turning those into pretty good businesses, and then we’re ultimately closing the sale on the back end where we someday acquire that studio that we’ve built a B2B relationship with through our product and service portfolio. 

Alex Bridgeman: Have you come across Kanbrick? Does that sound familiar? It was founded by a former Berkshire Hathaway executive and she and a partner are going to acquire other businesses. But one thing they did that’s kind of smart that sounds similar or kind of rhymes with that concept is they have a class of sorts where CEOs of large businesses will come together and they’ll go through different ways that Kanbrick looks at value creation based on Berkshire Hathaway experience but also their own experience working with companies and kind of a professionalize your business or grow your business faster type curriculum. I could see something like that applying cleanly here where if you were a music school owner, dance studio owner and wanted to learn how to run a better business, I haven’t run a business before, I just want to teach kids how to play the guitar or piano, that seems like something that would pair well too. 

Jeff Homer: Yeah, we actually own a business called More Than Just Great Dancing, which is exactly what it sounds like. It is a coaching product for dance studio owners about how to teach, how to do more than just teach students how to have great dance experiences. So yeah, it’s a 300-member coaching organization, and it’s an outstanding little business in its own right, in addition to giving us direct access to 300-member studios that become interesting B2B sales conversations over time. 

Alex Bridgeman: What other flywheels do you see within Ensemble starting to occur or that you’re thinking about kicking off more? 

Jeff Homer: The core one is within the studio business, where if we get to hundreds of studios, we will have hundreds of thousands of students in our owned and operated ecosystem, and that’s a really large population to then be able to drive out to these ancillary businesses. Today, our investments in the ancillary businesses are probably larger, they’re larger today relative to the core school portfolio than they will be in the future. And as we build the core school portfolio, we’ll be able to do more to support those ancillary products and services on a first party basis. So I think the schools to ancillary services flywheel is really interesting. And then the ancillary services to B2B acquisition flywheel is pretty interesting as well. I mean, the other one from an M&A perspective is just a talent flywheel. So, every time we do an acquisition, we bring in a new group of 20 to 30 people that are passionate about our industry and knowledgeable. And lots of those have been sources of more senior level talent that we’ve promoted out of the schools and into regional manager roles or corporate roles. And I think that talent flywheel has been really exciting to see as well. 

Alex Bridgeman: What other- so beyond dance, like do you see- I can see services like tutoring, like school tutoring being a nice complement. Like if you have a pool of 100,000 students, what else fits within that group as a service? 

Jeff Homer: I think gymnastics and tumbling would be the most adjacent verticals. It’s not to say that we’re ready to do those tomorrow, but we’ve already looked at dance studio acquisition targets that had small gymnastics or small tumbling businesses as part of those service offerings. So, it’s already happened. And that’s the way we got into dance in the first place was we bought a music school that had dance as well. And it was like, okay, well, we understand the majority of this business. Let’s figure out how to do the other part. Dance was always something that was on our roadmap. That was how we’d legged into that. And I can imagine us doing the same thing. Other youth enrichment is more challenging. Some things like academic tutoring, there are three large and very successful franchise businesses in that space that I’m not super excited to go compete against. Things like swim schools have a significant physical plant component where you need real estate and you need a pool. And then things like karate or Brazilian Jiu-Jitsu that are popular now are often kind of cult of personality businesses around one core instructor. And I think it would be harder to fit into our model. So yeah, I think music and dance is a ton of surface area for now. Gymnastics and tumbling might be interesting in the future, but I think we have a lot of runway within our existing footprint. 

Alex Bridgeman: We talked also about how the just the number of sellers and acquisitions you’ve done, 70 at this point, has given you a lot of reps and opportunities to refine your process. In what ways do you feel like you’ve streamlined the purchase process and then integration follow on? Where do you find that that’s gotten improved and could be improved for others? 

Jeff Homer: Yeah, the obvious one is just templatizing things. So every stage of the process has a template that goes with it. Every time we make a mistake, it gets added to the template, it gets caught in the future, hopefully. One of the unexpected benefits I find or I have found is actually that sellers trust us more by virtue of those repetitions. And so, when we’re trying to make an argument about such and such is a market term of a deal or this is just how it’s done, people believe us at 70 schools in a way that maybe they wouldn’t have when we had one or two or five. I do think for any roll-up entrepreneur, the difference between talking to a business owner owning zero of whatever you’re talking about and owning one of whatever you’re talking about is transformative. You’re all of a sudden incredibly more credible. Sorry, that was, I’ve used credibly twice in that sentence. 

Alex Bridgeman: I picked up what you put down. 

Jeff Homer: Yeah, you’re significantly more credible in that first conversation with a seller when you’re in the industry versus when you’re not. But there’s also a big difference between owning five and owning 50. I think as we’ve gotten up that curve, we’ve been able to push for more of what we wanted in terms of deal structure and terms. One of the biggest challenges we find in the lower market is sellers don’t retain appropriate counsel to do their M&A deal. They’re like, well, you’re a lawyer, can’t you do my M&A deal? I need a lawyer, not realizing that lawyers have specialties. And so they hire their divorce attorney to do their M&A deal. And we have to guide that person through a process without making them feel dumb for not knowing, but also without having to get outside of what is typical for M&A transactions. So yeah, I think we’ve built strong templates at the pre-LOI data request phase to do our financial due diligence, to do our LOIs and our post-LOI due diligence. Our integrating and onboarding is very templatized both in terms of handover lists, like things that people need to give us in advance of closing, and then also post-closing integration. And a lot of that now, again, is truly automatic and happening in a way where the organization has built capacity for that that’s not dependent on me personally to go do that. But yeah, like I said, an unexpected benefit is that we get more of the benefit of the doubt now by virtue of our reputation than we did at the beginning.

Alex Bridgeman: And has that translated to other, like to dance and some other different businesses you’ve looked at too? 

Jeff Homer: Yeah, and I think we treated our first dance acquisitions with white gloves in terms of, yes, we are a school business getting into dance for the first time. You’re going to get a ton of attention from some of the folks on our team that we recruited to really lead that dance effort. And we’re now seeing that start to inflect where when you have 60 music schools and one dance school, it sort of sticks out. But when you say, hey, we have seven dance schools and you’re going to be the eighth, they say, great. They have a level of confidence in our ability to operate. And we’ve been fortunate that some of the folks that we’ve recruited to our team have really significant reputations in the dance industry and so have helped us establish that credibility right away. But now by virtue of our portfolio, we have that credibility as well. 

Alex Bridgeman: What have we not talked about that you’ve thought deeply about and have a unique view on? 

Jeff Homer: I think something that I feel strongly about is the extent to which valuations in lower middle market are less heterogeneous than valuations in larger capital markets. So the difference between a small business that might trade between two to four times at the extreme ranges of evaluation we see for smaller businesses pales in comparison to large cap businesses that might trade between six times and 20 times depending on the perceived quality and return on capital. That was my original thesis when I did my own self-funded search, if you’re willing to allow me to stretch and call it that, back in 2018 was there’s enormous heterogeneity and equality of the small businesses that exist in the marketplace. There’s not enormous heterogeneity in price. So my initial search strategy was just to go look at a relatively large volume of businesses for sale in my metro area with the assumption that I would find some things that were low quality and some things that were high quality and I would know enough to be able to differentiate between them, but that I would not have to pay a premium for the higher quality businesses relative to the lower quality businesses. And I think that very naive, very simplistic thesis is what grew into some of my more nuanced views around like is there multiple arbitrage potential in this business? It’s like, well, if we’re in a high quality business at scale that should have a premium multiple, but we’re not paying a premium multiple to start with because it’s small, those are the drivers of that multiple arbitrage that I backed into with this sort of more simplistic view. 

Alex Bridgeman: Yeah, the math on that, on multiple arbitrage is pretty amazing when you start running the numbers, buying for two, three times and trading at, I don’t know what you’re trading at, but some multiple of that, the math gets pretty amazing. 

Jeff Homer: Yeah, I mean, it’s really powerful, especially when debt and leverage is involved. Because then on your equity, if you’re only 25% of the capital stack to begin with and you double the value, you’ve actually 5x-ed your equity. So, there’s some really significant value creation potential there. But I think it’s important to recognize why that exists. And the reason is because businesses exist on a spectrum from jobs to financial assets. And what you’re doing as the roll-up entrepreneur is you’re taking a bunch of things that would otherwise be someone’s job and paying job multiples for them and turning them into something that a capital provider can invest in on a passive basis through you and your labor. And that’s why there’s a returns to that effort is that you’re helping to create a financial product that didn’t exist when it was just somebody’s job. That’s what the overhead at Ensemble exists to do is to take a bunch of individual contributor entrepreneurs and turn them into a finance team and a marketing team and an operations team that replace those functions on a fractional basis. Yes, it’s really compelling, but it exists for a reason. And the reason is because it’s hard and you need to build something very specific to access that multiple arbitrage potential. 

Alex Bridgeman: Yeah, I completely agree. I enjoy the sales side of things. And so thinking about a product you’re selling and who’s going to buy it is kind of one way that I look at my search. And the way you phrase that makes a ton of sense to me. If you think of like Ensemble or other companies as like products to be turned into financial assets, like there’s a couple key characteristics you have with music schools that are obvious, but like are there other things you’ve noticed in talking with different sponsors about what they care about in certain businesses? And are there ways for you to incorporate those into Ensemble and make it a more valuable financial asset? 

Jeff Homer: Yeah, it’s a really interesting question. I mean, I’ve been really- we’ve been the beneficiary of just some dumb luck in that youth enrichment has become a really popular space. There’s just an increasing view that parents will spend, to a first approximation, any amount of money on the kids and their extracurriculars, especially if they are of an enriching nature. And so, youth enrichment and early childhood and the kind of childcare industry have all been tremendous points of interest from a private equity investment perspective. And we didn’t set out with that in mind. It just sort of happened to be a tailwind that we lucked into. Having said that, we do think a lot about maintaining a capital light profile and being a high EBITDA to free cash flow business and maintaining sort of the- what are the core elements that I pitch to a financial investor? Well, we have a highly engaged group of students that contracts with us on a recurring basis. Our parents pay credit card, auto debit first of the month type charges. We have a negative working capital cycle in our business. We collect money in advance of providing services. We pay our teachers in arrears. We end up with a negative working capital cycle. We don’t have a ton of CapEx imbedded in the business. We have a good free cash flow conversion cycle. These are the elements that are desirable. And so when we think about adding on to our portfolio, we want to do things that continue to, where those things can continue to be true as we get further into it. So if we were to go buy something that didn’t check all those boxes and then there’s this sort of bruise on the thesis in terms of, well, that’s true except for over here, I think that’s where managing the story and managing kind of how you’re going to sell the portfolio to its next investor I think is fair to be thoughtful about in advance. 

Alex Bridgeman: Do you buy the real estate if there’s an owner who also owns the building? 

Jeff Homer: We never do real estate. My own view is just that that’s somebody else’s full-time job. Commercial real estate is its own business and it’s hard and I don’t know anything about it. So, we do often have owners, sellers that do own their building and we just lease it back from them. So, we tell them, you have two options. One is to use this as income replacement. We can just cash flow to you and appreciate over time, but we’ll pay you rent. Alternatively, with a lease to us as a national tenant, this is going to be a pretty liquid piece of commercial property. And so, you won’t have any difficulty selling this in the marketplace once there’s a lease in place to us on a third-party arms-length basis. I am aware of some folks that have made real estate more a part of their strategy, more from an opco-propco perspective in terms of they’re basically getting arbitrage on buying owner-occupied real estate from a seller at a pretty high implied cap rate and then selling that down into a propco structure and getting good returns and good arbitrage on that. Early on, it just wasn’t a focus because it was too capital consumptive relative to the returns we were getting in the core business where we’re paying three to four times, three to three and a half times for schools. So we’re buying a school at a 30 cap, we don’t also need to buy the real estate at an eight. But I think more about it as we’ve gotten larger, whether there’s a world where that starts to become interesting to us. 

Alex Bridgeman: Yeah, it’s like having that kind of sale leaseback option available because you own the real estate, like is that valuable to another financial sponsor, even more so than the asset light structure you have today, or do you kind of go back and forth? 

Jeff Homer: I think it depends on the sponsor, but I think generally speaking, private equity investors, like financial sponsors looking to invest in businesses are not also looking to invest in real estate. It would be a unique sort of set up where part of the opco propco structure is actually segregating the assets so that they can each sit with a specific type of investor that values that asset more highly. A business investor for the business side of things, a real estate investor for the property side of things. So, putting them together, I think, would kind of muddy the waters in most cases. 

Alex Bridgeman: Yeah, it makes a lot of sense. Well, Jeff, you mentioned doing some investing on your own. Where can folks find you and get ahold of you and chat with you more? 

Jeff Homer: Sure, yeah. So I’m definitely actively investing in search and especially in consolidation theses. Just given my experience, hopefully there’s some relevant overlap where I can be a value-add investor to folks that are pursuing consolidation theses. But I’m on LinkedIn, Jeff Homer, Ensemble Performing Arts, is the best way to get a hold of me. 

Alex Bridgeman: Awesome, Jeff, thank you so much for coming on the podcast. It’s been super fun to chat with you over the years and in a lot of different formats. So it’s good to chat with you a little bit more. Thanks for sharing your time. 

Jeff Homer: Likewise. Thank you.