How to Sell Your Music School

Does This Story Sound Familiar?

Some people start a business with the goal of selling it one day further down the line. I can’t say I’ve ever met a music school owner who started their teaching business by selling it as the end game. Most music school owners stumble into ownership. This was certainly my story. 

I began teaching private lessons, my schedule filled up quickly but the money wasn’t enough to sustain my then young family. What’s a musician to do? I rented a little store front, hired my first teacher and before I knew it I was no longer just a music teacher, I was a business owner; an entrepreneur. Does this story sound familiar? 

How Often Does Someone Offer to Buy Your Music School?

17 years into the ownership of my music school I received a knock on my door from an interested buyer in my business. It never occurred to me that I was building a business that had value beyond the salary it provided me. I assumed I might hand my business over to one of my kids, or shut it down when enough was enough. I went ahead and sold my business assuming this was a once and a lifetime opportunity. At that point in time it was. 

Fast forward a few years when I heard about an organization that buys music schools called Ensemble Music Schools. I’d never heard of such a thing. Is this for real? I reached out to Ensemble’s founder, Jeff Homer to see if he’d like to be a guest on my podcast, Music Lessons and Marketing, to learn more about his story and how he helps music school owners exit their business. 

In our discussion Jeff shared with me…

  • How Ensemble qualifies a music school
  • How Ensemble valuates a music school
  • How to make your music teaching business attractive to a potential buyer. 

Below is a transcript of our conversation 

Dave:

So Jeff, if you could share with the listeners a little bit about yourself and what you’re currently doing in the music education space.

Jeff:

Sure, happy to. I think I’m in the very small minority of music school owners that are not professional musicians by background. I’ve been a lifelong student of music and have had tremendous fun with that, and it’s given me a strong appreciation for the value of music education, but I’ve achieved very modestly and would not be qualified to teach anyone, so I do not.

But my professional background’s in investing, I’ve worked with a lot of small and medium sized businesses to help them get to the next level. And often what that means is just sort of taking something that has a fundamentally good concept and building some structure around that. And those two things came together in my life in a really fun way a couple of years ago. I got involved with a music school that’s based here in Denver, which is where I live. And it was kind of a classical music school origin story, where there was a really fantastic Juilliard trained teacher, really dynamic personality, developed this really long waiting list, hired some friends and colleagues to teach the waiting list, sort of blinked her eyes, 10 years went by and she had this small business that she’d maybe not planned for or intended to run, or maybe didn’t have all the skills that she wanted to really take that to where we all thought it could go.

We definitely don’t change the brand name. Most of these schools that we’ve partnered with, […] they have this amazing reputation. Why would we come in and paint over that with something that doesn’t mean something to the community? So we keep that in place. Even things like makeup policies and billing policies, we often leave those in place just to ensure as much continuity as we can.

Jeff:

So I got involved there, and really helped to put in some work behind the scenes on systems and digital marketing. And some of the stuff is just kind of complicated and oftentimes not very fun, if music is your passion. And two things really happened there. One is, the school was very successful, and we were able to grow from there. And I was having a lot more fun than I was having at my day job. And so started trying to think about how to make this a bigger part of my life. And so we’ve spent the last couple of years going around pursuing similar transactions where we’ve partnered with music school owners that are looking to make some kind of transition in their life, whether that’s to retire or to even just to go back to teaching or focus on other business interests. We’ve generally purchased those schools from them, and then continued to run them very much in the same way. No big changes that are client facing, but we’ve really put in the work behind the scenes to help to grow those communities, and fill up those teacher’s schedules, and bring music into as many lives in those communities as we can.

It’s been a really fun ride. We’re up to 12 schools owned and operated today. We’re actively out there looking for new partnership opportunities, and yeah, it’s been really fun to discover your community and hope to plug into it and meet other music school owners in that context.

Our best prospects have been folks that have actively taken one or two steps back from their business. They’ve hired somebody to sit at the front desk and take the phone calls, they’re not the one on the phone with the client every single day, they’re not teaching half the students personally

Dave:

When you purchase their schools, do you rebrand it? Or is it still pretty much their school, but with your systems and operations driving it?

Jeff:

So basically, a good rule of thumb is if it’s student facing, we’re going to be really hesitant to change it. So we definitely don’t change the brand name. Most of these schools that we’ve partnered with, they’ve been there for 15 or 20 years, they have this amazing reputation. Why would we come in and paint over that with something that doesn’t mean something to the community? So we keep that in place. Even things like makeup policies and billing policies, we often leave those in place just to ensure as much continuity as we can. So yeah, like you said, our work is really behind the scenes on things that are important, but aren’t visible if you’re just coming in for your lesson. Working behind the scenes on scheduling systems and digital marketing, having really good Facebook and Google strategies. Doing the boring stuff, the finance, the accounting, the payroll that nobody wants to do. Those are the things we think we excel at. That allows the folks that are really good at teaching music, which remember is not me, to do what they do best as well.

Dave:

What is your ideal deal prospect? It sounds like somebody who’s maybe leaning more towards retirement or moving on something else.

Jeff:

Yeah. I think generally speaking, our best prospects have been folks that have actively taken one or two steps back from their business. They’ve hired somebody to sit at the front desk and take the phone calls, they’re not the one on the phone with the client every single day, they’re not teaching half the students personally. So people that have built a business that’s ready to exist kind of independently of them, and who are looking for someone to take it over and not screw up their life’s work, so to speak. Come in, change everything, make everything different, totally unrecognizable. Someone who’s looking for someone to continue this important work that they’ve done over, in many cases, 10, 20 years. I think that’s been a promise that we’ve been able to fulfill.

Dave:

And what are the attributes that you’re looking for in a music school?

Jeff:

Sure. So I think we typically have sort of three things that we’re looking for. I think first is sort of a fun first approach. That can take many forms, and it doesn’t preclude a very serious school where you have high achievers and kids that are going to study music in college and have real goals. But we look for places where fun comes first and there are no rulers wrapping knuckles when notes are misplayed or that kind of thing. We look typically don’t look to buy schools that have very rigid curricula. We believe strongly in kind of individualized approaches to music education. So we don’t have, for instance, Suzuki only schools. We have teachers that follow the Suzuki method and we think it’s great, but we also value diversity in instructional methods.

And so if there’s only one way of doing things, it’s probably not the best fit for us. Then in order to execute that, we need a really talented base of faculty in place. So we’re looking for places where the staff list is really impressive and can execute on that strategy. So those are kind of our guideposts. Like I said, there’s a lot of different flavors that are going to be a fit there, from communities where we’re serving a bunch of early elementary kids having their very first experience with music and it needs to be really fun and engaging, all the way to, we have several schools that send multiple kids to study music in college every year and want to be music majors and music professionals and have real goals and need to be pushed in those directions.

When we buy a school, we are 2, 3, 4, x-ing the historical amount of money that’s been spent on marketing. [I also] routinely see processes that were implemented at a smaller size that have not been discontinued as the school has grown. There’s been an under investment in scaled processes, where maybe something that worked when you had a hundred students, now there’s 300 students and [you’re] still doing things the same way.

Dave:

Okay. So I’m really curious. With these different schools that you’ve bought, you said you’ve bought 12 now, and then you had mentioned that you have a background in business growth. I’m sure out of these 12 schools, you’ve seen some similar patterns in terms of their systems and where they could use some improvement. So what are those patterns? What are some areas that you see music schools in general could use some improvements, from a systems and processes standpoint?

Jeff:

To me, it’s two things that jump out and that we kind of always are doing when we take over. The first one is under investment in marketing. Our space is fortunate that the competitive environment for things like Google keywords and Facebook viewers, they’re very cheap relative to other things. If you’re an insurance agent and you want to compete for an insurance key term like auto insurance, you got to pay 50, 60, $70 a click to win the Google auction and show up first. The equivalent music keywords are in the three to four dollars a click range. As a consequence of that, given how long a student typically stays with one of our schools and the lifetime value of that customer that’s associated with them, people are not investing nearly enough to maximize the return on their marketing spend relative to the value of the customer.

And so we see that all the time. Pretty much, without a doubt, when we buy a school, we are 2, 3, 4, x-ing the historical amount of money that’s been spent on marketing. We think we get an outstanding return from doing that. We can definitely talk more about that if you’re interested. The second thing that I routinely see is processes that were implemented at a smaller size that have not been discontinued as the school has grown. There’s been an under investment in scaled processes, where maybe something that worked when you had a hundred students, now there’s 300 students and we’re still doing things the same way. We’re not leveraging technology tools that, maybe they cost $100 or $200 a month, but that investment can free up 20 hours of your staff time and have them contribute to things that actually add some value to your community.

Jeff:

And that’s a trade that we would make every time. I think sometimes owners are reluctant to change things up, it’s working, it seems fine. “Hey, I’ve grown from 100 to 300 students. Why do I need to change my processes? They seem to be working.” But there’s often things that we can do to leverage more technology and automation in the day to day processes of the business, which improves everyone’s experience. It improves the front desk person’s experience not having to do those manual things, and it allows them to really add value to the student experience because they’re not doing plug and chug paperwork. They’re doing things that are fun and engaging for the community.

Dave:

And I want to make sure, I’m worried that we maybe jumped ahead too quickly, you said there are three things that you’re looking for in the schools. I want to make sure we covered them. Fun was one.

Jeff:

Number one was fun based approach. Number two was individualized approach to the student. Number three was qualified, talented faculty.

Dave:

Ah, what is that? Can you dig in a little, explain what that means?

Jeff:

Yeah. So what I was mentioning at the end of that was, we think that if you have a curriculum that just you push everyone through, anyone can execute that. But I think when you’re trusting a teacher to take a really individualized approach with a student, they’re going to have to have enough experience and expertise to diagnose and assess where they’re at, come up with an individualized plan for progress towards the student’s own goals. That requires someone who has a level of experience and expertise in teaching to be able to execute that strategy. So that can mean different things. In some of our markets, we’re lucky to be next to a really top quality college where we have half of our teachers are DMA students and master’s students, and it’s great.

In other markets, that doesn’t exist, and what we have instead are equally talented folks that just have what we refer to as equivalent performing experience. So no degree, but they can play. More importantly, they can teach, they’ve been doing it for a long time. They’ve really enjoyed sharing their passion for music. Perhaps, in many cases, they had to figure it out for themselves. So they’re good at turning that around and helping a student to understand different concepts that they’ve had to really internalize over time as well.

From our perspective, bigger is always better. It is almost exactly the same amount of work to do a large transaction as a small transaction.[…] We’ve done a bunch of stuff in the 250, 300 student range. […] I think we’re more willing to do a smaller transaction if it’s in a place where we already have [a presence]. But if we’re going to a new place, a new gate to add to my regular travel schedule of going around to visit all these schools, it probably needs to be a little bigge. […]. That ends up being about $400,000 in gross receipts, give or take.

Dave:

Do you have certain requirements in terms of how many students, what their sales figures are like, as you’re vetting or considering going into a partnership with a school?

Jeff:

Yeah, from our perspective, bigger is always better. It is almost exactly the same amount of work to do a large transaction as a small transaction. So the large transaction offers a better return on effort for all parties. That said, I think we’ve done a bunch of stuff in the kind of 250, 300 student range, and it’s been a nice sweet spot for us. I think we’ve been fortunate to be able to kind of push up market a little bit. I think now we’re starting to gain a geographic presence in some areas. I think we’re more willing to do a smaller transaction if it’s in a place where we already have, for instance, we have four schools in Chicago, we’d love to find a fifth one. We’d probably be happy to tuck in something that’s a little smaller. But if we’re going to a new place, a new gate to add to my regular travel schedule of going around to visit all these schools, it probably needs to be a little bigger at this point. So yeah, kind of 250, 300 students. I think generally we’re talking, depending on the market, that ends up being about $400,000 in gross receipts, give or take. That’s kind of our low end of our range right now.

Dave:

Okay. Yeah. That’s pretty specific right there. Let’s say I’m a music school owner and I’m not ready yet to part ways, but I know in the next five to 10 years, it’s something I might seriously be considering. What are some things that I can do to make myself more attractive to you?

Jeff:

Sure. Yeah. I think it’s not only more attractive to us, it’s actually taking steps that are directly in service of that goal. So if you’re thinking, “Hey, I’d like to start building my own exit,” the first step is to just gradually start reducing your time and involvement in the business. So you’re actually achieving your own goal little by little along the way. So that probably means adding to your administrative staff, and potentially bringing on someone that is, depending on how you structured your studio historically, you may need someone who’s a little more talented, more experienced than sort of just a $14 an hour night person that’s there when you’re not there. You need someone who’s going to be able to make the sales calls and make a really good impression and have that empathy and that great customer service mindset.

And so you may need to go out and get someone that you can really trust to “be you when you’re not there.” And that’s how we think of all of our managers. So I think taking gradual steps to kind of remove yourself from the business over time and make it so that if did get on the plane and go to the beach and never came back, the school would continue to function. That’s the best way to make it a smooth transition. That said, we have definitely done partnerships where we brought in our own general manager and did that substitution ourselves, and it’s a lot more work, but we’re certainly willing to do it. But I think to your point of, how do you make this more attractive? I think it’s build the systems, train your team, make sure that the knowledge that’s in your head right now gets dispersed through your organization, such that the business becomes something that can live on after you’re no longer involved.

So there’s pretty established valuation norms in this space, not for music schools […]. Typically for this size business […] you can expect to get between two and three times your, what’s referred to as seller discretionary earnings. (SDE) […] If you’re running things like your personal cell phone or your car through your business, definitely add those back as well, but that’ll get you to the cash flow of the business to a new owner on a discretionary basis. Multiply that by two, two and a half times on the low end, two and a half, three times on the high end, that’s going to give you a pretty good range of what your business is going to be worth.

Dave:

Okay. So I know the burning question for a lot of people is, what can someone expect you to buy their school for?

Jeff:

Sure. Yeah. So there’s pretty established valuation norms in this space, not for music schools, but for any small business of the size. If you’re selling a music school, or a tutoring business, or a corner store, or any of these things, typically for this size business we’re talking about, you can expect to get between two and three times your, what’s referred to as seller discretionary earnings. So all the money that flows to you or would flow to you if you didn’t spend it on other things. So the way to get there is take out your last year’s tax return and add up the net income, the owner compensation, the interest, and the depreciation charges to get to a rough SDE number. If you’re running things like your personal cell phone or your car through your business, definitely add those back as well, but that’ll get you to the cash flow of the business to a new owner on a discretionary basis. Multiply that by two, two and a half times on the low end, two and a half, three times on the high end, that’s going to give you a pretty good range of what your business is going to be worth.

Dave:

And I would think from the owner’s perspective, if they come to you and say, “Look, you see my systems, they’re already pretty rock solid. You see my marketing.” If you’re looking at schools that are bringing in a half a million a year, they’re doing something right. So I would think that gives them some negotiating power in terms of, in that range, if they feel like, “Hey, there’s not going to be as much work for you.” How do you handle that?

Jeff:

Yeah, no, it’s a good point. I think we’re always excited to partner with schools where things are on a really good footing today. That said, there’s a little bit of a trade off, because the more opportunity for improvement we see, the more upside there is for us. So those things are two sides of the coin. Either it’s running great today, it’s going to be relatively easy to continue to have success in this community, that definitely commands a premium. At the same time, if we think, “Hey, we have a lot to add in terms of value here. I think we can take what’s here and grow it significantly,” we’re also going to be excited about that and see value there.

So I think they kind of go together. I think additionally, one of the benefits that we provide, especially for schools on the larger end of scale is, to your point from a few podcasts ago about who buys a School of Rock franchise, given the kind of upfront capital requirements, it’s often not a musician. Because to your point, you don’t know a lot of musicians that are financially qualified to be School of Rock buyers. But at the same time, if you have a music school and your music school is worth half a million dollars, who are you going to sell it to? And I think we’ve been a really good fit for that type of seller, where we are in the music business, we are here to help run your school in a really first class way that your clients and staff are accustomed to. So I think we’ve been a good fit at that range, sort of higher end of the market, because maybe there aren’t as many buyers, and certainly as many music knowledgeable buyers out there for that size business.

Dave:

Well, I think that’s a great point, there aren’t. I sold my music school. As I was going through that process of the negotiation, one of my mentors said, “Look, how likely is it that somebody else is going to come along like this guy and want to buy your school?” And yeah, I owned a school for 17 years, and my buyer was the first person ever to express in interest in it. I’m so intrigued that a guy like you looked at the music education space and said, “Wow, I see opportunity here.” I think a lot of music school owners look at their schools and say, “I can barely make a living.” Making a six figure income seems impossible. It sounds to me like you see a certain potential in this industry. Can you just kind of shed some light on what kind of potential there is? How scalable is a music school?

Jeff:

Sure. No, that’s a great question. I’m going to give you a very technical answer. I don’t want that to color the fact that at the end of the day, we are teaching music lessons, and I think there’s value in that, in and of itself. That the service we provide is so important and can really transform lives. But putting that aside for a second, I think the part of music business that’s underappreciated is the recurring revenue and customer lifetime value dynamics. So if you think about the types of businesses that are super popular in the investing world right now, it’s all these softwares as a service businesses that have these amazing sky high valuations on the basis of they have this base of users that are there today and are going to be there essentially forever.

If you’re a Salesforce user as a business, you’re going to continue to use Salesforce, and you pay every year or you pay every month. The investing world really likes recurring revenue businesses. And gosh, what is a business that charges their parents on the first of every month for music lessons? It’s a great recurring revenue business. Additionally, I don’t know about you, but I had the same piano teacher for 10 years as a kid. I don’t think that’s an unusual experience. So the lifetime value of that student is actually very high. So we perceive the space as being one where the going in economics are quite good in terms of if we buy a school with 200 students, we expect it to have 200 students the next month. The recurring revenue is there.

If you have a music school and your music school is worth half a million dollars, who are you going to sell it to? And I think we’ve been a really good fit for that type of seller, where we are in the music business, we are here to help run your school in a really first class way that your clients and staff are accustomed to.

Jeff:

Back to what we were talking about a little early in the podcast, there’s this huge organic growth opportunity through investment in marketing because of the lifetime value of the customer. I think it’s relatively fair to say that a student at a typical school in a typical market is worth something between 1500 and $2,000 of gross profit over the life of the customer. Over the period they’re with your business, net of teacher cost, that’s probably what they end up being worth to you. Inn our experience, you can acquire that customer through marketing for between $150 and $200. So you spend 150 bucks, you get a student worth $2000. Those types of returns on marketing spend are not available in many other parts of the business world. The reason is because your competitors are not aware of that, and aren’t out there competing against you for that opportunity. If they are, it would all go away, and we’d be like the insurance agents spending $50 per click for insurance keywords on Google. The fact that we can get piano lessons near me for four bucks top of Google, is why that opportunity exists.

So I think it’s an underappreciated business. I think it is extremely scalable. I think it requires investment in organic growth. I think that’s tough if it’s coming out of your family’s budget for the month. I think that’s the difference that we have in a lot of cases is, we’re happy to make that investment in marketing, because I’m not living off the monthly distributions from the business. But that’s kind of how some of our sellers have been able to scale their businesses to 500 plus schools. Or students, sorry, not schools, 500 plus students.

Dave:

Talk about a lot of headaches right there.

Jeff:

So yeah, it is a scalable business, and one that we think is attractive. I think it’s also scalable for us in terms of adding more schools, which is great, because we’re building this infrastructure we think supports each of those schools that we’re bringing on to our platform in a really positive way. So we’re enjoying scaling in that respect as well. But an individual music school is very scalable and has the benefit of… The typical profit margin for a school may be between 10 and 20%, but every additional student you bring on has a profit margin more like 50%. So the incremental student is very valuable. S school that has 250 students might be twice as profitable as a school with 200 students. So that operating leverage is there such that if you’re right around that break even point, it’s not like you have to get to double the business to double your take home income. You really only have to grow 15, 20% to double your take home income. That’s the part that I think is really attractive and perhaps underappreciated.

Dave:

So these are all the positives about the potential with music schools. What challenges do you feel are unique to this industry?

Jeff:

I don’t know if they’re unique to this industry, but certainly staff retention and turnover is a big piece of it. I think given the strength of the student teaching relationship, which is at the core of our business, I think it becomes critically important to be able to attract and retain great staff. So that’s something we focus on really closely. We do some things that are a little out there, like we run a 401k program for all of our employee teachers, and we classify our teachers as employees for that reason so that we can offer them that benefit that they probably aren’t getting in other jobs that they have.

Jeff:

So if your goal as a business is retention, retention of students, ultimately, one of the drivers of that is retention of your teaching staff. I think because we’re often dealing with folks that are younger, in school, going through life transitions, trying to make it work as a musician, finding out that didn’t work and having to take a day job, these are always things that are popping up among our staff. I think because they are the product at the end of the day, having that continuity is really important and is an everyday challenge and something we think a lot about, how to keep our teachers happy, how to keep them engaged, how to keep them with us for a longer period of time.

I think generally nobody overcharges for their market. I think everyone, including me, is hesitant to really push the envelope on that. So I think we don’t come in and jack up prices or do things like that. But we are looking to get regular annual increases in tuition from, maybe not the moment we take over, but definitely a year after we buy the business, two years after, we’re looking to get regular annual pricing increases.

Dave:

You mentioned that your instructors are all employees. I have to assume that plenty of the schools you purchase, they’re contractors. So how do you make that transition and does their pay drop, does their hourly pay drop as a result?

Jeff:

So the answer is, it depends. We’ve done both. Typically when we take over a school, we’ll give everyone the option of moving to employee status. Typically it’s well received and goes over pretty well. I think for us, it depends on what the going in pay rates are. If in our view, the pay rates are kind of low, we’ll just move everyone over from contractor to employee at the same pay rate, and just say, “Congrats on the raise. You basically just got a 10% raise, congrats. We’re really happy to have you with us.” In situations where we think the pay rate is more market, we’ll typically offer a 10% pay hourly pay rate reduction in exchange for employee status, but we will accompany that with the math. So we will lay out to the prospective employee why that is fair, to the point of actually their take home is going to increase slightly at the end of the day. Because we think the difference is about 11, 12%. We’re only asking for a 10% pay reduction. You’re actually coming a little bit ahead.

And because we’ve done it a bunch, we have a nice little form we put together to explain why that is and walking through that process. In addition to the financial outcome, there’s the piece of mind outcome of, “I don’t have to figure out how to file my taxes. You’re going to do my withholdings? Great, sign me up.” So we’ve had good success with that. It’s been actually a really positive experience. It’s a tough thing to do to be like, “Hi, I’m Jeff, I’m brand new here. By the way, I’m going to change how you get paid.” That’s a really poor way to introduce yourself to a staff. But we’ve been able to do that very cautiously and with a lot of collaboration in terms of, “Hey, this is what’s happening. This is why it’s happening. Here’s why it’s okay. Take this sheet, talk to your CPA. Come back to us if you have any questions.” And it’s really gone smoothly.

Dave:

Let’s just walk through a quick scenario. You just bought my school, I’m paying my instructors $30 an hour, they’re contractors. How do you get them to buy in to this whole idea of a pay decrease and employee status, and really the pay decrease is what’s going to-

Jeff:

Yeah. I think it’s all about framing. So we’re not offering a pay decrease. But two things are going to happen. One, is we’re going to pay more, so it’s going to be more expensive for us. This is not a pay cut or something that’s going to save us money, and they’re going to end up with more money after tax. So we’re not sitting them down saying, “Hey, we’re cutting your pay. This is a bad thing.” We’re sitting down and trying to explain kind of a win-win situation.

And I think the way that we’ve been successful in framing that is, “Hey, today is as independent contractor, versus tomorrow as an employee, there are two main differences. One is, today as an independent contractor, you’re responsible for a hundred percent of your FICA taxes. Those are 15.3% at the federal level. We’re going to pay half of that as an employer going forward. So that’s 7.65% of the 10% that I’ve just told you is going to come out. It’s a complete wash. It’s very obvious that that’s equivalent. The second thing you’re going to get is we’re going to give you a 401k and it’s going to have a 4% employer match. So we’re going to put up to 4% of your gross pay into this 401k on a tax deferred basis, in addition to the fact that we’re paying to maintain it, and you’re going to have this tax deferred retirement benefit, and all these great things. So now we’re at 11.65%. 4% employer match, plus 7.65% FICA tax. So it’s clear that we’re already ahead. On top of that, you’re now going to be eligible for things like unemployment insurance and workers’ comp and all these things that you may have been responsible for. You don’t have to value those at all. Those can be free benefits because the 11.65 is already bigger than the 10% kind of equilibration that we’re trying to do.”

Jeff:

And so I think when you sort of lay it out like that, it’s clear that they come out ahead financially. They come out ahead on the fringe benefits, UI and work comp and things like that. Then they have the convenience factor of we’re going to do the withholding for you. You don’t have to figure it out every quarter. So really the package is actually quite attractive. I think if you do that in a confident way and with a piece of paper in your hand to show the perspective employee what’s going on, it can actually be a really positive thing. People are excited about it. The reaction is not, “Oh, that seems okay, I guess. I think I understand it.” It’s like, “This is great. Thank you,” is generally the reaction. I think that can be your experience as well.

Dave:

And just to play devil’s advocate, let’s say the 23 year old music teacher, which I haven’t been in about 30 years, and I don’t care about 401k. All I care about is how much money do I have in my checking account today, because that will be a little less.

Jeff:

Yeah. It is a little less, it’s pretty close. I think if you had somebody that maybe that person’s been there for a while and you can package that with a small raise. If you give them a 3% raise, maybe it’s totally equivalent at the end of the day. So, “Hey, instead of going from 30 to 27, we’re going to go from 30 to 28. Congrats on the raise. It’s going to be totally the same after tax.” And so again, things like that around the edges, I think, are really easy to do generally to make sure people go home happy from that conversation. But that’s not usually my experience.

Dave:

So where do you get more questions or pushback from, is it from the seller who’s selling their business concerned about how their current contractors are going to react, or is the pushback or concern coming more from the actual instructors?

Jeff:

Yeah. Again, neither. I think our sellers are usually like, “Oh, that seems like something my teachers will like.”, So generally the seller is kind of cautiously optimistic, and usually the base of teachers is enthusiastic. That’s been our experience. We’ve definitely had a few isolated cases. We’ve brought on 200 plus teachers at this point, we’ve had a few questions about it. “I’m not sure. This doesn’t make sense. Seems complicated. Are you trying to pull a fast one?” But we’ve been able to spend the time and just sort of sit with them and go through the math, and like I said, it’s been a really positive outcome. It’s actually no longer something I fear about taking over a business. This is no longer on my list of things I’m worried about in terms of, are the staff going to accept this? We’ve done it enough now to really be confident that this will actually be perceived as a positive, relative to the new ownership.

Dave:

Then can you speak directly for a moment to the music school owners who have contractors, they want to switch over to employees, but they don’t know how to make it financially work for them?

Jeff:

Yeah. The tough thing is, a lot of states are starting to take this decision out of our hands. There’s a lot of places now that have these ABC rules like the California one, where it’s just no longer an option. So I think again, that the framing has to be positive and you have to believe that it’s positive, in terms of I’m offering something that’s going to end up with more money in your pocket at the end of the day. Maybe for you if you’re not running a 401K, maybe you need to make a 5% adjustment instead of a 10% adjustment to be able to say that with confidence that, “Hey, you, my teacher, are better off after this change, and here’s why.” But I think going in with the mindset of, “Hey, this law has changed, I have to do this thing, it’s not great,” that’s going to color everyone’s reaction to it. Instead, if it’s like, “Hey, we have this great option, here’s why it’s good for you. We have this relationship. You can trust me, but here’s the information, ask your tax accountant, ask whatever.” I think it can go really well.

Dave:

Looking at these schools that you buy, and this is kind of a two part question, do they have a tendency to overpay their teachers, underpay their teachers? And then I want to apply that same question to pricing. Are you seeing them having a tendency to overcharge or undercharge? And what do you do as the new owner when you feel like one of those factors needs an adjustment?

Jeff:

Yeah, no, that’s a great question. I’ll start with pricing because it’s easier. I think generally nobody overcharges for their market. I think everyone, including me, is hesitant to really push the envelope on that. So I think we don’t come in and jack up prices or do things like that. But we are looking to get regular annual increases in tuition from, maybe not the moment we take over, but definitely a year after we buy the business, two years after, we’re looking to get regular annual pricing increases. I think that’s a practice that’s not generally followed by a lot of studio owners, I think.

Dave:

But what’s a typical price increase that you would be looking for on an annual basis?

Jeff:

Three to 5%, maybe. It’s something that makes sense on a round number. So just to use a real easy number, if you’re charging $150 a month for a 30 minute lesson, let’s go to 155, and then the year after let’s go to 160. I think nobody’s going to notice that kind of thing. If you’re nervous about it, the half measure that can still have a big impact is just do it for your new students. All of my current students are 150, my new students are 155. And over time, that will still have a big impact as that kind of rolls through as you sign up the 100 new students you’re going to have this year.

Jeff:

So I think pricing is always at least low to in line, it’s never high. And look, it’s hard to tell anyone they’re overcharging, if they have a big and thriving studio, there’s obviously an experience they’re providing that people are happy to pay for. So if you can get 100 bucks an hour for lessons, but kids are coming, they’re having a great experience, the parents feel like it’s a good investment, God speed. So I think that’s the pricing thing. I think you’ve had many, many podcast guests speak to that, and I don’t have a lot to add there.

I think from an employee or teacher perspective, I think it’s much more common to see underpayment. I think actually one of the things that we see more commonly is that there’s not enough spread between your brand new teacher and your teacher who’s been with you for 10 years. The pay rates for those things should be pretty different. I think people want to see progression and advancement. Your established teacher, that’s been with you forever, that has a hundred percent retention, that you can count on to to do a few things around the studio when emergencies come up, that person’s worth a lot to you. Having them kind of held at some sort of artificial ceiling because you feel like you can’t pay them, I think is wrong. So I think we often come in and we’ll sort of sit down with, especially if there’s been a manager that’s been there for a long time, and say, “Hey, here are the pay rates for the school. If this fell on the floor in the middle of the office and everyone looked at it, how would we feel about it? Would we be embarrassed?”

Jeff:

And I think that’s the mentality you want to have, is a lot of times the people who get raises are the people who ask for it, not necessarily the people who deserve it. So we want to make sure that, again, if that pay sheet fell into the hands of our teachers, that we could confidently look them in the eye and say, “Yes, this is our pay schedule. Here’s here is the high end, and here’s what you have to do to get there, and here’s what we want to see from you.” And the best possible pay outcome is where everyone feels like everyone else’s pay, except for theirs, is fair. Right. Everyone agrees that everyone else is ranked correctly, except for them. “I should always get paid more,” is always the view. But as long as the view is that everyone else is in kind of the right spot, you’ve done the right job.

I think if you polled our students at our schools that we’ve taken over, I think 75% of them would not know that something’s different. […] But they still see the same teacher. They see the same person at the front desk. As far as they’re concerned, their experience is the same. The name of the school is the same, the policies are the same, maybe the website’s a little bit different or some things like that, but to the client, there’s a lot of continuity, and we strive for that.

Dave:

That’s great, and I think really helpful for a lot of people. I love that, the asking yourself the question, if everyone’s pay rates were to fall on the floor, how would you feel? Because I remember as an owner myself, I was always like, “I wonder if they know. Do they ask each other?”

Jeff:

Of course they do. Of course they do. Don’t kid yourself. Of course they do.

Dave:

And yeah, I think that’s great. Okay. So what does it look like after someone sells their school? You’re in Denver, and someone in Chicago sells their school to you. How does it go down now? How do you run these schools from Denver?

Jeff:

Sure. That’s a great question. The answer is just, I spend a lot of my life on an airplane. Also we have tools like the one we’re using right now, the Zoom and things like that, even before, pre pandemic. But the answer, the real heart of the answer is, we hire somebody, or best case, there’s someone like this in the business already who’s a strong number two, kind of functions as a general manager, is ready to be the point person day to day. If not, we’ll go out and hire for that person. And I meant what I said earlier, they’re going to be me when I’m not there. They’re going to have that level of ownership.

Now, one of the nice things about our platform is it dramatically simplifies what it takes to be successful in that role. So we have all the systems in place, we’re doing all the marketing, all the finance, accounting, tax, payroll, all that kind of stuff is no longer part of the job that the studio owner was previously doing 10 o’clock at night, trying to figure it out, that’s all done. And so the general manager’s job is just to be kind of the chief client service officer, really empathetic and outgoing and building those relationships with the current students, with the prospective students, helping to find great fits, helping to resolve and diffuse issues as they come up. That’s really important, but it’s a simple, but not easy job. It is simple and straightforward in terms of what we ask of them. It’s not easy by answer to the imagination, but we think it’s very achievable.

Jeff:

And so the answer to your question is, we’ll drop someone in on the ground who’s going to live and breathe and care about the school in the same way. And then our platform is going to supplement all the behind the scenes, things that are going to be really important. And so to answer your question in terms of what it looks like, I think if you polled our students at our schools that we’ve taken over, I think 75% of them would not know that something’s different. So I go to all the recitals, so I get up on stage and I talk, and they’re like, “Who’s this guy?” And that’s fine. But they still see the same teacher. They see the same person at the front desk. As far as they’re concerned, their experience is the same. The name of the school is the same, the policies are the same, maybe the website’s a little bit different or some things like that, but to the client, there’s a lot of continuity, and we strive for that.

Jeff:

And so you, as the studio owner, could pop by the recital because you want to and you sort of enjoy seeing all students. And people would be like, “Oh, hey, it’s great to see you,” and still assume that you still own the school. So we’re definitely not waving the under new management banner out front. We’re not changing a lot of things that are student facing. We’re really striving to take over schools where we think things are on the right track and continue pushing in that direction. And that means not rocking the boat and undoing all the great things that have been done. I think a lot of the places we can add value are behind the scenes and kind of invisible. And that’s great, that’s fantastic that we can have positive impact in a low impact way for the client.

Dave:

And I would think for each school there’s a different sort of transition period. Typically how does that work?

Jeff:

Sure. So usually what we ask for is between four and six weeks of kind of part-time involvement in transition. Look, it depends on what your goal is. So we’ve had people sell to us and continue teaching at the school. They said, “Hey, I’m a teacher by background. This is what I want to do.” So in that situation, they’re there on an ongoing basis. But if you’re like, “Hey, I want to sell. I want move to Florida. I want to retire,” for the first two weeks, we’re going to be doing just transition work, making sure all the billing and stuff is moved over, that we’re paying for all the things that you used to pay for, and that all the financial stuff is tucked away and things like that go smoothly.

Jeff:

But the tail period is just because things are going to happen over the course of a month. Some client’s going to call, we’re going to be like, “Who is this? What’s this problem?” And we just ask that the seller kind of picks up the phone and helps us to make that transition. And so usually our agreement is kind of for the first two weeks, we’re going to work 10, 15 hours a week on some blocking and tackling transition items. And then for the next four weeks, we’re going to call you twice a week and we’re going to have some questions, and it’d be great if you could answer them and help us make this transition. But you can be pretty done and dusted out of there in two weeks if you want to, or you can stay involved forever if you want to.

Jeff:

We have one partnership we’re working on right now where the seller has sort of said to us, “Hey, we actually really like running our business and interacting with our clients. The things that we don’t like doing are the things that you say you do really well, the behind the scenes stuff, the marketing, the finance, all this kind of stuff. If we could just hand that off to you, we would continue to run the school.” So we’ve kind of paid them for the ownership, and we’re paying them a salary on an ongoing basis, and I think it’s going to be a great partnership. So I don’t want to give the impression that we just buy from somebody and then kick them on the bottom on the way out the door. We are excited to partner with people on an ongoing basis. I think in situations where retirement’s the goal, that’s not always practical, but we’ve definitely had ones that are ongoing partnerships to this day that have been really successful.

Dave:

Well, and I think that’s huge what you just said. As a seller myself of a music school, during the negotiation selling process, I was completely focused on the transaction and the purchase and what that was going to mean for my life financially. What I didn’t consider is the emotional impact of letting go of my baby. I just was like, “Ah, I’ll be thrilled. It’s a new chapter of my life.” And I really value my relationship with the current owner of my school. He’s my son-in-law. He married my daughter. And so I’m like, “Hey,” I check in with him all the time, and I’m very careful. I don’t want to, “Well, hey, be sure to do this and be sure to do that.” But I underestimated the emotional impact of letting go of something that I built from nothing. But at the same time, I’m really thrilled that I sold. And I think burnout can happen in any business. Yeah, go ahead.

Jeff:

Sorry. I was just going to say that someone sent me a really great book on exactly this topic. It’s short, it’s really easy. It’s called Selling Without Selling Out. And it’s all about the non-financial elements of selling and how to plan your life after sale, what do you want to do? How involved do you want to be? The author, he’s a venture capital guy, he’s talking about a much bigger business and he’s talking about a different type of company. But I think the message is really applicable in terms of, okay, you’ve dealt with the financial side. The other 160 pages of the book are all about how to do it in a way that feels authentic to you and doesn’t feel like selling out.

Dave:

Yeah. Yeah. That’s an important topic, and I’m glad someone wrote a book on it. Well, this is all really fascinating. And I have a feeling that my listeners are going to be intrigued. So you’re still in a growth mode, right?

Jeff:

Correct. Yeah.

Dave:

And do you have a sense of how many schools you want to own? Or are you just going to try to keep expanding and scaling your business?

Jeff:

Yeah, I think something that’s really important to me is that each school that comes onto the platform feels like it gets more from the platform than it receives. We don’t want to have a kind of colonial extractive relationship from these schools. We want to show up, we want to add value, we want to make good on our promise that, “Hey, we can actually help you run a successful school in your community and bring value to your teachers, your students, your families.” So I think for as long as that continues to be the case, where we get a little bigger, we can add some more resources, we get a little bigger, we can add some more resources, for as long as that continues to be a net positive, my goal is to continue doing that.

Jeff:

Whether that ends up being 40 schools or a hundred schools, I have no idea, but it’s been really exciting. And I think on the path to 12 schools, it’s definitely been a really positive thing for everyone involved, even down to the general managers having a peer set of GMs who are doing their job and being able to share ideas, and a peer set of teachers. We have teachers that say, “Hey, I have this weird question or this issue that’s come up. Has anyone ever heard of this?” Among our 220 teachers, we probably do have somebody that’s heard of that. And so there’s really great things that come from being part of this community, and that’s been a really fun thing to see. And so, yeah, we’ll continue pushing in that direction for as long as it makes sense to do so.