Would Warren Buffett buy a tuition agency?

First Published on 14/10/2015 at Estate and Manor Magazine

Would Warren Buffett buy a tuition agency?

Warren Buffett looks for excellent businesses where there are considerable barriers to entry, high returns on investment and excellent, honest management. This strategy has led him to become the most successful investor on the planet, compounding value over many decades for his shareholders.

What would Warren make of British tuition agencies? Would Berkshire make a bid for Bonas MacFarlane, Keystone, or even Bright Young Things?

I would haphazardly suggest that you are not going to see any one of those names pinned up in an office in Omaha, Nebraska any time soon. Over the last few years it has been clear that everyone and their Labrador has had the excellent idea of starting a tuition agency. I would guess that over half of agency owners have no relevant teaching experience and perhaps a quarter have come from a separate profession. How did this happen? To answer this question we have to think about what you need to start a tutoring agency and how innovative technology has made it so easy. Although I have never started my own agency I know many people who have, it is an asset light business, no heavy machinery is required to squeeze information into a thirteen year old boy’s head. The use of a laptop, mobile phone and access to tutors, clients and perhaps the use of the wonderful TUTORCRUNCHER software to automate all the boring maths is the bones of the business; some staff and an office outside of your bedroom can obviously come later.

Perhaps a competitive advantage can be had with a large book of tutors? Smaller agencies find it hard to fill placements especially those that are short notice or in a specialist subject, they often have to rely on outsourcing the job to one of the big boys.

Perhaps there is something intangible that creates a sustainable competitive advantage? An agencies’ human capital perhaps; experienced staff, tutors and relationships with schools and parents would seem to offer some sort of defensive moat against competition. This, I think, is more stable ground; it is definitely true that the larger more successful agencies can afford more expert staff and a stand at the education shows to pick up more upwardly mobile families. An agency runs on “knowledge capital” the tutors and the staff and the relationships they hold with clients. In order to keep them you need to pay them more than the other guy and more than they could make as an individual. If you wish to pay them more you will either need greater efficiencies in your business or you will need to charge more. There’s not much that can be saved and higher prices will allow the newer competition to take less commission and undercut you, perhaps even filling the role with the same tutors. This is fine if you are a business selling a unique branded product like Gillette, customers are still likely to pay more for a trusted product than a cheaper alternative but tuition agencies are more like large supermarkets predominantly selling other people’s labour and if someone can get the same product at a discount at another store they will shop there. There is also the constant threat that your prize tutors may have the clever idea of becoming a co-operative, banding together like French wine makers and ditching the agency so as to be able to almost double their pay overnight or offer cheaper rates to clients. You will then have to go out and find new tutors to fill the roles, often inexperienced and fresh out of university.

Like supermarkets tutoring agencies are likely to go through periods of rapid expansion and then contraction as too much competition erodes profitability. The strongest and most innovative agencies will likely survive a period of contraction and the weaker players will either need to be bought out or leave the game.

With the near constant disruption in the industry from technology and competition it’s near impossible to project what the view will look like in two years never mind a decade and for this reason I think the Sage of Omaha would put the idea in the “too hard” pile. TUTORCRUNCHER on the other hand seems like an excellent business, it has virtually no competition, a reasonably high barrier to entry (you want to hire someone to code your version?) and the potential to expand internationally. It has pricing power as once embedded into your business swapping it out would probably be akin to open heart surgery on a marathon runner.

If you ever want to sell some equity let me know!

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