A Twist of Fate

Movie producer John Davis was such a fan of Wetzel's Pretzels that he decided to see if he could buy a piece of the company.

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Movie producer John Davis wanted a healthful snack. The founders of Wetzel's Pretzels wanted cash. Of all the pretzel joints in all the towns in all the world, he walked into theirs.

John Davis is a player, a green-lighter of gargantuan film budgets, a scion of Hollywood royalty. The proud producer of such movies as The Firm and Doctor Dolittle, Davis has worked with Hollywood's A-list: Tom Cruise, Meg Ryan, Denzel Washington. Even his Los Angeles office is a Tinseltown landmark, located in the gleaming glass tower that Bruce Willis saved from Euro-trash terrorists in Die Hard. The surrounding neighborhood—erected on what was formerly a studio back lot in Century City—is awash with famous tenants. ABC, Bear Stearns, and SunAmerica have offices there. So does Warren Christopher, the former secretary of state.

But despite its affluent workforce, Century City is short on fine dining. So when the pangs of hunger interrupt Davis's wheeling and dealing, he usually heads next door to the Century City Shopping Center. On one such excursion in 1996, a woman proffering a tray of plump, warm pretzel pieces accosted him. Davis sampled one—and became a devotee of Wetzel's Pretzels and a regular patron of that outlet. "A hot, fresh pretzel is my favorite kind of treat," Davis says. "I like things that are healthy and not that fattening. I'd rather have a pretzel than a Krispy Kreme doughnut any day."

Over time Davis's hunger turned into curiosity. "I wondered who owned this company and if I could get a piece of it," he recalls. "It was the classic Warren Buffett-Peter Lynch thing of 'invest in what you know and love.' "

And thus, John Davis fell into the trap. It was a trap that had been set with care by Wetzel's founders, Rick Wetzel, 42, and Bill Phelps, 45, who had opened the Century City store partly in the hopes of bagging just such an investor. "It's no joke," says Phelps. "A lot of lawyers and entertainment people work in that area, and we chose that location in part because we thought we might happen across a financial investor." That putting-yourself-in-fame's-way strategy worked for Lana Turner when, as legend has it, she was discovered at Schwab's Pharmacy. That scheme has been almost as successful for Wetzel's Pretzels.

Not that the founders of Wetzel's, at the time of their discovery, were engaged in the business equivalent of lounging at the Schwab's soda fountain and dreaming of their big break. In 1996 the company—a franchise operation—was borderline profitable, although neither cofounder was drawing a salary. "We were plodding along on our own growth rate and cash flow," Rick Wetzel says. "We weren't actively looking for money, but we knew we needed a slug of cash to put the infrastructure together to find good franchisees and good sites."

Indeed, the company was at a crossroads. Wetzel and Phelps had opened the first Wetzel's Pretzels in Redondo Beach, Calif., in 1994, while both were brand managers at Nestlé. The two had met at the Swiss food conglomerate, and because they shared a contempt for bureaucracy, they began thinking about starting a food company themselves. Wetzel claims they chose the milieu of pretzels not because of the obvious rhyming opportunity but because they thought the existing competition -- Auntie Anne's and two small outfits owned by Mrs. Fields Cookies—was, well, soft. A Nestlé chef helped them devise a recipe, and the two partners put up $200,000 from their savings to seed the company.

The early Wetzel's stores were retail nightmares, the founders concede. Inspired by the spartan appeal of the name Starbucks, the pair designed signs that bore the single word Wetzel's, which baffled consumers. Those curious enough to try peering inside were thwarted by shelves of precious little mustard jars that had been built into the stores' windows. And those who did enter the pretzel store were beguiled by its wooden paneling, plush booths, artsy black-and-white photographs, and sophisticated lighting fixtures—an elegant look on which the partners had spent a fortune. Gaggles of young patrons regularly congregated in these pseudocoffeehouses. Most passersby, seeing the crowds and misinterpreting them as long lines, lived up to their name.

By 1997 the founders had fixed some of those problems by eliminating seating in their new stores and moving counters close to the door. The mustard jars were gone, replaced by what Wetzel calls a "theater of rolling," where customers could watch workers preparing the pretzels. But the partners still wanted to hire an expensive design firm to create a new look for the outlets, and they also yearned to bring on an ad agency that would be worth its salt. In addition, their management team had big gaps in areas such as real estate, marketing, and operations, and those needed filling. It was at just that point that a charismatic young producer strolled into their lives.

John Davis is one of five children of Marvin and Barbara Davis, a legendary Hollywood power couple. Marvin Davis's fortune is estimated to be $3.5 billion; he has bought and sold such iconic businesses as the Resort at Pebble Beach, the Aspen Skiing Co., the Beverly Hills Hotel, and Twentieth Century Fox. Originally an oil baron from Denver, Davis père is said to have been the inspiration for the character Blake Carrington in the 1980s TV series Dynasty. Edging out from under his father's shadow, the younger Davis worked on the second Indiana Jones picture, earned an M.B.A. at Harvard, and then went on to produce 52 films that have grossed $2 billion worldwide. He also dabbled in angel investing, mostly notably in WebTV, which was acquired by Microsoft in 1997.

Want more information about finding and working with angel investors? Read "How to Find an Angel Investor."

Davis's interest in Wetzel's Pretzels moved him to consult with Michael Seibert, his chief financial officer and a longtime family adviser. Seibert searched the Web and found a site that Wetzel's had set up to recruit franchisees. He called the number listed on the site, chatted with Phelps, and immediately saw a business opportunity.

Seibert liked the gross margin Wetzel's had: each pretzel cost 7¢ to make and sold for $1.59. He liked the product's positioning: tasty yet guilt-free. And he liked the customer demographics: 70% of customers were health-conscious women, according to in-store research. "It was a bit of an odd deal for us," Seibert says. "But occasionally we do things a little bit out of the ordinary."

Davis asked Phelps and Wetzel for a detailed new business plan to explain how they would use any additional money. After viewing that document, Davis personally called 11 acquaintances and persuaded them to go in with him on the deal. (The producer always works with coinvestors.) The coterie Davis assembled included Gary L. Wilson, chairman of Northwest Airlines; Dana Davis, his sister; Jake Bloom, a Hollywood lawyer; and David Israel, a producer of Monday Night Football. The group offered to buy 33% of Wetzel's Pretzels for $1 million. Davis also agreed to sit on the company's board, a position he ordinarily eschews for fear of being named in California's ubiquitous shareholder lawsuits.

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Mike Hofman

Mike Hofman was previously editor of Inc.com and a deputy editor at Inc. magazine, which he joined in 1996. The site was nominated for a National Magazine Award for Digital Media in 2010, and was named the best business website by Folio Magazine. In 2006, Hofman was part of a team of writers nominated for a Webby Award for best business blog. He lives in New York City.

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