Inc.: So if the numbers fit your guidelines, you're on the next flight?
Naddaff: No, I'm still suspicious. It might be that in one region of Louisiana, he could do 10, 15, 20, even 30 units, but if you expanded it on a larger regional basis, he'd get clipped. Sometimes a concept can develop profitably in certain pockets but would never make it on a regional or a national basis.
Inc.: What's the best way to assess the potential of any concept?
Naddaff: You've got to look closely at the barrier to entry. You've got to say to yourself, "Do I want to get into this deal and then get knocked off at the pass? Or can I put money in and get them up to the point where they become the dominant entity?"
Inc.: Typically, what's a high barrier to entry in the restaurant business?
Naddaff: The ability to deploy capital could be a barrier to entry. The ability to attract the right management could be a barrier. There's nothing in food itself that is a barrier to entry. Sometimes there may be a hook that's unique -- it might cost $10 million to put up the restaurant, and that's a barrier. If you and I wanted to put up a $100,000 pizza store, that's a business anybody can get into. You'll never find a recipe in the food business that's a barrier. But maybe there are only so many locations within a city where a particular concept can go. Or the design of the store may be so unique that you can get it protected by design patents. But bagel shops, no barrier to entry. Coffee shops, no barrier to entry.
Inc.: Yet Starbucks seems to have achieved dominance.
Naddaff: Yeah, but watch and see what happens in three or four years. It will be hard for them to maintain same-store sales; maybe competitors will offer better pastry or great scones. If they're smart, they'll sell it to somebody and go off.
Inc.: What other research did you do on serious contenders?
Naddaff: We did an analysis of each company against industry averages. We found out what niche it owned. Is it the casual-dining segment or the fast-food segment, or is it upscale dining or strictly take-out? When I stood in line for the first time in Boston Chicken -- and I was in line for 18 minutes -- I looked at the customers, I looked at what they were buying, and I looked at the prices. By the time I got to the front, I knew there was a viable business there only because of my previous life in the Kentucky Fried Chicken business.
Inc.: What convinced you?
Naddaff: I liked the fact that the customers were more upscale. They were a cut above the people who were buying the Kentucky Fried Chicken product. And I liked a $5-to-$6-meal occasion.
Inc.: But you didn't visit every outlet of the restaurant concept you were interested in, did you?
Naddaff: Oh, every outlet. We didn't just take the entrepreneur's word for it. This is very serious -- this is $14 million.
Inc.: So you sent out people to count the traffic, and what else did they do while they were there?
Naddaff: They looked at the food product. We even checked out who the chef was -- in many cases, it was the entrepreneur himself. We looked very hard at the team around the entrepreneur. In our team we all have unique little skills, and we all got a whack at the apple.
Inc.: What's your unique skill?
Naddaff: I'm the visionary.
Inc.: In the context of scrutinizing companies, what does that mean?
Naddaff: I look for the passion. I look for the commitment. I look for where this guy has been in his life. Is this a guy who has hocked his wife, his firstborn, his teeth, his contact lenses, his pacemaker, and his hearing aid? That, to me, is commitment. That's the guy I'm going to back.
Inc.: How do you measure commitment?
Naddaff: You measure it when you are one entrepreneur talking to another entrepreneur and the door is closed. I can see the sweat on his upper lip. Lots of entrepreneurs hock their houses. What's more sacred than a house? I like it when I hear someone has done that. I put it down in the book.
Inc.: What else do you put down in your book?
Naddaff: Is he a street fighter? Is he a guy who can put up with trauma? I can tell because I have been there in my life. I can sense the mood. I immediately connect with entrepreneurs, and they feel very comfortable with me. They will tell me things they would never tell anyone else. I want to see how much this business means to him. Sometimes the guy is 60 years old and he's never had a hit, but he's finally got something that can use his talents and he's going to make a go of it. There's a reason he needs to do it, maybe because he wants to put his kids through college.
Inc.: Did you come across concepts you thought were great but that couldn't be replicated fast enough?
Naddaff: There are some things that should never be franchised. Starbucks does not franchise, and they are right. They want to be able to control the quality. We had to look at consistency too: Could the food be consistently good if we expanded the business? You don't want something like sauces, or anything that requires a chef kind of person. Concepts that require unique talents are tough. I saw a couple of dinner theaters that belonged to a guy who had two or three of them and who wanted to expand. I didn't think that was a viable concept. It's tricky when you have a different theater group in each of the places.
