With $14 million to spend on his hunch, the former chairman of Boston Chicken scoured the country for a concept worthy of franchising. Here's why he didn't choose yours
"Pasta," George Naddaff is saying. "You put it in some hot water and pour some sauce on it, and you've got 16,000 people selling pasta. Good product. But how much more different are you going to make pasta? Oh, you're going to build a chain. Is that going to impress me? Absolutely not. Oh, you have a thicker pizza; oh, you have a thinner pizza. Is that going to get me in the deal? I don't think so. Do we need another yogurt chain? Is there anything easier to knock off than a coffee shop?"
If Naddaff's rant makes him sound like a dyspeptic restaurant critic, that may be because he has spent the last year visiting restaurants across the country. His mission: to identify a wildly franchisable concept worthy of the $14 million he has raised to take it public and grow it fast. "I'm looking for another Boston Chicken," says Naddaff. That might sound insufferably ambitious, if not for this: George A. Naddaff is the fellow who discovered the original Boston Chicken Inc., the restaurant chain that wowed Wall Street when it went public on November 8, 1993, setting a record for a single-day gain by an initial public offering.
That was a year after Naddaff had sold a controlling interest in the company to a group of former Blockbuster Entertainment Corp. executives, who have since renamed the company's units Boston Market. But the offering turned Naddaff, a major stockholder, into a multimillionaire and a "guru of franchising," as he calls himself. His official anointment came when underwriter GKN Securities Corp. approached him with the idea of raising public funds to identify and acquire a private restaurant chain worthy of franchising. In November 1994 Food Trends Acquisition Corp. -- which includes Naddaff as chairman, as well as alumni of Boston Chicken -- raised a total of $16.2 million, which, minus costs and working capital, left about $14 million. Naddaff had up to 18 months to identify a candidate that met specific criteria: a fair market value of more than $10 million and an operating profit at the individual-unit level. Naddaff's choice -- a five-unit restaurant chain based in Rockville, Md., and operated by Silver Diner Development Inc. -- also required approval by 80% of Food Trends' shareholders.
Naddaff had 20 years of franchising experience when he first set foot in a Boston Chicken outlet, in February 1987. With a partner, he had started out as a Kentucky Fried Chicken franchisee in 1967, opening 19 units. Subsequently, he launched Living and Learning Centres Inc. and VR Business Brokers Inc., both of which he sold. In 1994 Naddaff started Coffee by George, a double-drive-through-restaurant concept that ate up about $5 million before he closed it. "I'd like to forget about it," he says.
As for his current search, Naddaff couches his own motivation in terms of a bodacious generalization: "There is no greater drive in human existence than ego gratification."
Sixty-five-year-old Naddaff recently set up shop at the site of a former bank branch in suburban Newtonville, Mass. It's a strategic location, psychologically speaking: the original Boston Chicken store is around the corner, and one of his former Kentucky Fried Chicken franchises is down the street. "I'm in my 'hood," says Naddaff.
Inc. senior editor Joshua Hyatt talked with Naddaff about what makes a concept perfect for franchising, how he evaluated the businesses he saw, and why it's so hard to find a good dinner theater in the neighborhood.* * *
Inc.: What did you do the day after you'd raised $14 million to buy a mystery company?
Naddaff: When you tell the restaurant community that you have $14 million at a time when Wall Street has shut down on IPOs, they call. "Come out and see these 18 bakery-delis," they'd say, or "Come out and see me, George, I'll feed you at Spaghetti Freddy's." We looked at 80 or 90 of these companies in various segments -- they were all replicable -- and we narrowed it down from there.
Inc.: How did you screen the leads you were getting over the phone?
Naddaff: Let's say a guy has 10 units. I say to him, I want the financials on the 10 units. I want them to be profitable at the operating level. If they don't pass that first screen test, I don't talk anymore.
Inc.: Why did you make profitability the first test if you were looking at growth companies?
Naddaff: It's important to see that they are profitable at the unit level. I don't mind if they are not profitable at the corporate level; they could still be an early Boston Chicken. We weren't making money either when the Blockbuster guys first came to see us.
But let's say they do have the numbers and we exchange several phone calls and I ask for some references. Then I'll probably call someone I know in their town and say, "Tell us about this company." If they check out, I'll fly out there, and we'll do what we call the road show. We smell the guy's feet, he shows us some restaurants, we look at his team. We might find out that he has a weak financial guy or a weak operations guy, or that some of the franchisees they've got they shouldn't have sold to. I talked to a company that had 80 restaurants, and a third of the franchisees weren't making it. We wouldn't have touched that.
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.
Inc.: Were you hoping to find the next Hard Rock Cafe or Planet Hollywood?
Naddaff: Planet Hollywood is a tourist attraction; I don't think you go there for good food. I wanted something with mass appeal that you can put in multiple locations. I like a concept where you can put a substantial number of units within a single geographic market, so you can cluster them and get more bang for the buck from advertising. Just like Boston Chicken. Just like Kentucky Fried. We run one ad, and we hit 27 stores.
Inc.: How much did you trust the financials people sent you?
Naddaff: We didn't trust them at all. That's why our team would dissect them under a microscope and come to our own conclusion about whether the information we'd gotten was real.
Inc.: How often did it happen that you got numbers that looked great, and then, upon closer inspection, you found you had really gotten snowed?
Naddaff: No, it wasn't that people were lying. It was just that they didn't have the information themselves.
Inc.: What, for instance, wouldn't they know?
Naddaff: Food costs. Labor costs.
Inc.: Aren't those the key things you have to know to run a restaurant?
Naddaff: I would think so. But there were many times we'd get a financial statement that just was not done right, and so we would know that wasn't good information. We couldn't base an investment decision on the information they gave us. So we passed.
Inc.: What were those people paying attention to, if not those costs?
Naddaff: They tended to be looking at how people were receiving the product, or the fact that they were getting written up in the newspaper. A start-up is the hardest thing; I don't fault them. But I couldn't afford the luxury of spending time with people and fixing their businesses.
Inc.: Was there anybody who resisted you by saying, "I'd like the $14 million, but I don't want to be public"?
Naddaff: Yeah, there were a few that, after we talked about it and they understood what it was like to be a public company, with reporting procedures and quarterly numbers, said they wouldn't want to do it.
Inc.: What scares people so much about running a public company?
Naddaff: The amount of money you might have to add, the kind of scrutiny you go under. The fact that you actually put out a prospectus that tells all your secret information. They very jealously guard what they think of as their herbs and spices.
Inc.: Is the company you are acquiring really unique?
Naddaff: I wouldn't call it unique. But I will call it one of the best.
Inc.: One of the best . . . at what?
Naddaff: Management. Very unusual in the sophistication of the management and the technology, the up-to-date MIS reporting systems, and the way it captures information about its customers.
Inc.: So was technology another aspect you looked for?
Naddaff: Absolutely. Today you can have a system that records the amount of times a customer calls and what he orders. He might order chicken 80% of the time. You'll have that information.
Inc.: And what do you do with that?
Naddaff: You send him coupons for a special on chicken.
Inc.: How do you capture that information?
Naddaff: You put out a comment card that says, "Tell us about your experience here." Let's say you get 1,000 cards in a month and you plot those cards on a map. And you find that 70% of your customers are coming from within the first mile of your unit. Maybe 3% are coming from six miles away. So it tells you where you should be advertising.
Inc.: So you liked that the management knew enough to get that information?
Naddaff: More than that, they understand it. It's nice to have that information, but you have to know how to use it.
Inc.: Did you look at all at management below the executive level?
Naddaff: Yes. I find that more and more people seem to be sharing the wealth with employees. I think it is absolutely essential. You have such turnover in the food business.
Inc.: What made you think you could find another Boston Chicken so fast?
Naddaff: I'm not going to sit here and tell you that I have another Boston Chicken. That may never happen again in my lifetime. I'm human, but I don't think anyone will try harder than I will. I believe in myself.
Inc.: As you travel does it bother you to see a million me-too Boston Chicken places?
Naddaff: And so it goes. This is America, land of spin-offs. Look, wherever I go, people call me the chicken man. Why couldn't I be the gene-splicing guy? Or the high-tech guy? No. I have to be the chicken man. I don't look like a chicken, either. I'm a handsome guy. n