Slice of the action
Tom Potter founded the Eagle Boys Pizza franchise chain in 1987. In 20 years, he grew it to 200 stores with an annual turnover of more than $100 million. Last month he sold the business for an undisclosed sum to a private equity firm. He talks to Jacqui Walker about what’s cooking.
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Jacqui Walker: How does it feel to have sold your baby?
Tom Potter: It’s probably still sinking in. I am still working out of the same office and still working here in the business as a consultant, so it will probably sink in a little bit more in a few months when I’m not so busy.
You’ve sold to a Queensland-based venture capital group NBC Capital. You got a number of approaches to sell. There’s a lot of private equity money around at the moment and a lot of mergers, acquisitions and MBOs going on. Can you tell us the story of how you came to sell and why you chose to sell to NBC?
There were various issues that we needed to address. We knew that the business was going to need capital going forward. Whether that was going to be done through a capital raising or initial public offering and so forth was open to us.
The management also wanted to buy in so we put together a checklist of the things we required… bringing in some cash; let management buy in; access and availability to capital to go forward; and ensuring that there was a cultural fit with that particular party.
Why is cultural fit so important? Is it partly because you’re a franchise?
I think that the business’s culture and in particular its philosophy of going forward have to be maintained, and if a venture capital group comes in and decides they’re going to change the way the business is driven, in other words in a lot of cases driven from the bottom line instead of the top line, it can be devastating to the business.
So for myself, being an ongoing shareholder and also wanting to see the brand continue to thrive and prosper, I just wasn’t going to hand the baby over to anybody that would give me the biggest cheque.
There was a checklist of things that we wanted to achieve and we were able to achieve that with NBC.
How long did the discussions take?
And was it part of selling, you wanting to step away from the business a bit?
I think it was getting to a stage where the business probably needed me to step away from it.
What do you mean by that?
Well it’s probably due for some fresh blood.
We’ve continued to bring fresh blood on to the board of directors. We had a very good management team in place. Our general manager had been well and truly settled in, in the last two years, and was pretty much ready to take over as CEO anyway.
We’d achieved pretty much everything we wanted to achieve, so you do get to a stage where you say, well as a boxer, when do you retire? Do you retire at your peak or do you wait till you take a few body blows and say I’m really tired and run down and buggered, and now it’s time to sell my business.
The only trouble was sitting down and selling it when you’re still quite enthusiastic about it. It is certainly a roller coaster of emotion in that period where you’re negotiating it.
Can you tell me about that? What were you feeling? Sometimes excited and sometimes…
No, I wasn’t excited. I was pissed off half the time about it. Probably more so knowing that it was my time and I had to go. But on the other hand, I was being very very particular in the negotiations of the deal and the process going forward.
So I probably over-extended myself in regards to being a control freak on ensuring that the project going forward was as protected as possible. I’ve got to say there wasn’t a lot of excitement. It was more concern and anxiety.
Because this business is your baby isn’t it? You founded it 20 years ago, as you say, so can you tell me about that and how the business was created and how it grew over the past 20 years?
Originally it was a partnership between myself and my Mum. My background was in bakery and flour milling food technology. The actual uniqueness of the concept was that when we opened our first store it was set up very much like a bakery in the back and a pizza shop at the front, so everything was made fresh with unique recipes.
We had deep pans and thin pizzas and multigrain pizzas and things that were very different, and it was basically what we classed as a semi-gourmet product with high production output. It was very successful in Albury, so then we opened in Wagga and then we opened in Dubbo.
That was all good and well until we realised that controlling these enormously busy businesses that were spread all over the country was going to be a nightmare, overlaid with the fact that it was going to be difficult to raise capital to build these stores. So then we turned to franchising, and the rest is history.
So this was 1987 and franchising was becoming more and more popular I suppose. Did you have trouble recruiting franchisees or was it easy?
We started the business in 1987. In 1989 we decided we were going to franchise and we really never had any difficulty getting franchisees in the first five to eight years based on the fact that we were usually only opening up three to five stores a year anyway and a lot of them were coming organically. Like we’ve got a guy in Mackay who’s been a franchisee now for 17 years, and he was a delivery driver and is our longest-standing franchisee and probably to this day our most successful one.
You must have learnt a lot about franchising over the years. Has one of those lessons been hiring or granting franchises to people you already knew, because they’d already worked in the business?
That certainly helped. We don’t have that luxury as much now. We still probably have half our franchisees coming through the system, people that are either working in the system or working for the system. But because you’re building 20, 30, 40 stores a year, you just don’t have that luxury any more and we have to have a very detailed and scrutinised selection process.
So what have been some of the challenges over the years in building such a large chain?
I think that franchising is a much more sophisticated business than people realise and when we first started out there was just a big mateship and everybody was fine and the business was highly successful. Then you got to a stage where you really needed to put some serious strategy down on the business.
I think that the biggest challenges for this business have been that we’ve had to reinvent ourselves about four times in the last 12 years and reinvention means reintroduction of capital cost. It means change, which is extremely difficult, particularly with franchisees, and in a lot of cases people become very nervous about evolution of change.
We’ve redesigned our operations, which was the first big cost. Then we introduced the two-minute pizza concept. Now we’re introducing drive-throughs to the business. We are driving change, not reacting to it.
So how do you do that effectively with such a big network and franchisees who have their own capital invested in the business.
It’s difficult, but it’s something that has to be managed and firmly implemented. McDonald’s is in the same boat. It just simply can’t have a situation where some of its franchisees will do some of their advertising campaigns or some of their capital expenditure. So on one hand you might be seen as a dictator, on the other hand we are an army and we all do have to look the same and march to the same beat.
And I guess that would have led to conflict at some times.
When you’ve got 200 franchisees, there will always be conflict, because you’ve got 200 opinions. Sometimes… there’s a great saying about franchising. It’s like herding cats.
There is some more regulation about to be introduced into the franchising industry. Do you have any thoughts on that?
I think that the processes that the franchising industry have been taking with regulation and the laws have been steps in the right direction constantly. But I think at the end of the day if someone’s going to be a snake they’re going to be a snake, and if someone is going to try and run behind a lawyer and create a sandstorm or a smoke storm of intimidation and so forth, they’re still going to do it.
I mean we’ve been to court a couple of times. We spent a fortune on one case defending ourselves, which we ended up winning. The franchisee lost everything based on poor advice from his lawyer. They went through a grubby little precinct court in New South Wales that got around laws.
So I think that we continue to go in the right direction, but at the end of the day you’re protected by common law and I’ve sat in the witness box for four days answering questions, and at the end of the day the judge always looks for what was fair and reasonable.
So do you run franchise advisory groups? What are the internal workings of the Eagle Boys franchise like?
We have a Franchise Advisory Council. They meet quarterly and we work with them on constant improvements to the system.
You mentioned that you’ve reinvented the business several times over the years. Is that particularly because of the type of business that you’re in?
I don’t think it makes a lot of difference.
I think if you have a look at half a dozen industries in Australia over the last maybe five to six years, they were great industries that just got better by someone coming in and reinventing them. The hardware industry has been reinvented by Bunnings, the travel industry has been reinvented by Flight Centre and of course you have the coffee industry and so forth. I don’t really think, whether you’re selling pizzas or car tyres, it matters.
The constant requirement for innovation and change is actually driven by customers and our particular industry really only has three players. One that’s dwindling badly; I think we’ll probably overtake Pizza Hut numbers this year. All you have to do is look at Pizza Hut and ask why they’ve continued to dwindle from 400 stores to 200, and it’s because they’ve just done nothing. They just haven’t changed.
And of course your other competitor is Dominos.
Your stores are mainly in Queensland and in regional areas in New South Wales. What’s the company’s plan now in terms of expansion?
We’ve pretty much got Western Australia covered as well. We’re now the largest regional pizza company in Australia. We continue to work in the regional areas and the market’s we’re in, so we’ll continue to build out Western Australia, South Australia, (regional) New South Wales before we attack the Sydney and Brisbane markets. They will be done in due course but more so with an approach to drive-through.
So tell us about the drive-through concept.
Some five or six years ago, we really looked at the business and took a step back and realised that all three players were doing the same thing, selling the same product and pretty much cutting each other’s throats in a price war on a daily basis. We decided that if we didn’t change, if we didn’t do something radically different, the future was going to look quite bleak.
The idea was then to introduce drive-through based on the fact that 60% of all fast food goes through drive-through windows. That was the easy bit, because selling drive-through isn’t hard. Designing a way to sell pizzas in two minutes was the hard bit. That took us a couple of years but once we got that, and we introduced that into the system, it’s been a massive hit, and now we’re finding that up to 80% of our business in the peak periods is going through our two minute menu.
So people are walking in, looking up and saying, ‘What have you got?’ and we’re saying, ‘Well, these are the four pizzas we have on our two-minute menu’ and ‘Right, give me those two’ and they’re out of there.
So we didn’t change the product, didn’t change the price; we just changed the way we took the product to the marketplace.
So that’s driving new sales, not just replacing sales of other products?
It’s driving massively new sales and you can clearly track it when you move a store from one location to a new drive-through location 300 metres up the road. And they jump up to 100% in sales.
And so what other lessons or tips can you share with other entrepreneurs from your 20 years of experience building a business?
I don’t think that you can under-estimate the value of a board. Bringing in a board of directors very early is hugely critical. If I had had my time over, I would have brought inside probably the first two years of the business. It took me 10 years to do it. People say, ‘Oh, I can’t afford it’ and my response is, ‘You can’t afford not to, even if you just have a quarterly meeting of people who are there for no other reason than to help you.’
Surrounding yourself with people who’ve been there and done it… they’ve got a bit of grey power and they’re happy to advise you. So I think that that’s critical. Not just for advice but also for discipline.
I mean I was 100% owner of this company for 20 years and I don’t think we ever went to a vote on the board, based on the fact that a lot of the times I’d present up to the board an idea. They’d tell me I was off my head, go away and think about it and re-present the upsides and the downsides.
By the time the next board meeting came around I’d either turn up and say, ‘You were dead right’ or I would re-present, giving a lot more thought and realising that there was either more opportunity or more risk involved. So it was good.
I think that that is a great tip if you can surround yourself with two or three advisers and have structured meetings every month or every two or three months.
For someone who’s in business, they need to be very clear on whether the business is going to be a profit business or a balance-sheet business.
Are you building it to sell it ultimately or are you building it to extract cash out of it, or is it both? I think people get very confused as to what they really went into business for and what is their ultimate and allowable return on investment.
We always looked at Eagle Boys as a balance-sheet business. It was a business that we didn’t take dividends out. We continued to build the business and we knew that ultimately we’d be looking at a trade sale or an IPO.
So at times when you’re only earning a wage and you’re not taking huge chunks of cash out of the business and tripping around the world and having a wonderful time like a lot of these other high-faluting, wealthy people are. You need to continue to remind yourself that there is an end goal and don’t sway away from it. Don’t be tempted by the devil.
Now that you’ve sold not the whole business but a significant slice of it, you’re staying on as a consultant I understand for some time. What does the short, medium and longer term hold for you personally?
I’ve actually decided not to make a decision. I do a bit of public speaking and there may be an opportunity there to do that at a higher level, but I’m keeping my powder dry on that one because once you get on the circuit you’re pretty busy. So I’ve decided not to make any plans through till Christmas then I will start thinking about it.
Probably the only thing I do want to do between now and Christmas, I’m going to write a book, but it’s not going to be one of those wanky ‘go out and make money’ books. It’s going to be probably a book of funny events that have happened in the last 20 years in building the business.
Are you a diarist? Have you been writing down what’s been happening or have you got an excellent memory?
When you’re in franchising you are a diarist because you file note everything and you keep very very strict paperwork and files for both legal and contractual reasons.
I had a classic discussion with a franchisee the other day and he said, ‘Oh, blah blah blah’ and I said ‘No’. I clearly remember documenting what was the deal and he was relieved because he didn’t think that that was the case and he said, ‘Oh, I thought we had a handshake deal’ and I said, ‘Well I’ve never had a handshake deal’. I said we’ve always backed everything up in writing. I said if you go back and read your agreement you’ll see that that’s documented.
He rang me the next day and said, ‘You were right’. I said, ‘You just don’t do anything other than in writing and whenever you set something down in writing everybody else has to get the same deal’. So it’s not hard to forget.
So Lisa my PA, who’s actually left Eagle Boys and come to work with me, she’ll be working pretty hard over the next nine months scouring through those archives, pulling up some pretty funny situations and circumstances to put together this, probably what you’d call memoirs.
We look forward to reading that.
This is an edited version of the interview, which is available as a podcast.