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Tom Wells | 5 Things Every Brand Needs To Be Successful
POSTED 7.6.21 M&A Masters Podcast

Our guest for this week’s episode of M&A Masters is Tom Wells, Managing Partner and Co-Founder of 10 Point Capital in Atlanta. 10 Point Capital partners with visionary founders and operating executives to build dominant franchise brands. A foodie who loves hospitality, Tom found a way to combine those by investing in such companies as Walk-On’s and Slim Chickens.

We chat with Tom about the inspiration behind 10 Point Capital, and the meaning behind their brand name, as well as:

  • The one key thing they look for when partnering with a brand
  • 5 things that determine which brands will be successful
  • How to master building rapport with potential clients
  • Franchise investing post pandemic
  • And more

MENTIONED IN THIS EPISODE:

TRANSCRIPT:

Patrick Stroth: Hello there, I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today, I’m joined by Tom wells, managing partner of 10 Point Capital. Based in Atlanta, 10 Point Capital is an independent sponsor that specializes in a very interesting class of business, franchises. In particular franchise restaurants, which I’ve seen quite a bit of action in the last 18 months. So I’m excited to get into this. Tom, thanks for joining me today.

Tom Wells: Thank you for having me.

Patrick: Now, Tom before we get into 10 Point Capital and the work in the franchise restaurant area, let’s start with you. Give our audience a little context. How did you get to this point in your career? 

Tom: Yeah, so as you mentioned, I’m based in Atlanta, I actually grew up in Atlanta. But lefting left for a while, a long time and came back here. And I’ll give you that sort of path of how I got back here. After college up in the northeast of Boston College, moved out to California had always wanted to live out there. I was fortunate to work for a great investment bank out there called Harris Williams and company. Learned a lot about just middle market transactions, first exposure to private equity. And what that was prior to that had no idea. After spending a couple of years doing sort of the standard banking thing landed at a private equity group down in LA called century Park capital. Nice, very nice shop down there. 

Spent a few years there, got an MBA in Chicago, and sort of came out of that first part of my career going you know, I really enjoy working with sort of founder led companies. Really enjoy high growth businesses as opposed to getting in and having to deal with turnarounds or any sort of challenges. And that actually led me to what was a bit of a hybrid venture capital and growth equity world down in Atlanta. Came to work for a firm called VIP capital, a great venture capital and healthcare investor in Atlanta, where my current partner was, had been a founder of in spent a handful of years they’re really doing a lot of growth equity deals. But it led to the forming of 10 Point Capital. 

I know we’re gonna talk a little about that. But my founder, my my partner in 10 Point Capital, he had been a founder of VIP capital, but he was really passionate about the franchise space. That had been the bulk of his career. He had worked for franchise brands at points in his career, he had been a franchise investor back to being a work capital, which is a big firm in the space. In a few years ago, probably four years ago. Now he and I just started decided to form 10 Point Capital to focus on one thing, which is just investing in franchisors. And so we decided a few years ago to spin out and go go do that. And that sort of got me to where I am right now, I don’t know that I ever expected to be investing in franchisors. 

I think that this sort of consistent thinking about what I was passionate about from early on, and I always had the desire to go figure out something that I could be an expert in. And that was something that I just wanted to do for fun. One is just this, this intersection of just being a growth investor. I love working with companies that are growing, it’s certainly much more fun to be growing and adding locations and hiring people. And that’s just much more exciting. But secondarily, like, I’m a huge foodie. And I love hospitality. And it has always been something that was just more like a hobby or an interest and sort of to be able to mix those two things together and work on restaurants and branded concepts and things that are tangible to people is super fun to me.

Patrick: Well, when we turn our attention to 10 Point, and I always made the mistake of saying 10 points, it’s 10 Point Capital, and you didn’t name it Wells Capital. So you have more imagination than most insurance firms, law firms out there. So before we get into 10 Point, why don’t you tell us how you came up with a name because it’s not good insight into the culture of a firm.

Tom: Yeah, it’s funny. I mean, it is fitting when I people try to brand stuff, it’s really hard to come up with a name, it seems like every name or in particular, every domain name for websites taken. But as we were working on coming up with a name and starting the firm dedicated to this. We one of the things we’re big on is culture, is people. And so we had sat in a room and we had talked about obviously the types of deals we were going to do and the criteria, what they were going to look like. But we talked about who we wanted to be as a firm and what our culture, what sort of culture we wanted to set. And we came up we had 10 values, that we created at the firm. 

And so what was what was fun, and I could go through them all but I generally hit on the big ones like the ones that stand apart from me or like creativity and that’s we approach deals in a very flexible, creative manner. Relationships being another core value of our firm, it sort of ripples, all the way from the obviously the leadership and management teams we partner with but franchising is an industry and I’m sure we’ll talk about this too. Franchising is a very relationship driven industry. I’m not sure there are many industries that are more relationship driven. And then there were a couple other values integrity, and just doing the right way. 

And determination, I mean, we are, we do not like to ever give up, we are very determined gritty people. But there were 10 values. And so we sit in a room and this took, I don’t know, it must have taken a month or two. I mean, seriously, we’d spent hours and hours trying to think of a name. And finally, one of our operating partners, who’s Charles Watson, he’s the CEO of Tropical Smoothie Café, which we used to own. Charles sat there and was like, you know, what, we have 10 values. Why don’t we just be 10 Point Capital? 

That’s like a great name for the firm. And you Google you like sit there and go Google the domain name. And oh, yeah, that’s, that’s available. And it’s just, it’s funny, it fit. It’s a brand like if we’re you think about the segment, we’re in with consumer brands that stand for something. And we felt like picking our names was kind of a cop out, we wanted to have a real brand behind it. Later on, I noticed the benefit. We didn’t even think about it at the time. But the benefit is at any conference or event you’re at, 10 Point Capital shows up first on the list, because it’s in number.

Patrick: Digit. Yeah. 

Tom: Secondary benefit is everybody sees us first. But but that’s where the name originated from. 

Patrick: Okay. And now in when we spoke earlier, okay, you made a conscious decision. 10 Point Capital is not a private equity firm it’s an independent sponsor. So let’s talk about what you bring to the table as an independent sponsor, and then segue into the focus on franchises because that’s very, very interesting.

Tom: Yeah, so it’s interesting, we formed 10 Point is an independent sponsor, which means we raise capital deal by deal, we don’t have a committed fund, we’ve certainly had that in the past where we’ve had committed capital. But for us, we like the flexibility that being an independent sponsor allows. There’s a few things we like that are really unique about it. One, we’re able to, sort of, we don’t have a set pace, we have to go deals that we don’t have a bunch of committed capital, that we have to go find deals and put capital to work our. Our approaches, we’re going to go spend a lot of time in the industry, getting to know founders and entrepreneurs, and ultimately, hopefully find a deal that we like, and we want to invest our own capital. 

And so when we get to that point, then we’re gonna, then we’re gonna go get a deal set up with the founders and go talk to our investor base in what’s interesting is, and we find, it forces you to underwrite those deals more deeply than if you were out of a committed fund where you had total discretion. One of the things I really enjoy is you go put this on paper, you work through your thesis internally, and how it all makes sense, you’ve got to sort of figure out how to convey to your investor base. But then you go talk to 100, smart people, or however many people about this deal, inevitably three, or five, or 10, really interesting insights are going to pop out. 

There’s going to be risks that you didn’t even process or think about, for whatever reason that pop out from some of your investors. And so having to on the front end, just apply that amount of rigor to it, we really, really enjoy. I think the other thing we like is, we do one deal at a time, and I’ll get into 10 point of what we do. But we’re never gonna have a ton of deals, we may have three to five companies at a time. And we’re deeply involved in them. And so the approach lets us keep our core team very lean and focused, but also just do the deals we want to do with the people we want to partner with and enjoy working with. And so that that’s worked really well for us. 

We have wait, generally we’re trying to do one deal a year, and so you can be very methodical about it. And we like that sort of one deal at a time. I tell investors of ours when we do a deal, they’ll always ask what do you think the next deal is, and I generally always say, I have no idea. I’m not even thinking about it. I’m gonna do this deal. I’m going to spend six months or a year or whatever it takes to feel really confident in the deal. And then I’ll think about the next deal. And I think our investors enjoy and appreciate that that like, we just go heads down and try to work with the companies to get them. Get them going.

Patrick: I think I’m sorry to interrupt, but I can imagine some of these investors because you’ve been successful, that you’re at this nice slow pace. Do they ever get anxious saying, wait a minute, yeah, this was really good, get going, find another one. Or do they say call me first?

Tom: Yeah, it’s interesting. I, they certainly appreciate being on like, we go out to our existing investors and talk to them first. And really, it’s it’s a little unique right now, like, especially where the economy is, I mean, we get more inbound from our investors going, hey, what’s next for us? And we’re we closed on a deal. And we’ll talk about it a closed on a deal six, seven months ago. I’m just starting to think about what’s next. And I sort of joke with investors, like I told you, I wasn’t going to think about anything else. And now I’m starting to think about it. So maybe this year, we’ll have something for you. Maybe we won’t. We feel good about our companies. But that’s it. 

So yeah, it’s um, we definitely get some inbound, but we just we go at our own pace. And we feel like we can get good opportunities that way. And I guess I we haven’t really dove in, but diving into what we do at 10 Point Capital, because you asked that also. So we are really simple people as I talked about. So we invest in one area, which is franchisors, and oh, spend a second talking about what a franchisor is, because not everyone fully appreciates it.

Patrick: So I think this is really helpful because this isn’t the procession everybody has is a couple of brands that they know and you’re not picking up into the individual units. So get into that because that’s very helpful.

Tom: Yeah, so we don’t we generally aren’t gonna own many units and so at the franchisor level is the way it works in franchising is founder goes and creates a brand they generally open the first few restaurants or if it’s services, we there are a lot of things you can franchise. They go get their first few open and they start franchising. And what that means they’ll go find franchisees who will come and they’ll pay them some sort of fee to sign up for the system, and then they’ll pay them an ongoing royalty to go open and build their own units. I think what people naturally go to is McDonald’s or Taco Bell. 

But there’s a hotel franchisors, their services franchisors like roto rooter and Mr. Sparky, so you can sort of franchise anything that’s replicable and process driven. And so we like investing in the brand, the parent company who’s going to collect the royalties and run marketing and sales and training. And our skill set is more tied to how do you go scale these branded concepts. And so we will invest in franchisors, they have a bunch of sort of similar criteria, because they all look a little bit the same in our mind. In terms of when we want to get involved. Generally 30 to 300 units. 

They’re, they have past the point where they can prove that it’s one thing to be the coolest restaurant in Atlanta, or Nashville, or Los Angeles or whatever. It’s another thing to have open 30 or 40 of these things across a bunch of markets and gone, well, when I go to Birmingham, Alabama, I learned I need to be in this real estate or I need to have this type of franchisee or, or this is how I get customers in the door. And so we’re looking for those proof points and multiple markets at that point. We want the franchise infrastructure to be set and we want them to have sold franchises that sort of shows that they can go put it together, get people interested and get that pipeline going. 

Patrick: So sustainability.

Tom: Exactly sustainability. The other thing that’s really important to us and you start to see it at this point, and I think it gets glossed over occasionally in franchising it the unit economics have to work for the franchisee. That really just means they got to make money. And they have to make a good return on their investment. And it five units or two units or 10 units kind of hard to see that. But you hit 30 and 50 and 100 units, they might not all work, there’s some painful lessons that get learned along the way. But you know, you figured out if it works and what it generally needs to look like. And then finally, for us people like yeah, at the end of the day, people drive every outcome in probably every investment industry. 

And so, for us, we want a founder that’s going to be involved and we our pitch to founders as we help create dominant national brands, we’re going to help you take a great concept and take it national and scale it out. And so we’re looking for that you don’t need the whole management team. But we do want a core leadership team that we can work around. And so those are those are the ideal situation for us. And then I think we’re very flexible. I mentioned this being an independent independent sponsor. My pitch to founders is like a funny pitch, which is you really founder you don’t need us, like you’ve built this great franchisor and they take a long time to build. But you’ve built a great franchisor over 10 or 15 or 20 years, you’re cashflow positive, now you can look five years out and go holy cow, this thing’s gonna grow from 5 million EBITDA 30 or 40 or 50 million of EBITDA. 

But we think we can help you grow faster. And oh, by the way, you’ve probably never taken any liquidity. So why don’t we give you a little bit of liquidity now we’ll take a minority position, we won’t, we don’t need to control your business. We’re partnering with you. And we’re backing you as a founder. And that’s resonated really nicely and oh, by the way we can if you need money for growth, too, because you want to invest here and there that works for us. And it’s funny because we do get the question a lot from investors coming in it’s like okay, you gave these founders some capital what is what are they going to show up for work? 

Does that how does that motivate them going forward? And the types of brands that we’re partnered with that the founder they’re all in on this this is who they are. They’re here to fight it out every day till the end of this thing and that’s really a consistent across the leadership of our teams. Is that this is they’re not going anywhere. But it is strange it is it is to give them that liquidity gives them comfort. Like they can go home to their family and say, you know, if anything ever happened to me, you’re my family’s taken care of. And oh, by the way, I have a little money in the bank now not enough that I’m going to be happy long term but enough in the bank that yeah, if you if I need to go invest in scaling the business or take a little risk because the upside is huge. I’m comfortable doing that. It’s not like my bag could fail.

Patrick: Well, I think you’re I think your message is is different from some others out there because I really like that genuine approach where hey, you don’t really need us. But we’re here. I can imagine because this this does happen in a lot of professional services too. I can tell you an insurance it will happen where you’ll have somebody from a larger institution going up to a prospective target saying you know what, you’re never gonna get over the hump unless we can carry you. And it’s just absolutely tone deaf and I like the the approach you have and also just the concept that you have. You’re looking for people that want to stay in the business. They’re not looking to exit out as in other cases. And so, by the way your model is set up. I mean, you’re kind of strapped to the to the masthead with them, which is got it got to help with the rapport.

Tom: Yeah, it’s interesting. The other thing we talked to, I would spend a lot of time on is like, you’ve built your culture, you’ve built your brand, and the restaurant, like you sell X, Y, and Z product. I don’t want to touch that the lease like that works all day long. So like, my job is to protect that, like I and it’s important to founders, like, I want to protect your culture, because ultimately, going from 100 units to 1000 units, culture is probably the biggest thing of date that will dictate success for them. It is good is that is it a lot of ways and so telling the founders, look, we’re not here to tell you what to do, we’re here to help you grow faster. 

And oh, by the way, you’re there’s probably 10 mistakes you can make between now and then and hopefully, we’ll help you eliminate, prevent some of those mistakes in you know, and not only that we bring a network of companies that we have leadership that just sort of the best practices across the portfolio. And so it’s resonated really well with founders. And we, we get excited about the potential. And usually most of the founders are used to, to your point, the big PE groups come in and go, this is great, you built a great business, I would love to buy all the business. 

The founder is sitting there going, but if I just wait to get more like I, I’m not ready to get off, and I get to control it. And I have a ton of upside. And so it’s been, we sort of approach it and I talked about relationships earlier. It’s a partnership industry, it has to work for everybody. And so we try to come with flexibility and creativity to create deals that work for for both sides. And we haven’t really touched on the brands. And that’s probably cool, too. So I can I can tell you a little about that.

Patrick: We’ll get into brands. One of the things as great as when we talked before, I think one of the you’ve mastered a great way of building rapport because of your experience with this. And also as a foodie, you know, the attraction you have to toward the restaurants. But one of the things you’ll ask them or just in conversation is every one of these organizations has a has a you know, troubled stepchild unit talk about that. 

Tom: Yeah, it’s what’s fun is so you get these dialogues, and I’m never going to go, what’s your EBITDA? How fast you’re growing? What’s your unit count, that’s like every other person in the segment. And we know the businesses well enough to sort of have a good proxy for what it looks like. What we spend a lot of time on is talking to them like an operator, because that’s how we view the world. And so a lot of the times I get in and go, you have what how you dealing with with, I’m sure you got a couple of operators that are causing you headaches, right now, they probably don’t listen, they probably do whatever, you know, what, which ones are those how you feel about that. 

And in it, it really takes their guard down. And I do it in a way that’s like, hey, we’ve got these other brands, I could tell you which ones don’t, you know, mistakes we’ve made or who the operator that we have some challenges with are and how we’ve worked to resolve it and create a partnership with them. And I think acknowledging that there’s always challenges and issues is just it’s such an interesting way to approach it with them. Because it’s not like, okay, these guys are gonna come in and tell me what to do. It’s like, I know, they’re gonna get in the business. And they’ve seen everything. 

And they’re going to get alongside me and try to think about it the same way as I do. The other thing we really spend a lot of time trying to do is is getting into your point is like, okay, what problems do you have as a brand? Where are you? Where are you running? Where are you stuck right now, like, chances are, I can get that pert that get the team connected to a leadership team at a different brand. That’s that solved that problem where I’ve got a vendor in the space that can be helpful. And those are things we do before doing the deal. 

And partially because we like seeing the transparency from the teams and getting to know the teams, but it’s an industry that likes to help each other. And it’s one of the things I love about it is generally even though that yes, I’ve heard there’s competitors within a segment. People work together in the franchise space. And it’s a really special unique thing. And I think you see people in restaurants in particular, like, they don’t view the restaurant down the street is their competitor. There’s a real community around the restaurant operators. And so we like to take that approach to these deals.

Patrick: Now, before we get into we’ll talk about trends, you know, later on, but just as interest for my audience right now, everybody wants to know, okay, of the restaurant sector, you know, and you were involved with restaurants, you had this desire pre COVID. Why don’t you talk about just the sector right now pre and now we’re mid top, you know, approaching post COVID.

Tom: Yeah, and just I think it’s helpful for reference like where we sit. So with three, three, really two restaurant concepts today and a third concept is non restaurant. So right now we have investments in Slim Chickens, which is like a Zaxby’s type competitor for people who know that chicken tenders segment. But drive through sort of premium chicken tenders. So sort of I would call QSR quick service brands. We have walk ons, which is we just invested in walk ons and now it’s a sports restaurant. There are about 50 of them in the southeast and middle of the country. Their big boxes are full service, sit down boxes. I joke and I know we’re talking pandemic a little bit it’ll naturally come up but we invested in October in the middle of the pandemic, a few months ago. 

And then we have a non restaurant brand called Phoenix Salon Suites, which is like a we work for beauty professionals. The professionals are able to come into a strip center and rent a space out in our locations and run their own business sort of fully independently. The other brand was a restaurant brand we just exited last year was called Tropical Smoothie Café. All different scale, the smallest brand being Walk Ons with 50 locations. Tropical Smoothie was about 900 locations when we exited. The others are in the 100 to 300 unit range. But really runs the gamut of type of brand. But in terms of industry trends, and where we spend our time I think what’s what’s interesting to us in the restaurant space and COVID had a bit of an impact. 

But we had a we have a heavy convenience focus so the consumer and really look at what the consumer wants over time that we order with our phones. Now we we like drive throughs we like things that are sort of convenient to our lifestyle. It’s interesting, we did a casual dining deal because that’s natural with with Slim Chickens. It’s a drive thru. It’s the most convenient thing in the world. You look at like a Walk Ons, which is a full service sit down restaurant. You can go haven’t that doing the pandemic, and how does that do with, you know, consumers not going to full sit down stuff anymore, and you look at, you’ve got to supplement with third party and carry out. And just create reasons for that customer to come in the restaurant. And so, yeah, then you’ve got to have a convenience component to your business with takeout and third party delivery. 

But also, you’ve got to give consumers other things, you’ve got to use technology to engage with them. And to get them to come to you versus other people, you definitely in the restaurant space, have to innovate, I think what’s what’s fun to us is, if you stop innovating as a restaurant, there are very few chains that keep their menu the same forever. And like you can think about McDonald’s or I don’t know, whatever it is, but you look at if people go like Taco Bell changes its menu all the time. You look at just sort of anything else in the franchise space or the restaurant space, you’ve always kind of got to go to what’s next and innovate. 

And so we spend a lot of time thinking about just the trends and what could happen over time in restaurants. And so like for us, we when we get involved at the core, we’re like data and analytics driven focus. So we’re going to spend a lot of time helping put technology in place to go figure out what works and doesn’t work and what the analytics are and how to how do how are the customer trends going over time? And what can we do to impact that. But we’re gonna spend a lot of time on consumer facing technology too. I want my I want the consumer to be able to pick up the phone and order it as seamlessly as possible and come by and get it regardless of the restaurant type in I think I probably would have said pre COVID you know, look, you look at drive thru concepts, maybe you don’t need as much technology. 

But chick fil a has a great, incredibly good app, our chicken brand ton of the orders are coming now through technology through order ahead and through third party delivery. And so I think you just have to stay aligned with where the trends are going. I think if you step back like we when we like to invest we also look at the industry trends. 

So Slim Chickens like people love chicken that segments growing like crazy. I look at like the Phoenix salon suites business salon suites is an industry segment are growing 15% year and that brand is the number two player in the market. It’s it we have natural talent, you look at walk ons, and I think people go well, casual dining is you know, people don’t go out as much. But if you go into secondary and tertiary markets, which is our bias, so not not the big cities, not New York, Chicago, LA. But you go to like Birmingham and Toledo and Tulsa, Oklahoma, just great markets with a lot of people. 

And you put a really high quality restaurant in there that’s consistent and treats them with great service and great food and a cool culture around it. People come back all day long. And so I think it, it can surprise people that are in big cities that brands like Olive Garden, Texas Roadhouse, it just do incredibly well in these markets. But it’s a great growing segment. And so then our goal is okay great brand great culture, like let’s think about what the brand what it looks like, in five years, how’s that consumer going to evolve? And what are the trends going on? It’s very fun.

Patrick: I think that’s what you’re that’s the real value you’re bringing in is you’ve got that that broader perspective as owner founder, they’re, they’re busy running the units, menus and the day to day stuff, and maybe looking for new alternative opportunity here or there. And you come in with big picture, particularly with the technology view, I think is very, very helpful. Because you could just see it, I mean, Silicon Valley learned that that you know, brands would live and die based on the user experience on the website. And you know.

Tom: It what’s interesting is like in the technology world has figured out there’s a lot of restaurants and a lot of franchised restaurants. So the amount of technology coming into our in our segment is, is interesting. And you have you talk about restaurants and like it traditionally has been a buyer that’s not as sophisticated on technology, right? You’re like, I’m gonna fry chicken or i’m gonna I’m going to make hamburgers or I’m going to do whatever I do, and I’m going to replicate it over and over again. In technology is very limited impact in that. And that’s changed a lot over how you advertise over how you run all the systems within your restaurant over how you integrate into third party. 

And so it’s been really interesting to see the amount of kind of SaaS base products that come into the space selling. And you have the restaurant operators going, I can’t even parse this together in the brands, that evolution and five years later, over the last five years, if you had told me our brands would have Chief Technology Officers five years ago, I go in, that’s kind of crazy. Having a little bit of a technology investing background, I go, Hey, we don’t need those. Every brand needs a technology Chief Technology Officer now. And that’s been a huge evolution here. I think the other thing I would say, and so helping them focus on like, alright, how do we get the right partners in place, and you can, what’s great is the flip side of having all this technology coming into our industry is you don’t have to custom build anything anymore. 

So you can go off the shelf, and you can piece it together. And everything integrates with API’s. And so it is nice that you don’t have to, you don’t have to custom build software, but you do need someone who knows how to integrate and sort of deal with data management to be your technology lead. I think the other thing we spent a lot of time on with these companies is just focus, like a for those who deal with entrepreneurs every day, part of why you’re an entrepreneur is you have a lot of ideas, and you’re always running around trying new stuff. And I could never do it. I just that’s not my personality. And I have tremendous admiration for someone who can start a business from scratch, especially in the franchise or the restaurant segment and grow it. 

But there’s a point where it helps them to have focus. And so a lot of what we come in and if building out the team is like what do you not like to do as a founder? Well, let us help you hire some people that go do the things you hate doing anyway. And two, how do we help you focus on what moves the needle? So founder, if you ask that we and we love doing there’s going to ask what are the big things you’re working on this year? Generally, you get a list of like, five to 25 items they’re trying to do to do in one year. 

It’s like we’re going to we’re going to change this system, we’re going to do this we’re going to do the new menu, we’re going to add in should change our prototype, you know, it’s 50 things long, it’s just a ton of stuff. In helping that founder go, okay, it’s great. But you can probably only do three of those big things like your whole team has a day job. And so we’re gonna let them do their day job in but we’re gonna help you focus on let’s get three things and let’s do them well, in over a five year period or seven year period, if you do three things a year, you’ve transformed that whole business.

Patrick: Yep, 15 to 20, out of the 30 to 50 are done. Yeah.

Tom: Yeah. And so we spend a lot of time there, because I think it is being not so in the weeds, you can step back and help them have a framework around. Yeah, you need to do this. But oh, by the way, does it drive your revenue? Does it drive your franchisees profitability or does it help your brand? And there’s a lot of stuff that just gets pushed off that list? 

Patrick: It’s not an issue of discipline with them, it’s just bandwidth. And so get getting the focus there works out really well, I think the other issue that’s, you know, critical for people to understand with that your structure as an independent sponsors, you don’t have a fund, so you can’t afford to have misses. If you’re making an investment or you’re, you know, investing diligence on on a target, okay. You can’t afford to have something in the margin. So you’re spending more time looking at these things. And, and you’re you’re, you know, tied to tied to that investment a lot more directly than somebody who has a fund, and this is one of 30 portfolios, so you got to get it right. 

And I bring this around, because, you know, you had mentioned earlier that this with a franchise is a big relationship oriented business. You cannot remove the human element from mergers and acquisitions transactions and doing investment and so forth. And as you’re going forward, you know, these deals involve risk. And there there is risk, these don’t, don’t happen in a vacuum. And you’re dealing with owners and founders that haven’t gone through an M&A process before. And you’ve got a longer diligence period. 

And there’s always the potential that some disruption or distrust can build up from beginning to end the process, because you’ve got the diligence, you then get to the indemnification wording in your purchase and sale agreement that what the seller hears when you’re talking to them about this, it’s essentially, look, I know, we put you through all that due diligence, but you know, just in case, we the buyer missed something, and it cost us money down the road. You have to pay us so but don’t worry about this standard business stuff. We’re used to that. Okay, that’s what the seller hears. And the seller’s response is gonna be, I answered all your questions. You can’t hold me responsible for something I didn’t know about. 

To which an experienced buyer is gonna say, yeah, but we’re making a bet on you 10s of millions of dollars, that your memory is perfect. And this is the process of just go forward with us and trust us. And, you know, the seller can forgive the process over time, but they’re never going to forget that. And if the the tragedy of the situation is it’s not, you know, being taking advantage of somebody is just an experienced party versus a less experienced party. In the whole process, the beautiful thing is the insurance industry has a way that that process or that that inflection can be avoided. And that’s ensuring the deal. 

Okay, the product out there is called reps and warranties insurance. And essentially, it’s designed to step in the shoes of the seller. And in terms of the indemnification obligation, just essentially they look at the reps that are in the agreement. They look at the buyers diligence to make sure that they looked over and vetted the reps. And essentially, they make a statement for a couple bucks. If a breach happens post closing buyer, you come to the insurance company we will pay your loss don’t go to the seller buyer come to us buyers like that because hey, they’ve now they’ve hedged the risk. And if there is a loss, they can have no guarantee that it’s going to get covered and they don’t have to pursue the seller, seller comes out with a clean exit. 

They usually have very little money that’s held back in escrow because the policy attaches at a lower point than most escrow. So the escrow being lower means seller gets more cash at closing. More importantly, they get the peace of mind knowing that, hey, in the event, something does happen, I get to keep my money, there’s not going to be a clawback. Now, this product rep and warranty ensures is being used throughout private equity right now. However, it was pre pandemic, it was reserved only for $100 million plus transactions, okay had to be up on the big ones with the big diligence and the big firms and everything. So smaller targets like these franchise, franchisors weren’t eligible. 

That’s changed. Now, because of competition in the insurance market deals. The rules for eligibility for deals to be insured have gone from $100 million threshold down to as low as $10 million threshold. You don’t need audited financials and extensive diligence. You do need diligence, but you need simplified stuff. And so the more we can get that word out to organizations, the better because I will tell you from personal experience, if a buyer gives the seller an option saying hey, well we can do an escrow and uninsured the deal or will insure the deal in your escrow is now a fraction we just move forward with that, how about that. 99 times out of 100, the seller is willing to pay the entire cost of the policy. Just to get that release. 

Okay. So if you’re a buyer, I mean, this zero cost to you. And you know, we see this as a real positive effect. Because I mean, private equity is already in place it on the larger deals, it’s now down to the smaller ones. But you know, you don’t have to take my word for it. You know, Tom, good, bad or indifferent. What experiences have you had with rep and warranty?

Tom: Yeah, it’s funny, like you mentioned, it was harder to access on the smaller deals in the past. And so we have used it it generally, we want to grow these businesses and obviously sell them for a large amount of money. And so we’ve used them on it’s been in play on exits, and we’ve had it on the on the sell when we’ve been selling a portfolio company. It’s great to have it sort of to your point, it really simplifies that process on the back end, because you realize there’s really no or minimal exposure to you as a seller for to your point, things you didn’t know about or didn’t weren’t diligenced properly, or whatever. 

For whatever reason. You know, we have not used them going into any transactions. I think is you talk about that where the you can get the policies is come way down market now to smaller deals. And some of the deals like we do, which typically are we’re a minority shareholder, I think about the types of deals we do. And it sounds incredibly interesting and helpful to those types of deals. So you like you put ourselves in our shoes. So we’re a minority partner, we come into your point, these are founders that we’re investing in, there are a couple things in the purchase agreement that actually matter in sort of this is one of the contentious issues that really matters when you’re giving a founder the first liquidity and they’re going, wait, you’ve come clawback 20%, or whatever he put up of the capital in and so that’s scary for them. 

And then you think about it for us. So we’re a year into a deal. And this this happens from time to time. Things pop up. Maybe there’s some sort of basket or some sort of threshold you’ve got to meet before you can go collect. But you go okay, well, I’ve crossed that now. It’s like I got about $100,000 of claims. We might have invested $15 million. It might be or 20 or $30 million, you may have $100,000 or $500,000 worth of claims on stuff that you know matters, but it’s not a ton of money. Now I’ve got to go back to the founder. I’ve got to say I need that money out of your pocket. 

Oh, but by the way, we’re still partners in this I promise you we’re still partners, and we’re going to be in this for a long time together. It’s a really uncomfortable situation to be in from us because we’re a minority shareholder, they’re still in the deal. The relationship is what drives these deals for us as minority shareholders and so that having the ability to go put something in place like that, that now that it’s sort of moved down market to where we’re investing, it’s something something we’re gonna look at on our deals. 

Because it If you don’t have it, then you’re otherwise making a business decision, like, I’m going to chase this. I’m either going to chase for this money to get back from the founder that’s going to jeopardize and potentially ruin the relationship. Or I’m going to somehow have to give that money up. But hopefully that I can, you know, keep the relationship and that drives better returns, and it becomes really much more of a business decision for us. So yeah, being able to take that off the table would be really interesting and helpful in our deals. 

Patrick: I’ve heard here in Silicon Valley, because we’ve got a lot of aqua hires in the tech sector, where the business doesn’t have very many assets, they’re just bringing over the team. And that’s a real dilemma that that the buyers face because all of a sudden, they bring in this coding team or programming team and great talent and everything, and they’re rock stars. And they’re waiting for their $2 million escrow return. 

And the you know, the the buyers just sitting there saying, okay, how do we break it to them that, you know, we just had a $1.4 million loss? Yeah, that that’s a real tough pill to swallow on why he says business decision, if you’ve got an insurance company on their net, you  report it. So, it makes it makes it a lot more elegant and say it’s it saves the sizzle relationship. Now, Tom, we mentioned before that, you know, as we’re recording this, we’re, you know, thankfully on the back end, I’m confident to say now on the, I guess the beginning of the end of the pandemic. What trends do you see for the rest of the year going into 2022?

Tom: Yeah, it’s really fun where we sit, so we get consumer data every day, right? We have consumer facing brands, and you see what the consumer is doing every day versus the prior year, and the years before that. And the week, and you can compare to past weeks. What’s crazy to us is over the last call it five, six weeks. So we’re coming out of the back end of the pandemic, there’s vaccines, there’s obviously with stimulus money that went out earlier this year. We are seeing record days across all our brands from from a spending perspective. And granted, our brands are concentrated more in, like I said, secondary tertiary markets. So we’re not in cab, we’re not heavy. 

In California, we’re not in big cities, that still may be a little shut down. We’re in southeast middle of the country, smaller towns in there, our people are out spending. And that includes our walk ons, which is just sit down all the way through slim chickens, which is more of a fast food restaurant we have seen across the board. And I sort of expected going into this that we’d see from a consumer perspective, okay, restaurants are open, I’m going to stop going through the drive thru or picking stuff up or doing a pizza or whatever I’m going to do, I’m going to shift over to sit and back down on a restaurant. And they’re absolutely going to sit down on the restaurant, but they continue to order go through drive thru and do delivery pizza. And so I think the rest of this year, we are going to see a lot of consumer spending. And I think we’re already seeing that, right? 

Like you’re seeing supply chain disruptions just with the amount of spending going on. But I’m really bullish on what the rest of the year looks like for people where we are. It’s really interesting on the franchisor side. So we spent a lot of time thinking about how do you go sell find good franchisees basically sign franchise agreements. And what we’ve seen at this point in the cycle where you get this, you had an economic disruption, people were a little nervous about where they their livelihoods came from and how much control they had over their own income. It’s actually great for franchising, people go say, you know, I’m gonna go into business for myself as a franchisee. And so what we saw sort of coming the last half of 2020. And we’ve seen that continue into this year, franchise, interest is way up. So all our brands sign more franchise agreements with new franchisees than ever it wild and last year. 

So I think from our industry perspective, it things are really positive. I think from a consumer perspective, I would expect a lot of spending this year. You know, it’s it is a foodie, and someone who loves independent restaurants is really sad to see all the carnage that happened last year. I mean, there are a lot of independent restaurants and small businesses that didn’t make it. There is in the restaurant industry in particular, but all retail like a little bit of organized chaos, and that those in those failed, but now you’ll see a new wave of restaurants reopen, it may, we may all be eating a lot more chain food this year, until that they all get open. 

But in about a year, you’ll see these restaurants open back up and in the cycle happen again. And what’s cool is okay, the local spot closed down and it’s it’s, it’s awful. And it’s really sad. But another chef is going to come around and go I’m going to raise a little bit capital from people I know. And I’m going to maybe I’ll get that second generation restaurant space cheaper. And I’ll go open my restaurant finally. And the landlord will cut me a deal because they need someone in there. And so you’ll see new stuff pop up and keep going and that and that’s when new concepts get created and new brands get created. 

And so it’s unfortunate This is sort of how it happens. But on the on the back end of that I think we’ll see a lot of obviously economic growth and we’re already seeing that in the consumer spending. And then we’ll see new brands and new cool things grow. It did this the restaurants and retail that opens on the back end of any sort of economic hiccup. tend to be the best investments to get made. They just tend to cost wants to get into and they do really great volumes.

Patrick: Yeah, I that’s a great observation. I think that there are there’s a rumbling out that a lot of people in the labor force of at least the executive force and so forth, are not going to be as dependent on an employer for their livelihood, they’re going to take matters into their own hands. And I think that’s a great, you know, observation you have there because we’re seeing that another little, little things as well. But, you know, real real alpha Wolf. Tom Wells of 10 Point Capital. How can our audience members find you learn more about 10 Point?

Tom: Sure. Our website is 10pointcapital.com. It’s the number 10 point p o i n t. 

Patrick: No s.

Tom: No s. 10 point capital, you could probably google it with the s and I bet you we show up still. Hopefully and or you know, I’m available. I’m always around via email. So, T for Tom Wells, w e l l s @ 10pointcapital.com. I always love hearing from people who like the space or new brands or and talk I can talk franchising all day.

Patrick: Look, you and I could talk restaurants and you combine two things I love which is sports and and fine dining. So it’s just too bad, too bad California may not be an ideal market for you at this time.

Tom: Yep, yep. No, but we’re the we’ll get them spread out. So when you’re on the road, you can go to one.

Patrick: Outstanding. Well, Tom Wells of 10 Point Capital. Thanks for being a guest. Really enjoyed the talk today. 

Tom: Thanks for having me.