IFA Chairman Aziz Hashim Says Franchise Profits, Rates of Return Are Key

WASHINGTON, D.C. – Chairman of the International Franchise Association Aziz Hashim sat down with Blue MauMau during his organization’s Legal Symposium last month. He began by discussing his franchise experiences as well as the importance to buyers and franchisors of knowing franchise-level profits.

Having started his career as a single unit KFC franchise owner some 20 years ago, Hashim has not only quickly purchased and grown enough franchises to be one of America’s largest franchisees, but his private equity firm NRD Capital also buys franchisors.

He’s a remarkable man with a remarkable story.

An immigrant from London, Hashim excelled. He graduated with a degree in electrical engineering from the University of California, Irvine and joined the prestigious but now defunct aeronautics and electronics giant Rockwell International. Within weeks he knew engineering was not for him. Having worked sweeping floors and flipping fries in fast food since the age of 14, that was a world he knew. His bliss would lie in entrepreneurship.

In 1996 Hashim bought his first franchise, a KFC restaurant in Atlanta. It was the same year the Big Peach would hold the Olympics. His single-unit chicken eatery would develop into a huge multiunit and multibranded franchise empire of over 80 Domino’s, Subway, KFC, Moe’s Southwest Grill, Pizza Hut, Popeyes and Taco Bell franchises.

Hashim thinks it is critical that franchise buyers ascertain systemwide franchise-level profits and performance measurements before deciding to buy a franchise. “There are some metrics that are universal,” he stresses about the importance of measuring profits. Yet many franchisors are clueless when it comes to knowing franchise-level profits from activities that they mandate of franchises. He powerfully argues that it is profitable franchises that make for a profitable franchisor.

In following that thought, the engineer of businesses had a really outstanding idea.

What if franchisees, who were often retailing, financial and operational experts in their own right, were in a position to direct the franchisor to focus like a laser beam on the fundamentals, such as store-level economics? In an industry in which franchise-level profits were often obscured, who better than multi-unit franchisees to know where to find it and what the reality was when investing?

Hashim has put his money where his mouth is. Two years ago, he founded private-equity firm NRD Capital Management, LLC for franchisee investors. NRD’s philosophy is to grow by paying attention and measuring franchise unit-level metrics so as to better align franchisor activities with franchises’ profits. As members of the private-equity firm, multi-unit franchisees fill the franchisors’ boards of directors in which NRD participates, directing those franchising firms to implement and manage long-term strategy. Other franchisors have had franchisee-led private investment firms take over, but in those cases – e.g. fast-food’s Long John Silvers or skin care chain Sona Medspa – all the private investors could see was trying to right their own troubled franchise system. In contrast NRD searches for franchise opportunities to own wherever it can make a difference.

This is the first of a series of interviews with leaders of the International Franchise Association.

Don Sniegowski: You have come a long way from franchisee to now private equity firm founder, which includes being a franchisor of casual dining chain Frisch’s Restaurants and fast-casual Fuzzy’s Taco Shop. Tell me about your journey.

Aziz Hashim: When I first moved to the United States at the age of 14 from London, where I grew up, it was one of those things that I fell into – a Burger King as an entry-level person. During the next eight years, all through high school and college, I worked in various Burger Kings, rising through the ranks to management. I graduated with a prestigious degree from UC Irvine and went to work at Rockwell.

Ninety days into that job, after spending eight years on the front lines with customers and customer service in fast food, I found I really didn’t like the confinement of a cubicle and hangar-sized rooms filled with engineers all working on massive projects. It wasn’t for me. I wanted to go back to franchising.

I didn’t know what I was going to do. I didn’t have any money at the time. But none of those things were important to me. The most important thing was that I had a passion for that line of work. I took that leap. I felt if I didn’t do it then, it would become harder to be an entrepreneur the older I became. It is not impossible, but it is not as easy.

Sniegowski: What did your father and mother say about you leaving engineering for flipping burgers?

Hashim: I didn’t know what they would say, but they were incredibly supportive. They just wanted me to be happy and told me that I needed to do what I thought would make me happy. In fact they mortgaged their house and gave me their life savings. They said, “This is the seed capital, now go and do what you need to do.”

That is a good lesson for us as parents–let your children follow their path.

I wasn’t having much success in Los Angeles. My sister had gotten married and moved to Atlanta. She invited me there. So I came and fell in love with the place. This was a place where we could bring up children. It is a little bit more of a sane environment than Los Angeles and Hollywood. I was very fortunate to be able to open a KFC franchise right before the Olympics. This was 1996.

That was my first business, a KFC in downtown Atlanta. KFC had not spun off yet into Tricon. The brand was still owned by Pepsico. One thing led to another when it came to growth that often comes in franchising if you do it well. I became a multiunit, multibrand franchisee. And then I became a multistate franchisee and a multinational franchisee.

Sniegowski: Back in your days with KFC, did you know Cheryl Batchelder, who is now CEO of Popeyes Louisiana Kitchen?

Hashim: I did. She had a stint at KFC. I was impressed with her during that time. I noted to myself that I would one day like to do business with her. Years later when she took over Popeyes, I invested in a Popeyes franchise.

I follow management. It is part of my underwriting and business philosophy. She is a good lady to follow.

After the recession I felt that franchisees needed to have some investment on the franchisor side of the equation. Unless you went out and bought company stock, like in McDonald’s Corporation, how could a franchisee participate in the franchisor side of the business?

Franchisees really cannot.

I decided that as a franchisee the way to do this was to start a fund, and for us to actually buy franchisors. That is how we would have a stake in the franchisor side of the business. That was one side of the equation. The other part of the equation was that there was no clearing house for underwriting good franchise systems. There are so many franchises created every year, but there are no systems to evaluate franchises, right?

If you want to go rent a hotel room in any major city in America, you could go to Trip Advisor and read 5,000 reviews to spend $89 or $100 a night. But if you want to drop $400,000 to invest in a franchise, there are very few places where you can get an unbiased opinion on how that franchise performs. I felt we could be that clearing house. We could accumulate a cadre of brands that over time we felt would represent a good investment for a potential franchisee. That would be a good service for them and a good service for us because if we are buying good franchisors with good unit economic propositions, franchisees will be happy and the franchisor will make money as well.

Sniegowski: Your private equity company focuses on franchise unit economic performance. How do you compare apples to oranges for investing in casual dining Frisch’s Big Boy, fine dining or a quick service restaurant, which are in different restaurant segments?

Hashim: There are some metrics that are universal, such as an acceptable rate of return for a franchisee or anyone that makes an at-risk investment. If you put money into a mutual fund, you are going to get X return. You will be a hundred percent government insured. However, if you are going to invest into a business opportunity, there is considerably more risk. Therefore, there should be significantly higher return on an investment. We are looking for investments that are commensurate with the risk and the work. Again, using a CD [Certificate of Deposit] as an example, you put the money in the bank, and you go back to your day job. There is no active management of that money. In a franchise, there is active management. There is a reward for your labor and efforts in running that business.

My firm has its own proprietary metrics that takes into consideration the reward there should be for a given investment. It has been developed over the past 20 years that I have been a franchisee, essentially the same metrics that I have used to determine whether I would like to be a franchise of a brand or not.

Sniegowski: I’m assuming when we talk about return on investment, we are talking about measuring and anticipating a franchise unit’s cash flow and the time value of the capital that it took to create that cash flow.

Hashim: Yes. Return on investment, cash-on-cash return, total IRR [internal rate of return], time to break even, and factoring the resaleability. What is the market for that business? Assuming you do great, does anyone want to buy your franchise?

Does the brand have credibility in the marketplace? Is there liquidity that way? What is the quality of management, which is a nonquantifiable metric, but it is important just the same. Who is the leader? What has been their history? There are a number of things to look at.

Sniegowski: There are a number of franchisors in many sectors nowadays that reveal franchise unit-level EBITDA [earnings before income tax, depreciation, amortization: an indicator of overall profitability of a business] to investors [franchise buyers].

Hashim: Clearly. That’s the profit, right? Without EBITDA, you don’t have anything to take home.

Sniegowski: How universal is EBITDA? If you were to buy a baseball franchise or a hamburger quick service restaurant, would you want to see EBITDA?

Hashim: I think there are different metrics because you are buying an asset that has inherit value. For example, you would argue why is Amazon.com worth what it is on the stock market when it has lost money every year since its beginning. Answer? Because the value of the stock keeps going up. This shows a difference in investment metrics for operating businesses versus high-tech fast growth companies. Every industry has its own series of metrics that work for that industry.

We are looking for things that meet my exact standards on what I think is an acceptable rate of return on an investment. So we are looking for those types of franchisors that offer those types of returns.

Sniegowski: When you first started out in buying a franchise, your KFC, how did you determine EBITDA or a rate of return?

Hashim: I was clueless! I was just happy that KFC gave me a franchise.

In that case KFC was the top of the chicken QSR world. It was the gold standard in franchises at that time. As a new franchisee, I was just thrilled that they accepted me as a franchisee. To get the bank loan, you had to do a business plan. You had to create a model. We did all of that. Our plan showed that we would have profitability, otherwise I’d be a lunatic as an engineer to sign up and not have any prospect of profitability outcome. But the expectations were all sort of in-house modeling and business planning done in conjunction with finance advisors and all that kind of stuff.

It was a different story back then. Plus, we didn’t have NLRB, overtime laws. It was a kinder, gentler time to do business.

It is not the same today. It is not as easy or as lucrative to be a franchise as it was because of today’s added pressures on the model. What that means for us is that the brands that we underwrite must stand the stress test for all of these pressures that were not there before. Every one of these regulations comes at a cost. You have to bear that cost in your business model.