Rick Ormsby:

We'll wait for folks to trickle in here, and for those of you who are just joining, I suppose be entertained by our little banter here. We've all got jackets on today. We're all 48 years old, I learned that yesterday. I turned 48. So we got three 48 year olds in jackets in the middle of their careers about ready to talk restaurants. Is that the kind of thing that anyone really wants to listen to?

Adam Diamond:

This is like Wikipedia for middle age right here. We've hit it right on the nose.

Rick Ormsby:

I was reading up a little bit on the generations. We talked about this a little bit yesterday, but our generation gets a bad rep, man, The Gen Xers. We're cynical, independent. We don't like other people. We don't play well in the sandbox. We don't listen to our elders. That's us, as a generation.

Adam Diamond:

Yeah, that's what they say. I think the rep is bad. We're doing okay.

Rick Ormsby:

Yeah, Totally. Totally. Tom's not that way, though. Tom's a little bit more... He's a gentleman. I don't know about you, Adam. I'm not [inaudible 00:02:25] gentleman but Tom is.

Adam Diamond:

I've been accused of cynicism on occasion in my life.

Rick Ormsby:

Oh goodness. Appreciate you guys joining in as we get going here, you'll see... I'm on a iPad, so I'm looking right now, Adam. Adam's got a beard on and Tom doesn't, and of course everyone knows me. For those of you who will be listening to this on The Restaurant Boiler Room podcast, just give you a shout out and thank you for listening. All the content that we're going to have here will be available. If you signed up for the webinar, we'll email you a copy of it, of this webinar once it's completed in the next maybe 48 hours or so. That'd be number one. And then number two, it's going to be on our website too at unbridledcapital.com.

I'm really excited today. We'll wait another minute or two to get started, but these two gentlemen represent companies that have bought a lot of restaurants over the last, I'm going to say, five years. Really, most of it's probably been the last four years if I'm doing my math right. But collectively, they probably have somewhere in the 650 restaurant total range. And these are two really smart gentleman. Both of them have Ivy League education, so they're fancy like that. One, Tom lives out in California and Adam lives in... Do you live in New York, don't you? Or you live in New Jersey?

Adam Diamond:

I live in Connecticut, just north.

Rick Ormsby:

Live in Connecticut, yeah. They're here today to talk to us a little bit about how they started their restaurant companies and what's in their future and how they did it. They're different. One cool thing that I hope you'll find today is, as I was joking earlier about we're all the same age, all three of us are 48 years old. Things have gone right and wrong in our professional careers, all three of us, I'm sure. We're probably all at the midpoint of our careers. We've chosen different paths. Even though you'll see Tom and Adam, I'm going to ask them to talk a little bit about what makes them different from one another. Even though they both run and operate restaurants, they have a slightly different perspective about how they do it and how they got where they're now. Hopefully that'll be a cool discussion.

If you have any questions along the way, all you got to do is just raise your hand. Guys, if you see any questions pop up that we want to just tackle along the way, let's just do it. And you can always hit me up with an email during or afterwards. I'll try to watch it if there's anything you want us to ask. Without further ado, it's a couple minutes after the hour. Thank you for joining in this webinar. And so I've got Tom Scott and Adam Diamond with me, really excited to hear him talk about their story.

Full disclosure, even though Unbridled didn't sell either of these gentlemen their first business, we've done multiple deals with both of them over the years and sold them collectively hundreds of stores. And so we're honored and blessed to call them friends and have them as a part of this webinar and want to hear their story. Why don't we start off with Tom. Tom, why don't you tell us a little bit about your background and then what initially interested you about the restaurant business and that kind of stuff. And then Adam, you jump in too afterwards, how about that?

Tom Scott:

Great. Yeah, thanks Rick and appreciate having us both on today. I'm a managing partner with Triton Pacific Capital Partners, we're a Los Angeles based private investment group. I've been with the firm for 18 years, which seems pretty amazing when I think about it. Prior to that, had some experience in strategy consulting and as an independent sponsor focused on private equity transactions. During my time at Triton, really been focused as more of a generalist investor investing across a variety of different industries. But really over the last five or six years, as you well know, been very focused, almost exclusively focused on building out our Tasty brands and Tasty Restaurant Group business, which I'm sure we'll get into it in a little more detail.

What's gotten us into the restaurant business? Triton over its history that goes back to 2001, as I mentioned I'm a generalist investor, but we've had some areas of focus and specialization. By example, we've a healthcare services group dedicated team. It's been with the firm since 2004. I think over time we've really started to recognize the merits of a focus strategy, and especially in certain industries where that domain expertise really matters. It's hard to step in and out as a single portfolio company investment. The other unique attribute, I would say, consideration is probably the better way to put it, is our capital base historically has been non-institutional. And we've had a captive capital markets team that we've leveraged to raise capital.

And so going back a few years ago, we had looked at restaurants, We had spent some significant time, maybe a decade or so ago looking at a couple of situations where larger brands were in the process of selling off corporate owned stores. Large market opportunities. So we invested a fair amount of time, we just didn't get anything over the finish line, but it was enough to get a taste of the business, if you will. Got a little bit, I'm not sure I'd say smart, but we got some exposure. But as we fast forwarded to a point where we were starting to think about how we could build a business with scale that had the right attributes for our investor base, and we were taking a bit of a clean sheet approach to that, the QSR business really kept resonating and kept coming back and pretty quickly became the center point of a strategy that we started putting the pieces together going back six, seven years ago.

That's really quick history on me and the firm and what got us into the restaurant business, but it was at the end of the day, I think an appreciation, at least high level, for a lot of the attributes that we saw in this business versus a lot of the other businesses that we've had exposure to over the past couple decades.

Rick Ormsby:

Let me see if I can say this back to you. You got more and more insane by the year until you got totally insane and then you got into the restaurant business? Is that basically what I heard?

Tom Scott:

That's basically what you heard, in a nutshell.

Rick Ormsby:

I met Tom first time at a Burger King, it was a small regional Burger King convention in Florida. That was probably in 2017. And he'll tell us a little bit more about the restaurants that they own and operate now. What about you, Adam? You got a wild background too, of insanity to get to the place where you are.

Adam Diamond:

Well, now I'm nervous, if you're calling Tom insane. I was marveling at how organized his thought process seemed in terms of getting into this. Also, thanks Rick for having us and thanks for having me and Tom together. I came at it a little bit of a different way. My I first job out of college was working in Disney in their strategic planning department, and they put me on a bunch of theme park development jobs. I didn't raise my hand and say I wanted to learn about theme park development, it just happened. One of the positive externalities of learning about the theme parks is you've got to learn everything about any kind of real estate based branded consumer services business. It was bootcamp for hotels and restaurants and retail.

I went from there to Starwood Hotels where I spent about 15 years most of the time that company existed and had roles that mirrored the path of the company. Started out a lot of the hotel companies and the restaurant companies as a real estate company that dabbled in brands, did a lot of strategy, M&A, real estate work. And then as we sold off the real estate and invested in brands, I became the CFO of the franchisor of Starwood. Did everything in a parallel business except operate. But after 20 years of being in large public company roles, always had a bug to be an entrepreneur. I'd love to say I whiteboarded the whole thing out, but had some friends who introduced me to some folks in QSR and I started to see the parallels between the hotel and the QSR business model. But more importantly, recognized that the QSR space was, and I feel passionately about this both on the franchisor and the franchisee side, somewhat unnaturally fragmented, just based on its history of entrepreneurs and how the companies have stayed separate.

Came up with an idea that I could apply the skillset that I had learned mostly at Starwood and bring it to a space that really had an opportunity for some different kind of thinking and different kind of money to come in and roll some things up. I had a good friend at Starwood over 10 years named David Tetens who's not on the call, but whereas I can do a little bit of everything but operate, he's the consummate operator. And the two of us said, "Hey, let's go find a business to buy." And went from there. We took this lifetime of experience and applied it to an entrepreneurial desire to really shift gears. And then it's evolved from there.

Rick Ormsby:

You get snake bit in this industry, in a good way. Not many people start their careers saying, "I'm going to be in the fast food business." I didn't do that either, but here I'm too 20 plus years later and it's the love of my life. Once you get involved in it, it becomes something that you just, I don't know. Usually I tell people, you look at it for a year or two and then you go do something else or if you stay, you do it for a hundred million years until you die. It's either A or B, usually because it's so special in a crazy way. Adam and I first met when he and David came down to... I was living in Louisville, Kentucky then, and they came in town I think to see young brands. And then we had breakfast, 2000, and maybe 17 or so. Both of these gentlemen are... Even though Tom's has a little bit more history in the actual looking at deals and in the role that he's in, both got into the business around the same time.

All right, Tom, you're up. What restaurants do you own? Why in the heck did you choose the brands you're in and how have you grown your business? And then you're up next, Adam.

Tom Scott:

Currently we've got, I think just over 400 restaurants in total. And our first acquisition was mid-2018, five years effectively of time from when we really got started. So we've got just over 400 across 20 states, maybe it's 21, 20 states. We're in four different platforms, which gets us into six different brands. Basically we have a Burger King business called Tasty King. We have a Pizza Hut business, Tasty Hut, we have a KFC business, Tasty Chick'n that also has some exposure through [inaudible 00:12:35] to Taco Bell. And we have a Dunkin' business, Tasty Delights, that has some co-brands with Baskin-Robins. We've got pretty good exposure across the majority of the QSR categories, if you will. I think set up perspective going forward, we've got a good position, good place across brands we're excited about.

In terms of how we selected brands, I think our overarching strategy drove a lot of our decisions. We know we want to get into situations that allow us ample opportunity to scale a business over time. While there could be some really attractive opportunities in the restaurant space on a regional basis or a small emergent brand basis, those really just weren't available to us, at least in terms of executing the type of strategy to get to scale that we wanted and needed to achieve. We were very limited, you could say to tier 1 concepts across the major categories. And as we really worked through our process of thinking through where to start, its' not necessarily rocket science, but a lot of it just came down to where did we see the alignment with brands or the potential for alignment where we thought that the pathway and the support for what we're trying to achieve was there. That was a big part of it.

And so really from the outset it was having those conversations feel as though there was the right meeting of the minds and then the opportunity, the specific opportunity then obviously needs to make sense behind that. But that was the thought process that got us started and from our first deal into subsequent deals, followed the very similar playbook in terms of thinking through the right partner, the right strategic partner brand-wise, relative to that long term goal. Which we made a lot of progress, but we, in our view, have a ways to go in terms of our overall growth targets.

Rick Ormsby:

Thank you Tom. I think I've seen all kinds of different ways of doing this for folks who get into this business, some go really narrow and deep into one brand and they just like, "I'm not doing anything except this brand." And they just go deeper and deeper and deeper into it, like investing in stocks and bonds and mutual funds as a strategy. And then some people, you see have a second leg of their stool, they'll build one brand up and then they'll pivot towards another and grow that one slowly, which we'll hear about Adam in a minute.

What Tom and his group have done is, you heard six brands, they're primarily in four brands, but in those brands in a pretty big and pretty forceful way. And they did it pretty quickly over a short amount of time, which is very, very unique. I wouldn't say they have as many brands as Flynn does, but heck, it's getting close with six brands under their platform and four hundred restaurants over a four year period. Goodness gracious. That's something so really interesting. Adam, what about you guys? What restaurants do you own? What brands do you operate? Why did you get into them? That kind of stuff.

Adam Diamond:

We until recently had one brand under our platform, ADT Pizza. And we have as of last week, 203 Pizza Huts across nine states, mostly the South. Last month we made our first acquisition in our second brand, which was a smaller Taco Bell acquisition in Louisiana. Once my partner David and me decided we wanted to do this, we didn't have capital, we really wanted to go find a deal. We were really acting as independent sponsors on our own. The original idea when I came to see you in Louisville, I was looking at like 20 Pizza Huts in Louisville. The idea was to buy a business that was maybe three, 4 million of EBITDA, be able to pull a club deal together and then grow from there. After getting our feet wet, we really failed up. We kept looking at deals of that size, which were highly competitive, ended up being shown a deal that had 125 Pizza Huts across four markets and it really forced us into a different place very quickly.

I have a long strategy background and this is probably one of the more opportunistic things I've ever done. You can sit there and decide what brands you want to go to and what categories you want to go into. My partner and I were looking at buying broken brands that we could grow. We were looking at franchisees, we were looking at everything and not making a whole lot of progress. And then around the end of 2017, you guys actually started sending us a whole bunch of Pizza Hut deals. I was like, "What's going on here?" Because if someone's selling a bunch, there's either something very wrong or something very right. We did a deep dive on Pizza Hut. I have two little kids who eat pizza 20 times a week, so it's a ubiquitous category. It's a 60 year old brand, but it was damaged.

Coming from my Starwood background, if you had 10 brands and one of them was struggling, then all 10 were struggling. And I took a look at a company like Yum! And Taco Bell was on fire and KFC was being turned around really successfully. And we looked at pizza and said, "Look, they're going to get this right." And we saw an opportunity to buy a brand, really two chances to turn a business around. We could operate a really good business on the ground while Pizza Hut was figuring out how to improve the Pizza Hut brand. That's what took us into Pizza Hut. And then by the time we were in it, October 30th will be our four year anniversary. By the time we were a year plus in, things started going better, we started stabilizing the platform, the KFC folks came over to do what we had hoped, which is improve Pizza Hut.

We say we've been in for four years, but we had COVID, we had stimulus, we had staffing problems. To say that we've been sitting around deliberately thinking about what we do with our platform is true, but at the same time it's been triage and opportunism. We thankfully had our platform and COVID gave us a couple of opportunities to grow from 120 to 200. I'm pretty aggressive, I think Tom is also developer. You can build something at a lower multiple. Well, you could a couple years ago, at a lower multiple than you can buy it at.

Once we really established our Pizza Hut platform, and we are not a heavy G&A company, we outsource as much as possible. We didn't have a lot of capacity to go after multiple brands at multiple times. So we wanted to go deep on Pizza Hut and then a year to six months ago said, "Hey, what's the right compliment next?" We looked at Taco Bell as a really stable brand that could level off some of the volatility that pizza and some of the other brands are going through. And you guys showed us a deal and we said, "Okay, hey, let's go after Taco Bell and let's commit to Yum!"

In hindsight, the story sounds all thoughtful, but once we learned about Pizza Hut, once we started to figure it out, we decided let's go as deep as we can. And we'll continue to do that. It's not like we'll hit pause on Pizza Hut and now totally shift to Taco Bell. Now we have a Pizza Hut platform that we can grow. We want to eventually get some scale behind our Taco Bell platform and see ourselves hopefully in a few years as a three or four or five brand Yum! Franchisee depending on what they have and what they're successful with. A different angle, but I think both approaches can work. I think it's where you're starting from and where you're coming from and we're happy with where we're right now for sure.

Rick Ormsby:

Great. Couple things you said that I really like. One was that you looked at anything and everything to start out with, and I get a lot of phone calls about this and if you're on this webinar or hear it on the podcast, you probably heard me say this. I take an inventory of people who started really wide and when I talk to them they say, "Oh, we'll look at anything." And then I come back to them a year later and almost none of them have bought anything. Usually, the narrowing is not only natural but vital to be able to get your first acquisition. And that's what you ultimately did when you got into the pizza system and in the Taco Bell world. Bragging on you here for a minute, Heck, you're the first new Taco Bell guy to get into the system, that I know of, in three or four years. It's not an easy thing to do. That shows... And both of you guys have a healthy dose of perseverance in your blood. Maybe that goes to the Gen Xer thing.

Adam Diamond:

Persistent annoyance is what I would recommend.

Rick Ormsby:

Totally, totally. Me too. People know me well. I'm the most annoying, persistent person you'll ever meet. Let's do a pause for a minute and with a little bit of a more interesting stuff, what's you all's favorite menu item? Let me start by saying I love the Gordita Taco Bell and I love the Double Decker Taco. Those two things I think I could have could've kept an entire village of Taco Bell restaurants and business in my twenties eating that stuff. And still if I get to a Taco Bell... Of course, we're trying to get the Double Decker Taco back on the menu. There's like this big thing going. But my love affair with those two products is eternal, man. What about you guys? What's your favorite menu products?

Adam Diamond:

Tom's got more to think of, so I'll go first. I'll do two, Pizza Hut. I'm a sucker for the Pizza Hut Wings. Wings are about 15 to 20% of our business. I'm a New York wings snob and I put Pizza Hut Wings up against any of them. And then I've actually, I've spent the last two weeks training in a Taco Bell, which hopefully you have not been served my food. I had my first-

Rick Ormsby:

Don't go [inaudible 00:21:59] on the meat, man. Don't go [inaudible 00:22:00] on the meat.

Adam Diamond:

I get yelled at for not enough cheese, the crunchy gordita with the Dorito shell, which never appealed to me intellectually, it was fricking awesome, man.

Rick Ormsby:

It's tremendous.

Adam Diamond:

I'll be having another one of those when I go back tomorrow for my last day.

Rick Ormsby:

That's awesome. What about you, Tom? Give us something.

Tom Scott:

We got a lot to pick from, right? I've got some soft spot in my heart on the Dunkin' side just for a few Munchkins and a nice iced coffee going back to my time where they were more available to me than they are today. [inaudible 00:22:36], the Whoppers, the classic. Within the Burger King business, you can't go wrong with the Whopper of cheese or a Sourdough King. I'm a big fan of the new Crispy Chicken Sandwich. The KFC chicken sandwich is a great, great product. And anything on the Thin-N-Crispy crust from Pizza will do.

Rick Ormsby:

Wow. You got... He's very judicious. You'll see that about Tom. He's judicious, he mentioned one-

Adam Diamond:

But he is a better marketer. He got the key products out there, I'm like [inaudible 00:23:04].

Tom Scott:

I don't know what your thoughts are, I'm excited for the handhelds on the pizza [inaudible 00:23:13]. We tasted those at... It was the spring convention and I thought that was a really good product, at least what I tasted back then.

Adam Diamond:

I can't wait. I think it's necessary in terms of having a lower price, handheld, other product line for lunch or snack or anything. And I really hope it's a hit.

Rick Ormsby:

I'll share with you real quickly, my second favorite thing to eat is a Blueberry Cake Donut, so Tom-

Tom Scott:

There you go.

Rick Ormsby:

And with the Blueberry Cake Donuts, I could.

Adam Diamond:

Tom, I can't believe Dunkin' Donuts are not ubiquitous. Growing up in the Northeast, I just assumed-

Tom Scott:

We're trying to do our part. We just signed a development deal, a new market to go build 45 over the next seven years. We're trying to do our part.

Rick Ormsby:

That's great. That's good. How about that? That's interesting. Little personality, fun thing there. Back to the questions, I'm just staring down at this list and I don't know about you guys, being at 48, I don't see close up so good anymore, man. It's getting worse by the dang day. It's like my arms are getting longer. As I look at this, what one or two things did you guys do correctly to build your business and what would you do differently? Maybe "Oops, I screwed up." Or "Man, I hit these one or two things really well." Tom, what do you think?

Tom Scott:

A couple things. And this will get a little bit to just as we chat further some of the similarities and differences, but I think one thing we did do, and I'm not going to say it's necessarily that we did it correctly, but we definitely did it differently, which is we invested significant amounts on the front end in terms of people infrastructure. At a number of different levels from a back office perspective, from a field level perspective. The benefit of that was it really allowed us, I think, to get to the right place with brands. They understood the commitments we were making, they understood what we were trying to bring forward in terms of focus on how we wanted to manage and grow and invest behind these businesses. But that's not the typical approach. And I think we were being fortunate in some ways because we were able to get some momentum, some scale, and then leverage that early on with some of those investments.

I think we're, obviously... We'll get to this topic I sure as well, but in the current environment, things maybe not as positive as they maybe were through the COVID years where it was going to be easier to do that. You're having to tighten up in some areas, maybe think a bit differently. But for us the benefit is we've gotten to scale now to absorb all that, but on the front end we still needed to get that scale to support some of those investments. We definitely put a big investment on the front end. Again, not saying it's correct, but definitely different in terms of the approach.

I would say the other thing we did in terms of building the business, and I'm not going to take any credit for this. We've been fortunate with great people around us. Robert Rodriguez, our operating partner, has really done a tremendous amount to build the team at Tasty Restaurant Group, but even our brand officers across the different brands, we've been able to attract and bring in some really exceptional folks to run each of these businesses. And I think early on really started to... Well, they all have different approaches.

The commonality was I think a focus on culture and we've really taken it a few steps further in terms of... It really first became apparent in our Tasty Hut business, our pizza business, where the business we bought, we stepped into a longstanding business that had limited turnover, but it was running a certain way, but it was a very predictable, stable business, but wasn't one that was really looking to do much to shake things up or to be dynamic in terms of top-line growths. But you had a lot of talent within that organization. I think we were really fortunate to find the ability to bring talent into an environment. And we've done this across a number of deals where they can be effective.

And so I think the leadership we've had and their approach to building a very family-oriented culture that has served us well in terms of all the positive things that have happened across each of the businesses. That's probably the single biggest driver, I would say, of progress, of sales growth, of profit improvement, [inaudible 00:27:05], it comes back to the people, it comes back to the culture that the brand officers are really trying to set the foundation for. But a lot of it's just been... As we've done acquisitions, we've been really lucky to find a ton of folks that just have untapped potential. And if you find a way to unlock that, it just has a very organic way of driving good things. And that I would say I take zero credit for. But in terms of something we've done well, it's putting in place the opportunity to implement that culture and do it fairly consistently across each of the businesses.

Rick Ormsby:

Yeah, it's neat. As evidenced by the name Tasty in front of all your companies, you've brought it all into one culture. You screwed up a little bit though along the way, I'd take it. Didn't you? I know I have.

Tom Scott:

We stubbed our toe right out of the gate. Look, hindsight is what it is. Easy to be critical. But I think we learned a lot at each deal along the way. And what we thought we were stepping into in our first transaction was a deeper turnaround effort than I think we had assumed in terms of our analysis. Obviously, a situation that costs more, takes longer, a lot of lessons learned certainly through that process and frankly a process that continues to be a bit ongoing. It's not all bad in terms of, as you guys both know, it's hard to get into this business, it's hard to establish the right situation within any brand, let alone multiple brands. And I think once you're in on the other side, it's a lot easier to operate and be strategic and be thoughtful about where you take the business. But certainly in terms of lessons learned, I think we got off to a tough start in terms of just the depth of what we were stepping into and how much fixing we needed to do with our initial transaction.

Rick Ormsby:

The first transaction now keeping... I'll have to say here, Unbridled didn't sell in this first transaction. Adam, you're you're on deck here. But let me just say something. As I look into my life at one or two of the things that I did correctly to build our business, and I would just share, not that it's about me at all, but above all things, I really, really love this business, the products and the people and everything that goes on. I love the Americana, the American dream, all of it, that's wrapped up into this franchise restaurant world. That's the one thing I did right. I know I've done that. That's the one thing I know I've done right, is that I wake up every morning and love it. I want to eat it, I want to talk to people about it, I want to do it. I want to learn about the new products.

The one thing is just that, in anything in life, if you really love something and you want to dedicate your life to it, more often than not it'll go right. You'll stumble along the way more often than not, [inaudible 00:29:47]. Adam, what do you got?

Adam Diamond:

It's felt that way some of the time, Rick, [inaudible 00:29:51] for years. Our experience has been in some ways identical to Tom's, in other ways, the opposite. We came at this, as I said, looking for something a little bit smaller. And it was two guys with two backpacks and a couple of iPhones trying to convince a big brand company to let us buy some restaurants. The person Mike Elliott, who sold us our first deal, who you know well said to us, "Hey, how big a business will you guys buy?" And I think we'd swung and missed on three or four Pizza Huts that were the size we thought we wanted. And I said, "We'll buy something as big as Pizza Hut will let us." I think we ended up a little bit biting off a little more than we could chew right there at the beginning because matching two guys with two backpacks with four-state operational turnaround.

We were the opposite of Tom. We had one HR consultant, we had a finance consultant. We literally had nothing but the people in the business. And while the people in the business were awesome and we found the right ones and we've elevated them to positions of leadership and we couldn't be more proud of what we've built today, for that first year, we thought we knew what we had to do, but there was no leverage to getting it done. If we had done what we're doing now on the Taco Bell side, we found a deal that has mid-teens restaurants, very tight geographically, performing well financially with an outstanding director of operations that came with it, that business is... If you ask me what would I do if I could do it again, that's how we intended to start. But if we had done that in the beginning, we wouldn't have the scale that we have.

There may be a happy medium between building out a large organization if you don't have any capital. Because we did not have any capital and just being two guys with two backpacks. Because I think we left because of the time it took us to get our arms around the bear the first year. We weren't quite as far ahead as we might have been when COVID hit and who knew COVID was going to hit. I always say that I'm brilliant because I decided to invest in a delivery and carry-out business right before COVID. Dumb luck, but we were lucky that we had that year and that Pizza Hut had taken price up to take advantage of it. But those were market forces and brand forces that really carried us through.

And now that we've... Not that things have totally calmed down, but now that things have settled a little bit, we're making a lot of those investments that maybe Tom made in the beginning. I just got off a call. We're doing a seven market roadshow where we are retraining every one of our employees. We've had 200% turnover per year in the last two years. People are going through a training course, they're getting on the front lines and they're going. We've hired a VP of training, a director of training. We're putting training resources all around the country, all around our markets, to retrain everybody to get over that hump of staffing, quitting, staffing, quitting. Because we know people want to be trained, we know they want to be happy at work and we know that'll lead to retention.

To something Tom alluded to, that's a hard thing to invest in right now. It's very hard given what we're lapping from last year and given inflation to go invest significant dollars in G&A. But we're making that investment because frankly we haven't had the time or the head space or the energy for the organization to be able to absorb it in the last couple of years. Okay, great, we figured out we have to start training four years into the business. It didn't take us that long. It just took till now for things to settle down enough for the organization to be able to absorb it. That requires a long-term... I'm sure this is one of the questions later, but you don't make a huge investment in training if you're only going to be doing this for another year. It requires a belief, which I have that we're going to push through this cycle and get through to better times.

Again, all of this is so clear in hindsight, I think one key takeaway... And people all the time they're like, "Oh I want to do that. I've thought about going into franchising." I'm like, "Go for it." But I think what 40 year franchisees have told me is that what we've experienced in the last four years, they've experienced every piece of it, but they've never experienced it all at once. Could we have possibly known that that's when we were starting? No. Do you roll with it? You sure do. But sometimes it forces you to build your organization in a different sequence. [inaudible 00:34:18] have initially thought, or that a business school case might tell you to do.

Rick Ormsby:

You wanted to join the Navy and then they grabbed you by the back of the head and threw you into SEAL training day one basically is what you're saying. And so this restaurant business, man, everyone is just making so much money. Money is just blowing out of everyone's pockets and it's-

Adam Diamond:

And it's all stable, stable cash flow.

Rick Ormsby:

And everybody is getting so wealthy and golly, gee. It's like buying Bitcoin, right, Tom? Is that the way we think about this business?

Tom Scott:

I'm not sure it's exactly the way we're thinking about it. No, it what's interesting. It came out some of the commentary, but I think [inaudible 00:35:01] reflect on what Adam was saying, in our own experience, there's so much focus on the brand selection, but honestly I think the initial platforms, the actual business you're buying matters. It matters in a meaningful way. Because our experience in Pizza Hut, and we're probably now in a very similar place together, but where Adam started, where we started, I think a lot of it, the brand's the brand, and you got started in pizza a little sooner than we did and it's hard to time a bottom, but your timing in hindsight was probably good, it was well before a lot of folks were focused on the brand.

We were fortunate as well. We came in even a little closer to I think the trough of the brand in terms of its own performance. But I think the difference is [inaudible 00:35:43], our pizza business, which you know well, Rick, because you represented the seller, it was a very... Despite what was going on in the brand, it was a very stable business and they had just a lot of history, stability at all levels of the organization and performance wise. And so I think that's important. Because as the brand then started to go through its improvement on number levels and then COVID hit, we were able to really accelerate what we were doing. I think Adam did the same thing, but he had a little more work to do to get things foundationally set before he did a lot of the same things we did.

If I go back and look at our initial transaction, you could point to brand issues, but brands go through cycles. The brands we're all in and focused on. These are brands that over time they figure it out, they perform. And I'm confident that that will continue to happen and see it happening across a lot of the different brands we operate within. But what's hard to fix is some of the issues within the core business you're buying. And I think that may sometimes get lost a little bit within the focus on the brand selection, that's critical but I think strategically understanding what you're stepping into is a big part of it as well.

Rick Ormsby:

So what Tom just... Let me interpret what he just said. He said it's not a get-rich quick scheme to get into the franchise space. It's a lot of hard work and it's a long-term situation. I know I'm putting your words in your mouth there, but sometimes people come into it thinking the opposite and they get popped in the head. In terms of you two guys, you're a little bit different in the way... The audience here already sees some differences from what we've been talking about between the two of you, but talk about a little bit more about how you're capitalized and that structure that might maybe lay out a little bit of the differences between the two of you.

Tom Scott:

I'm happy to jump in if you want. We've got two different... Under our structure, we have a captive management company, Tasty Restaurant Group, and that's really the back office support and all the leadership that we use to support the brand businesses that we're operating in. The brand businesses themselves are capitalized with equity from Tasty brands and Tasty brands too, which are vehicles that were set up with capital that is a hundred percent committed to this strategy. We have dedicated, committed capital focused on this QSR strategy across currently two different vehicles and a path to layering more capital as it makes sense onto that going forward.

And then we really structure each of the operating businesses independently. Each of our brand businesses has a separate capital structure, different lenders, debt providers, most of those traditional franchise finance. I think one case we have more of a FINCO structure. I think the form and structure is really just dependent on where we are in terms of the stage and the needs of individual business in terms of what we're trying to solve for from a growth standpoint. That's how we're structured.

Rick Ormsby:

Yeah, good. What about you Adam?

Adam Diamond:

We're pretty traditional. Our first deal, I guess we went backwards, we found the deal, then we found the debt, then we found the equity and much later in the process than I probably would've learned.

Rick Ormsby:

Fire, ready, aim. Fire, ready, aim, shoot or whatever. Yeah, totally.

Adam Diamond:

And the seller had to know. We must have paid way too much. But we have some very loyal and kind friends and family who own a little bit of the company, but most of our equity is owned by being Capital Credit and how we got to them. Because being capital, the equity arm would more traditionally invest in deals like this. But we had the debt and we were looking for a mezz piece to shrink the equity need and they looked at it and they had some room for equity in their capital structure and they had some folks who had experiencing QSR and pizza specifically who decided to make the equity commitment. ADT Pizza, ADT Investment sits above it, was funded once with that one deal. It was a one-time investment. It's a little bit of weird structure. I'm the GP and the CEO and they're the LP, but they really are a fantastic partner. And we've been able to grow without incremental equity. We also haven't distributed any out. So they continue to be our large majority equity partner.

As we grow the Pizza Hut business, it's been the same structure. We've just modified the debt and continue to pull businesses in. And then on the Taco Bell side, we set up a separate ADT Taco entity that has separate debt against that. But both with traditional term loan finance with players you're all familiar with, and then the same equity holder up top. The advantages of that are there's no real... I don't have a gun to my head, not that Tom does, to go put money to work. And we have an incredibly supportive equity partner who's been there through obviously an incredibly volatile time. At the same time, as we grow, we have to work with them on how exactly we're going to accomplish that. And our first couple of acquisitions, because the business was growing so fast that debt was able to accommodate our acquisitions going forward, I think it'll be a little more reliant on new equity. And that's something that we're working through as we speak. Pretty traditional is-

Rick Ormsby:

I appreciate both of you all sharing that. For those of you who are franchisees who listen, especially maybe mid-size franchisees, for these two gentlemen here, they're structured different from one another, but not a enormous surprise. But [inaudible 00:40:56] way different than what it used to be when in the good old days, in the last six or seven years as these businesses, like these gentlemen have been acquiring start getting consolidated, it becomes in most cases a game of the larger franchisees no longer owning a hundred percent of their businesses and having no outside help with their equity because the dollar values just get too high.

It gives me pause to sit and think about it. When I was young lad in industry and there very few folks like you all, and it was mostly midsize operators who may have had a brother in business, and the two of them built the business and operated it and acquired small franchisees around them and went from eight stores to 15 to 25 to 32. And then eventually they got too big for the britches and they had to... And then these ideas came up, like a sale-leaseback, which we could talk about that, but it's not the best for some people, a good idea for others. Some of these other creative structures came up and then we started getting partners and then family offices and private equity people. It's really snowballed on itself. If you've been listening and you've been around a long time, it's really a neat transition.

Adam Diamond:

At that point, we stress to our team members all the time that my partner and me do not own 220 restaurants. Because there is a perception that we're just the owner. And that shift is not something that's obvious to your team members. And for reasons I don't need to go into, we want our team members to know the truth, that we're investors and operators and not necessarily... I would love to have been one of those guys who bought in 40 years ago and I owned a hundred percent of my business. Definitely today's environment, which I think is more similar than other industries now forces a different approach.

Rick Ormsby:

Do you ever think, and this is off script, do y'all ever think there'll be a timeframe when it goes back to the good old days where M&A and things get consolidated and then they split back up, just like you play basketball in the early 2000s with shorts down to your ankles and then in 1950s they're all the way up to your upper thigh. Do we see a trend that does the opposite of what's been happening? Will that ever happen again you think?

Adam Diamond:

I think for the brands that have allowed institutional consolidation, the horses left the barn. I don't know. I think money flows where there's opportunity. And I started this out by saying that it's not... As awesome as the franchise industry has been for the achievement of the American dream, for a business to be fragmented and stay fragmented as counter to economics. I think when you see brands and they're out there and we know who they are, who have limited ownership to one or two restaurants and they've really kept it that way, they can keep it that way. But I think for the types of brands that have allowed, not allowed, but also seen the value in what the capital and management hopefully skill that people like Tom and me bring, never say never. I think it's tough to see how that reverses itself.

Tom Scott:

I agree with Adam's comments there. You can get all the nuances of some of those other brands that may be able to be a bit more fragmented. In some cases those brands have significantly higher AUVs. You can operate differently potentially in a few of those brands. I think there's too much buy-in from the brand side on understanding if they can get the right combination of operating expertise and capital in the form of partners and have a more consolidated network, if you will, there's a lot more they can get done more quickly across the system. And I think that's really the key. Different brands or different stages. Some need different things from the franchisee base to address asset actions and grow. But by and large, I think the ability to have groups that can efficiently manage, optimize, develop within a certain geography, I think makes a ton of sense as I put a brand hat on.

Rick Ormsby:

Yeah, no doubt. That's right. Especially from the franchisor level. Let's pivot a little bit. How's things going right now in operating environment? What's it like? It's been a bit of a rough year, care to give us some just thoughts maybe Tom [inaudible 00:45:13]?

Tom Scott:

Sure. Look, it's no surprise it's been a real challenging environment since late last year on a number fronts. But when you boil it all down, it's all about inflation and it's all about... Not just inflation, but how much and how quickly. I think one of the things we've always liked about the business, [inaudible 00:45:31] our thesis from day one is the resilience, the outperformance relative to other sectors during recessionary periods. And we still firmly believe that. It wasn't a recession, but you saw the benefits of the carry out and drive through business during COVID. If you go back over time, the data supports, certainly the trade downs in how QSR can perform.

I think one of the issues you have right now though is you've got the value component of the business, which certainly helps bolster during recessionary periods, is under more pressure because of the inflation side of the equation. And so you can pass through price. And this business is great in terms of your ability to pass through price, but you just can't keep pace with the rate of inflation taking place. What we've been trying to be thoughtful and increased price across all businesses where it makes sense, that gets you to a certain place, but you're looking in the rear view mirror so you're continuously playing catch up until we get to a more stabilized environment. No crystal balls, so don't know how long, but clearly we're going to be operating for a little while longer. Minimally, at those elevated levels.

I think over time, you do the pass price on, but then the question is where do you start to bump up against check price, average check that starts to have of the opposite effect on the business. That I think we've managed it as well. By and large, where we can, not perfect by any means, but even with that, there's still compression in the unit economics. There's compression at the four wall, if you don't address G&A, that flow through that is so great that we all experienced when sales were booming, goes the other way on you. I don't think it's any different for us, I'm guessing, than it would be for Adam or anybody else in this business today. There's maybe differences across brands, differences across businesses and stores, but by and large, there's definitely a compression that is there. I do think it'll alleviate, I do think you'll get back over time, but there's a process that we're all going through here that we're probably still mid innings on.

Rick Ormsby:

Yeah, it's good. Adam, before you answer, I'd just add, some of you on the are familiar with the California legislation, the FAST Act legislation that's recently got signed by Governor Newsom and it has some pretty deep potential implications for the fast food industry in California. And so this is, forever the salesman given a pitch here. If you are in a state that goes the way of California after California makes changes and you operate in those states, be mindful of what impact of $22 minimum wage would have on the business and if legislation gets enacted.

There's an assignment we took at one point time up in Washington. Goodness, right when Seattle hit $15 an hour, the business is in bankruptcy in three months. Now the business is out of bankruptcy. They're able to raise their prices over time and they're doing great, I'm sure. But to your point, Tom, you can't... It's hard to adjust, you can't pass it on to consumers and how much are they going to... You're going to go get a $15 Whopper meal? Are you going to do that? Are you going to eat a $10 number three on the Taco Bell menu? At some point the pricing gets concerning. What do you think, Adam? What do think about all this?

Adam Diamond:

I think you just said a lot in a very short period of time, Rick.

I mean, this not a direct comment about minimum wage, but what I think has been so fascinating... I'm going to go off talk a little bit. What's so fascinating about this industry is that the consumer and the team member are really the same person. We had stimulus checks go up, everybody spent that on pizza, but people started working less. You have this weird situation where when demand is high, your labor supply is lower, and then when demand starts coming back down, your labor supply starts going back up again. Obviously we're living in the same macroeconomic environment as Tom. We knew sales were coming down post-COVID. It just wasn't a natural level for sales to stabilize that. And we were prepared for that. I think what we weren't prepared for was sales to come down and then cost to come up as rapidly as they did, which in turn becomes a double whammy on sales because folks are paying for gas instead of paying for pizza.

Just because I'm so new to Taco Bell, I'll use Pizza Hut as my example here. I think Pizza Hut and we have done a good job looking for other customers. In the beginning of July we turned on Uber Eats and DoorDash and GrubHub and it's added mid to high single digits to our business. Even though we're losing traffic because we're raising prices to our core customer, we're going out and finding some new customers. That combined with the comps easing from last year has allowed us to stabilize. When I say stabilize I mean stabilize against a pretty rough back half of last year. So I'm with Tom, I think we're... I'd like to say we're middle innings. Deflation doesn't really happen, so the question is when will prices stop going up and how can we moderately take price to catch up?

The third whammy that I think that is separate from the operating business is this little thing called interest rates. We [inaudible 00:50:47] in March and we have to hedge half our loan. Our old loan was hedged at 0.16%. Our new loan is hedged at 2.5%. Our blended cost of capital as of today, has probably gone up by 350 basis points. You have the negative leverage on the operating business and then you have interest, which is going the wrong way. It requires really good lending partners, which we have, really good equity partners, which we have, really good management, which we have, which says, "Hey, we were loving it when things were great. Things aren't so great right now. We got to keep investing. We got to look at this as a long-term business."

And I talked about our training investments, not do anything rash. Because I think if you just look at data, you might do things a little more drastically than you want to, but I hope Tom's right. I hope it's middle innings, not early innings. We don't look at our peak in '21 or mid-'21 and say, "Oh, we're going to get back to that in two years." We don't look at that as a peak. We say, "How are we going to get back 10, 20% of our business in the next two or three years?" And I think if we did that, we would see that as a win. Because right now we're on the edge of where if things go up, it flows a lot and if things go down, it flows a lot. And I think we need to hopefully get over that hump as quickly as we can.

Rick Ormsby:

Clearly a good point about interest rates and probably too tight [inaudible 00:52:12] credit. We just did, and I'll send this out, everyone will see this soon, the lending survey, 14-question lending survey asking all kinds of crazy things and the results are really interesting. But one of the things I noted was... I sent it to 300 lenders in June and then the same survey in October and 45 of the 300 emails came back undeliverable within a three-month period.

The informal Rick Ormsby index, whatever that index is, it's saying, "Oh crap, the lenders are bailing from the space a little bit because of the conditions." And lenders they look in the rear view mirror, they don't looking forward very well. They're behind us three months typically. We see things before they do, which means to me the [inaudible 00:52:59] going to continue, to your point. I got one 30-second question for each of you, if you can do it. And then we're going to ask a question about the World Series. The question for Tom is what keeps you up at night? It could be anything. You could say little green people running in the fields. What keeps you up at night, Tom?

Tom Scott:

Yeah, look, I think we just hit on it really. It's the dynamics in the current environment and just not having the full playbook of all of the different pressures and when those likely play through, how they play through and managing against that. And I think we're hyper focused on it. We're spending a lot of time on it. I think we're got a lot of things well-situated in terms of team and structure and support, but just those external influences on the business right now. Your ability to build a plan around that, given some of the uncertainty, I think that's probably the single biggest challenge right now.

Rick Ormsby:

Fair enough. What about you, Adam? Quick answer.

Adam Diamond:

I think it's the unknown unknowns. Russia and Ukraine was not something that we needed in the past nine months. I don't lose sleep over inflation or wage rates or people quitting or price sensitivity of consumers because I know about them, I'm not happy about them. It's what's next that keeps me up.

Rick Ormsby:

My answer to this would be, I always want all of the franchisees to be successful. Sure, in our business you can make money doing distressed deals. I don't like to do those kind of deals unless we absolutely have to. We want all of the franchisees to do well. That's what keeps me up, is that like, "Gosh, if you guys are not doing well, I'm worried." I think we all are hoping that things will improve a little bit. Who's going to win the Super Bowl? I'll start. I grew up as a young Braves fan back in the eighties or watching TBS and Dale Murphy and Bob Horner and Claudell Washington. You remember any of these names, man? Pascual Perez and-

Adam Diamond:

All of them, man.

Rick Ormsby:

These guys mean they were a bunch of scrubs, but they were always on TV. That was my team, so I'm ready for the Braves. What about you? Dale Murphy wasn't a scrub.

Adam Diamond:

I'm a die-hard Yankee fan.

Rick Ormsby:

Oh, Yankees. Yeah, one of those guys, man.

Adam Diamond:

No, I'm not. Hey, man, I grew up in the eighties. We didn't win any World Series and go to the playoffs. I stuck with them. I'm also a jet fan, Rick, so I have... That lends any credibility to my [inaudible 00:55:21], pleasure in my pain.

Rick Ormsby:

Tom, I'm guessing [inaudible 00:55:26].

Tom Scott:

I'll say Dodgers because I do live in LA and it's my adopted nationally team. But the real answer is I got to take the opposite of Adam, which is anybody is fine other than Yankees. As a Red Sox fan, I've got to take the other side of that.

Rick Ormsby:

Good. That's fantastic. We find something you guys don't agree on, maybe we can start picking at each other over. That'd be a fun thing to do.

Gentlemen, it's been an honor to have you. Thank you for everyone who's listened and watched. Again, we'll send out this information out via email and it'll be on our website, the webinar will be. Wish you two guys and your businesses nothing but tremendous blessings and success and continued growth. Thank you from [inaudible 00:56:06] and Unbridled for joining us and being part of our story too, we really appreciate it.

Adam Diamond:

Thanks for inviting us. This was fun.

Tom Scott:

Yeah, thanks Rick. Appreciate it.

Rick Ormsby:

Absolutely. Y'all be good.