Defining Hospitality

DH - Nate Edgerly/Tom Donaldson
===

Speaker: [00:00:00] What I do is inconsequential. Why I do what I do is I get to shorten people's journeys every day. What I love about our hospitality industry is that it's our mission to make people feel cared for while on their journeys. Together we'll explore what hospitality means in the built environment, in business, and in our daily lives.

I'm Dan Ryan, and this is Defining Hospitality.

This podcast is sponsored by Berman Fall Hospitality Group, a design-driven furniture manufacturer who specializes in custom case goods and seating for hotel guest rooms.

dan-ryan_62_05-02-2025_144103: Today's guests are a duo with backgrounds in finance, tax, and investments. They bring in a wealth of knowledge on hospitality, business strategy and leadership. Both of them bring in years of board experience where they strategize and innovate business decisions. They're the CEO and chairman, respectively of Enzo Group Incorporated.

Nate Edgerly and Tom Donaldson. Welcome, Nate and [00:01:00] Tom.

nate-edgerly--he-him-_1_05-02-2025_144104: Thanks for having us.

tom-donaldson_1_05-02-2025_144103: Thank you, dad.

dan-ryan_62_05-02-2025_144103: it's really exciting to have you on and I just, I wanna forewarn our listeners that I'm out a little bit over my skis because you two, I would consider you guys allocators of capital, correct. In the hospitality space specifically, although not limited to, uh, the food and beverage category. Did I say that correctly?

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah. That's a fair characterization. Sure. Yeah.

dan-ryan_62_05-02-2025_144103: Awesome, because I'm sure our listeners do not want to listen to tax stuff because that's just, I'm sure, I'm sure it's exciting for one of you, but it's probably not exciting for others.

tom-donaldson_1_05-02-2025_144103: It. It is exciting for only one of us here,

dan-ryan_62_05-02-2025_144103: Which, which one?

tom-donaldson_1_05-02-2025_144103: either. It is

dan-ryan_62_05-02-2025_144103: Oh,

dan-ryan_62_05-02-2025_144103: okay. Oh, Nate Taxman. Um, well, hey, that, you know, that's really how you learn the nuts and bolts of everything, I think, and, and how to maximize returns and, and, um, speak from a place of knowing what you're talking about, which I often don't. [00:02:00] I'm a fan of all things hospitality, not an expert.

Um, so that being said, you've developed this and grown this business. That invests raises money and invests capital, allocates capital into many different facets of the hospitality space, predominantly, uh, food and beverage and restaurant. Um, what draws you to it? Um, we'll start with Tom. As far as, when I say what draws you to it, why hospitality?

What does hospitality mean to you?

tom-donaldson_1_05-02-2025_144103: So hospitality means to, well, why hospitality and then what it means to me. Um, it is funny. I, I grew up working in restaurants, bartending, waiting tables, so I've, I've known it pretty much my entire career, even before more of my professional career. And then quite randomly as an attorney in a large law firm, uh, somehow I was selected as a guy that did a lot of the restaurant deals.

So, uh, I ended up even practicing law in that area before I left to join the investment side then. But hospitality to me is really [00:03:00] more of an. Experience. Uh, and I think a lot of people in the industry are, are realizing that more and more these days. Um, it's not just going into a restaurant and eating food. It's going into a place where you feel comfortable and that it's part of your community. And the food needs to be good and the service needs to be good, but it's an experience that you're willing to pay for. Um, and it includes all aspects of, of your experience while you're there. Uh, I, I guess that kind of summarizes what I think of hospitality.

Nate probably has a little different take, but.

dan-ryan_62_05-02-2025_144103: Cool. And I have questions on what you said, and then we'll hear what Nate says and we'll come, we'll come back. But Nate, what about you? Like why this specialization and what, what, what does hospitality mean to you and why have you developed and grown this business to allocate capital within this industry?

nate-edgerly--he-him-_1_05-02-2025_144104: Sure. Yeah. So, hospitality really. Kind of found me. Um, I Tom, I was involved [00:04:00] in professional services and, uh, and I actually met Tom through working on some, uh, business transactions in the hospitality space. Uh, and over time I became very interested in the investing aspects in the, um, the financial aspects of restaurants.

And then kind of furthered my interest with operations and marketing and it just kind of, it was this thread that once I started pulling on it, it was just endlessly interesting and, and enjoyable for me. So, um, the people that I met were amazing. Um, uh, loved basically all aspects of, of hospitality and restaurants. to me, hospitality is really about, um, an authentic desire, uh, to bring joy and happiness to other people. And that's a very general sort of description of hospitality, but I think it, it's applicable to a lot of different, [00:05:00] uh, areas of, of business, um, and different relationships that the businesses have with their customers and context and stuff like that.

So,

dan-ryan_62_05-02-2025_144103: Mm.

nate-edgerly--he-him-_1_05-02-2025_144104: um, that's what it means to me.

dan-ryan_62_05-02-2025_144103: Okay. And then, and, and the idea of bringing joy and happiness as far as going into your vocation of raising capital, allocating capital to the f and b says, and we can get into what, like how you define and how you, how you ascertain what targets to invest in and what kind of returns you expect to get.

But joy and happiness happens to people when they're having a great experience at a, let's just use a restaurant, a great restaurant, for example. Um, but also restaurants are notoriously risky investments to make, right? So that could also not bring a lot of joy and happiness if some of your LPs or. Other investors don't get the returns that they want.

So how do you identify those places from startup to a more mature [00:06:00] business that are bringing joy and happiness to those customers, right? You see this as a good thing and they may wanna scale or expand. How do you identify your targets to invest in and help grow? And what kind of returns do you expect to get on those, generally speaking.

tom-donaldson_1_05-02-2025_144103: why don't I start with a big overview and then you, you get into the, the, the, the more detail of it. I think

nate-edgerly--he-him-_1_05-02-2025_144104: Okay.

tom-donaldson_1_05-02-2025_144103: the bigger overview is that, we, you are right, the, the single one-off restaurants are high risk investments, uh, all of them. And so, uh, we don't really invest. In that, in that space, uh, we, we typically invest in, once there are more mature multiple units, uh, develop more of a management team, uh, I think that allows for, uh, a lot of that risk to be pulled back. And they, they've already kind of figured out a lot of things, a lot of restaurateurs haven't figured out yet, some of which they, they really don't have a choice on. I mean, there's idiosyncratic risks [00:07:00] involved with just having a single unit, right?

dan-ryan_62_05-02-2025_144103: Mm-hmm.

tom-donaldson_1_05-02-2025_144103: the, they could shut the road down for two weeks and all of a sudden your entire business is in, in limbo. Uh, but if you're one of a hundred units, it's a lot easier to kind of handle. And so we look for a little more mature restaurants than, than just one-offs, and that, that reduces the risk substantially. But then there's a lot more that goes into it that I'll turn over to Nate, that he, he he'll dive into.

dan-ryan_62_05-02-2025_144103: Cool. And then I, I, I do want to come back, um, to you, Tom, on that idea of how many units and what that lead, how, you know, like when you walk into that room. Actually, before we get to Nate, I'll, I, because it's fresh on my mind, um, how, like, what's a good. Number of units for, if you're, if you're making your first round of investments in this one particular group, what, what's a, like a rule of thumb minimum for you?

And then, uh, to me, leadership teams and the, the high, a high functioning leadership team is so difficult [00:08:00] to get, but if you, you kind of feel it when you walk into the boardroom or the meeting room or wherever they're doing their monthly, quarterly weeklies, you, you just get a feel that they've invested so heavily in the culture and they all believe, and they're all, they're all super passionate about what, what they do.

So how do you identify the numbers and then how do you, what's your barometer for like a really, I don't know, a class A leadership team that's just like firing on all cylinders?

tom-donaldson_1_05-02-2025_144103: So I guess I'll start with the number. And the number is really not a set thing because it really has more to do with the people than it does the normal, the number of locations. So I think if you found a coherent, well operating management team that's done it elsewhere, let's say they just exited, uh, a sale or they, they've just, they've left another larger group and they're on their second or third unit, I would consider that probably a safer bet if their units are already functioning the way you would expect these guys to run 'em. Uh, [00:09:00] that's safer than 15, that have been piecemealed together and, and maybe don't have as strong a team. So there's no set number. Uh, definitely more of a management team. People question for me, uh, than it is a set number, uh, but. Experience does matter. I mean, restaurants, they're hard businesses even in the, the, the, I mean, just having a lot of 'em doesn't make it any easier. Uh, it's, it's hard business just at a much grander scale. Uh, the larger chains face some, you know, the same problems that any restaurant faces. You know, high food costs, high labor costs. All these things have to be addressed on a near daily basis. And so, uh, at, at an experience management team that you can look back on their past, you know, they have a, a, a, a record of success, uh, means a lot.

And even if they're in a new brand or a new concept, I think that experience is extraordinarily valuable.

dan-ryan_62_05-02-2025_144103: Mm. And just from my experience, I, I know a bunch of restaurateurs that I've been in business groups [00:10:00] with where, you know, they'll have two or three units and they really struggle because they know how important it is when they're gonna go to five or six to build that team above them that sits outside of the restaurants mostly and are really working on strategy and execution at all the, in, at all the individual restaurants.

And it's a huge, um, I wanna call it like a leap of faith or just kind of, I. Taking that first step. 'cause you, you have to, those people in that leadership team or management team are so critical to the overall success and scale. I like to use that relatively gingerly because it could scale means many things to many people, but to really take that leap to more, um, to more locations.

And that's critical. So when before you make an investment, are you, how, how do you approach the leadership team? Do you meet them? Do you walk in there? Is it virtual? And give an example of like a super high performing and functioning [00:11:00] team. And I know Tom, you've been talking a lot, but we could also bring Nate in.

And Nate, that probably ties into your, what, what you, what was teed up that you were gonna talk about a second ago as well.

nate-edgerly--he-him-_1_05-02-2025_144104: so one of the first questions I ask, uh, when I'm a new management team or kind of getting to know a new concept is who's managing the operations in the four walls of the unit? I. And how is that working,

dan-ryan_62_05-02-2025_144103: At each location.

nate-edgerly--he-him-_1_05-02-2025_144104: at each location?

dan-ryan_62_05-02-2025_144103: Oh wow. Okay.

nate-edgerly--he-him-_1_05-02-2025_144104: probably the, one of the biggest truisms in the restaurant business is that the largest or the longest lever in the organization is the general manager of the unit. Um, they having a, having a clear sense ha with a leadership team that has a clear sense of who's managing the units, what their responsibility set is, they're building teams, how they're leading people, how

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: [00:12:00] within the four walls and in the community. Those are some of the most important decisions and actions in a restaurant business. And that's really the fundamental unit that you're, you're building a franchise on. And, uh, not to say that multi-unit leadership isn't really important. It is, it's absolutely critical. you know, everything from marketing to operational leads and, uh, HR and finance, all that's really, really important. But that general manager is generally, I think of not, the most important person. 'cause it's hard to say who's the most important. I think everybody's important in hospitality, but,

dan-ryan_62_05-02-2025_144103: Hmm

nate-edgerly--he-him-_1_05-02-2025_144104: um, they're the longest lever for achieving great results.

tom-donaldson_1_05-02-2025_144103: you know, one follow up to what is you, you mentioned in your question, uh, you know, the leadership team that may need to come in above them after a certain number of, of locations. I think that's a

dan-ryan_62_05-02-2025_144103: I.

tom-donaldson_1_05-02-2025_144103: point. Uh, and I, I agree absolutely what Nate just said, that your, your general managers [00:13:00] are probably, I mean, that's the heart and soul of, of keeping things running correctly. Uh, but the founder slash you know, leader that takes you from one to maybe 10, uh, maybe even 15, um, is usually different than the one that takes you from 15 to 30 or a hundred. It

dan-ryan_62_05-02-2025_144103: And actually I, 'cause I want to dig into that 'cause I think that's kind of where I'm kind of going, going around. 'cause I've seen this in a couple of different businesses where that gm, um, Nate, that's so awesome in that one location could become an amazing part of the overall management team across many, many locations.

But sometimes they're the right person. But when they make that step up to the overall management team, it might be the wrong seat and they might thrive better on site in that location. So from kind of as we're talking around this, how do you ascertain I. When you have that general manager in the field to come up to the leadership team or the [00:14:00] management team, how, in your experience, from the things that you've seen, what are like success stories?

How do they ensure that they can make that transition and they don't like being, or they, so that they don't miss being on site, but they're really continuing to add value and have that long term strategic vision?

nate-edgerly--he-him-_1_05-02-2025_144104: that's a great question and the, what it really highlights is the difference in aptitudes and skillsets required for unit leadership versus multi-unit leadership. Transitioning from in-unit leadership to multi-unit leadership is one of the hardest transitions an operator can possibly make because, the skill sets and the aptitudes required for success in the role as a multi-unit leader are just very different

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: in-unit leadership.

And it is, it is great to have the experience, but only a small handful of, of general managers can make that transitional move. the, and really it depends on a [00:15:00] couple of things. I mean, one of the things that's really critical is having an organization that can train and develop those general managers into multi-unit. Leaders. The other thing that's critically important for, for most of the successful concepts that I've seen in the past is making the general manager role a career worthy goal. a lot of restaurants, uh, aren't designed economically that of a, a destination on the career path. And, and one of the things that I really try to do when I work with, with restaurant concepts and, and leadership teams is to answer the question of how can we make this general manager role a career objective

dan-ryan_62_05-02-2025_144103: Awesome.

nate-edgerly--he-him-_1_05-02-2025_144104: a destination in its own right?

dan-ryan_62_05-02-2025_144103: Totally.

nate-edgerly--he-him-_1_05-02-2025_144104: and I'll tell you, there's some extraordinary stories that Outback Steakhouse in its prime was, uh, an excellent example of how a general manager could [00:16:00] be, you know, a great career.

dan-ryan_62_05-02-2025_144103: Well,

nate-edgerly--he-him-_1_05-02-2025_144104: mean.

dan-ryan_62_05-02-2025_144103: I think that's a good point, a, a good point of, not so much a departure, but just to kind of bring it down more back to like real world earth now. So we've identified the types of companies that you look for and you look to allocate capital to and help them grow, right? Not a specific number of units, but enough to have some sort of scale and a really good management team.

Um, what is a, like, give us some examples of maybe not the biggest or the best or the highest returns, but a, a restaurant in your portfolio that kind of was at that, okay, we need cash to grow. We have this great leadership team. We've created these. Career paths for our general managers. Um, but now we need capital to continue to grow.

What's a great example of, of a, of a restaurant group or franchise in your portfolio? That is a really good example of that. So our listeners and watchers [00:17:00] can kind of visualize where we're swirling around to focus.

nate-edgerly--he-him-_1_05-02-2025_144104: Sure. Yeah. So, um, I worked very closely with a restaurant business, uh, called Taco BA based in Northern Virginia. Outstanding chef driven, uh, uh, concept, you know, primarily tacos, but had a pretty, pretty broad offering. The food is extraordinary. If any of, uh, of our listeners are in that ecosystem, I highly recommend it.

It's a, it's a wonderful place. Um,

dan-ryan_62_05-02-2025_144103: And how many units did they have when you started, and like, where are they now? As of Q2, 2025.

nate-edgerly--he-him-_1_05-02-2025_144104: They had, they had five units when we started working with them, and then they had, uh, 16 units, uh, So, yeah, so this is actually one of the. The key questions that they were working to solve as they scaled from five to 16. Um, and they did a great [00:18:00] job kind of evaluating, okay, you know, how do we go from scrappy, you know, kind of, you know, highly productive units, but scrappy, you know, managers who kind of rose through the ranks without a whole lot of infrastructure and a whole lot of training, and as a really, um, desirable sort of place to to hang your hat. And, uh, they, they did a great job with that. And, and, uh, it was through a lot of close work between the owners and the, the operators there that, that they were able to accomplish that. I mean, it's a, it's a great business, great people. Um, I can't say enough good stuff about

dan-ryan_62_05-02-2025_144103: And then, so they're in like the, in the DC area, um, are, do they go up into Maryland or Pretty much dc Virginia.

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah, Maryland, North Carolina, Nashville, Tennessee.

dan-ryan_62_05-02-2025_144103: Oh, wow.

nate-edgerly--he-him-_1_05-02-2025_144104: they're pretty broadly.

dan-ryan_62_05-02-2025_144103: Taco Baba. Okay. So, but when they had five restaurants, how did you even find them? How did they approach you? Did you [00:19:00] approach them? Uh, like how do you, how do you find your targets? And then you're like, okay, like, walk us through that, that whole deal. Um. Like how it worked and, and, and then how you present that to your investors, where you raise the cash or raise the capital.

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah. So, so this was actually at a, at my previous firm, uh, where we, where we worked with this business. Um, and uh, it's just good old fashioned going, eating a lot, like going

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: Eating at like 40 different restaurants until you can barely walk finding the ones that really strike the right chord.

And then, uh, you know, reaching out to the owners of those businesses to get to know 'em. That that was, you know, through the relationships we had in the industry that happened to know some, some, uh, the founder. Um, and that was a great connection.

tom-donaldson_1_05-02-2025_144103: Those identifications are one thing, but the, I would emphasize the relationships is [00:20:00] where it comes in from, right? Like

dan-ryan_62_05-02-2025_144103: Hmm.

tom-donaldson_1_05-02-2025_144103: just being around the industry forever, knowing like they come to you more often than you have to call 'em at this point. And so if you don't have relationships, or we would never even consider an investment if we hadn't had a relationship with the, the, at least the management team and likely the owners, uh, for a substantial period of time.

So to get back to you, we just don't call people up and say, Hey, can we buy your restaurant? That just, that doesn't

dan-ryan_62_05-02-2025_144103: So you're, you're like boots on the ground tasting and checking it out and feeling the vibe of each of these locations and say, okay,

nate-edgerly--he-him-_1_05-02-2025_144104: Oh

dan-ryan_62_05-02-2025_144103: is, uh, this is good. Because one other thing just to share with you and the listeners, um, I've started a bunch of different businesses and through, I did this entrepreneurial master's program and one of the, one of my classmates, um, said, oh, he was starting a franchise.

And he's like, oh, read this. Like, I forget the name of the book. It's like, how to start a franchise. I never wanted to start a franchise, but if you read all the elements of what makes a great franchise. [00:21:00] It's applicable to any business and whether you decide to franchise or not, if you have all those systems, pro processes, playbooks, um, scripts, um, procedures, guidelines, it's gonna make any business really successful.

So, I'm assuming once they've reached that small number of individual locations, they kind of have most of those playbooks and systems and processes, and they have to have some wonkish people working there to make sure that it's all a symphony conducted. Well,

nate-edgerly--he-him-_1_05-02-2025_144104: You know, it's, that's a really interesting point. Uh, I have worked with three unit restaurant chains that have systems, procedures, policies, and operational matrix that, you know, some hundred unit chains would be envious of.

hmm.

I've also worked with, you know, 20 unit chains that are still grappling with how do we standardize, uh, and operationalize that kind of intellectual property that you're talking about. Um, it's, [00:22:00] and, and, but as an investor, it is absolutely a positive thing when you see that a leadership team or a founder has taken the time and effort to build out. You know, replicable systems and processes,

Hmm.

Yeah.

always a good sign. Um, because they're thinking about, okay, how do I do more of this?

I mean, one of

Hmm.

of the big things is, you know, we were talking about this earlier. restaurants kind of fall into different tiers. The ones that are very successful typically have highly productive economics. Early on, they've worked out kinks. They've figured out, okay, what is, what does my box look like?

What is, you know, everything from the salt shaker to the pictures on the walls, you know? Um, know the details. I mean, this is a details business.

Hmm

uh, those units. [00:23:00] Oftentimes reward the founders and the capital providers at a higher level businesses that are, uh, kind of run to pay a salary, for example.

So, you know, and, and a lot of it has to do with mindset. When the entrepreneur goes into the business and says, I want to have a lot of these, they're solving a very different problem the, from the, problem that a single unit entrepreneur is, is solving. They may come to the realization that they want to have a lot of units, but somebody who goes in with that mindset ahead of time, they're asking the right questions, they're ask, they're solving the right problems, and they're

hmm.

something that can be scalable.

dan-ryan_62_05-02-2025_144103: But they always have to start with one, don't they?

nate-edgerly--he-him-_1_05-02-2025_144104: Oh, absolutely. I mean, there's always, there's always experimentation that takes place

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: first unit. I.

tom-donaldson_1_05-02-2025_144103: And U usually the first unit doesn't look like the fifth unit.

dan-ryan_62_05-02-2025_144103: Right. Oh. 'cause they learned so much and they're picking out even better salt shakers and getting so dialed into to, to every single aspect and [00:24:00] continual improvement. But then it's that founder's dilemma. Okay. So they get to three or four or five, and then they want to keep growing. They built it. 'cause then I think once you get to like a handful, that's when you can build that overarching management team.

Right. Is there a rule of thumb for how many units you need or a, a, a restaurateur might need, um, before they can build that overarching management team.

nate-edgerly--he-him-_1_05-02-2025_144104: Yes, yes.

tom-donaldson_1_05-02-2025_144103: of each of the units too.

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah.

dan-ryan_62_05-02-2025_144103: give us, give us some parameters, like give us some

nate-edgerly--he-him-_1_05-02-2025_144104: yeah,

dan-ryan_62_05-02-2025_144103: intersectionality about like speaking averages for now, from your experience.

nate-edgerly--he-him-_1_05-02-2025_144104: So it's a financial determination for the most part. You,

dan-ryan_62_05-02-2025_144103: Mm-hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: don't want to overburden the store level profitability of the unit with g and a.

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: the targeted range for g and a is typically between six and 10%. Sometimes you'll see a little bit higher early on if there's an especially opportunistic hire that you can make, at

dan-ryan_62_05-02-2025_144103: that's just operating the restaurant costs six or [00:25:00] 10% of whatever the revenue coming into the restaurant is.

nate-edgerly--he-him-_1_05-02-2025_144104: the store level. Yeah.

dan-ryan_62_05-02-2025_144103: Okay,

nate-edgerly--he-him-_1_05-02-2025_144104: level. So if you've

dan-ryan_62_05-02-2025_144103: got it.

nate-edgerly--he-him-_1_05-02-2025_144104: units, but like to Tom's point, you've got three units that are really, really profitable, that 6% could be the equivalent of, know, 10 units with less profitability. You know, the math

dan-ryan_62_05-02-2025_144103: Oh, okay. I understand what you're saying. Okay. So carrying on with that logic, at what point does a, a group, let's say they're hitting those metrics at, at what point have you seen where they need to invest in their management team? 'cause sometimes you're so in the weeds trying to just grow and grow that you don't really Many restaurateurs, I would think, don't think about.

About creating that overarching management team. Isn't that, isn't that safe to say?

tom-donaldson_1_05-02-2025_144103: Well,

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah.

tom-donaldson_1_05-02-2025_144103: also say that they sometimes over that they, they expect the growth to come and they build out their GNA first

dan-ryan_62_05-02-2025_144103: Hmm

tom-donaldson_1_05-02-2025_144103: the growth isn't there because it's difficult to do the [00:26:00] growth when you don't already have that management team above. But you can't layer in a few million dollars in cost and then hope that you open up chains in a, in a methodical, you know, efficient way.

nate-edgerly--he-him-_1_05-02-2025_144104: This is the dilemma of scale in the restaurant business. I mean, what we're talking about is, is so,

tom-donaldson_1_05-02-2025_144103: Which is why

nate-edgerly--he-him-_1_05-02-2025_144104: and this is,

tom-donaldson_1_05-02-2025_144103: at this point.

dan-ryan_62_05-02-2025_144103: Yes.

nate-edgerly--he-him-_1_05-02-2025_144104: yeah. I mean this is what Tom and I have worked on for at this point, is how do you, um, how do you make those decisions? What's the right next hire, for example, is it an operational hire?

Is it a marketing hire? Is it a finance hire? know, 'cause you're filling that g and a bucket, you know, with talent and you need to make the right hire at the right time for the, for that particular. You know, business organism

tom-donaldson_1_05-02-2025_144103: and.

it is D it is different if you're going to be a corporate based, you know, chain versus a franchise.

dan-ryan_62_05-02-2025_144103: Yeah. So at what point does a, let's say there's a restaurant group that [00:27:00] has 10 restaurants. They built a good management team, and do they all, more often than not, do they, there's gotta be a fork in the road at some point where they're like, you know what? Let's franchise this so we can get other entrepreneurs in that could use their own capital versus, Hey, let's get some outside funding so that we can keep all this under our own umbrella and really.

Although many, many franchises do a great job of making sure that everything is followed and like you don't, you can't tell a difference between location to location, but at what point does that fork in the road happen for most restaurant entrepreneurs?

tom-donaldson_1_05-02-2025_144103: It is the financeability question. It's, uh, that, that's the fork. If, if you can finance the growth, uh, either through equity or debt. Uh, they tend to hold off on the franchising as long as possible, um, unless they've got it really built in. I think if, if they're having difficulty financing the growth, you lean and you have a good

dan-ryan_62_05-02-2025_144103: Mm-hmm.

tom-donaldson_1_05-02-2025_144103: you, you jump into franchising early because it's just such [00:28:00] a fantastic structure to grow.

dan-ryan_62_05-02-2025_144103: Yeah. But then you have to really have all those systems and processes done. Okay, so let's say that now I'm a restaurateur. I have 10 locations. I got a great management team. I'm exploring. The franchise route versus capital raise route for debt and equity to continue to finance the growth. That's where you guys come in, right?

So you've, you've been walking around, you're fat from eating all the food in the, in the, in the area. You're like, wow, this one's really good. Oh wow. They're actually looking to grow. What kind of conversations do you have with that restaurant to get to a green light or that re the, the management team to get to a green light of, okay, this is a great place to allocate capital, and then how do you go out to your investor base, whether it's institutional, high net worth, family office or whatever, wherever you're getting your capital from your equity.

Then how do you approach those guys to say, Hey, I got this green light over here. This is why it's great. [00:29:00] These are the kind of returns you can expect. Write a check as an LP or I, I assume that's how you're operating, but I.

tom-donaldson_1_05-02-2025_144103: Why don't I speak to the, the, the, the LP part and then Nate will speak to the, the rest of it. But we typically have, uh, either our own proprietary capital or, uh, already held capital. So we're not, we're not going out to LPs to say, Hey, is a good idea to invest in Bojangles. We don't do that. Uh, we already have the capital to put to work.

dan-ryan_62_05-02-2025_144103: Oh, so you have your own, you're not, you're not doing a fundraise.

tom-donaldson_1_05-02-2025_144103: We do do fundraisers as well, but that's typically, uh, like right now we have an active one and, uh, promissory notes being issued. Uh, but those are being issued to the holding company. And the holding company has discretion to make investments as needed.

dan-ryan_62_05-02-2025_144103: Got it. Okay. So now, so you have your capital and what kind of returns is your, is that tranche of capital looking to get before Nate, who has the green light on the management team and the locations? Like what are the kind of [00:30:00] metrics that you guys look at before make writing that check group?

tom-donaldson_1_05-02-2025_144103: the example of what we're doing right now, we, we are issuing 10 to 12%, uh, you know, notes. So our, our cost to capital is 10 to 12%. Um, and that way, I mean, Nate's in a hole already, right? He's gotta, he's gotta be producing above 12% returns, uh, to make that viable.

dan-ryan_62_05-02-2025_144103: Mm-hmm.

tom-donaldson_1_05-02-2025_144103: uh, he's looking, uh, I'm, I don't wanna speak for Nate, but I'm assuming it's gonna be in the 20% range, uh, to make sure that the economics flow through to the investors, et cetera.

dan-ryan_62_05-02-2025_144103: And then do those notes for the 10 to 12% coupon that you're, that you're issuing, issuing to your investors, is that, does that ever convert into equity or does that stay as a, as a note?

tom-donaldson_1_05-02-2025_144103: In the current raise we're doing right now, that actually does convert into equity upon a listing on a national exchange. So the, the existing entity, uh, if it does, uh, list, uh, on the NYSC or nasdaq, uh, then they will [00:31:00] be able to convert into a, uh, the equity at a 20% discount, which really juices their return.

dan-ryan_62_05-02-2025_144103: Oh wow. Okay. And then, so then Nate, go back to the green light of how are you vetting them and making sure that they're ready for game time, and how do you turn, how do you flip the switch to green?

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah, franchising is as close to an existential question for a business as you'll find. Um, there's a huge capital component to it, like what Tom described. Um, the franchise model is a much more capital light for the. For the parent kind of franchisor entity. and it unlocks kind of or can unlock a disproportional uh, growth sourcing traditional capital into the balance sheet of the operating company, uh, accomplish

dan-ryan_62_05-02-2025_144103: Mm.

nate-edgerly--he-him-_1_05-02-2025_144104: some of the equally important questions about [00:32:00] franchising are really about what do you want your business model to be? Because it is extremely difficult to have feet in both camps of company owned operations and franchising because you're, when you're franchising, your customer is the franchisee, right? You're serving the franchisee and the best franchisors have that service mindset of, you know, your success. Mr.

And Mrs. Franchisee is my success as a franchisor. Those are the best systems out there. There are a lot of systems that get started without a really clear understanding of like, Hey, this is the business we're going into. Like we were serving food, or we were, you know, teaching kids how to swim, or whatever the franchise model is.

But when they make that transition, they learn very quickly like, oh geez, I got a whole new set of constituents here that I have to work with and satisfy that are entrepreneurs that have their own opinions and wanna, you know, do things their own way. And, so there's a lot of of work done [00:33:00] around driving alignment. Obviously it's built on the backbone of really strong systems and processes, the ability to distribute those systems and processes and then help those franchisees problem solve about whatever they encounter in their unique marketplace. Right. So the, that's the conversation that I typically have with a. With a concept that there, many, many of them are interested in franchising because they've heard tales of like, oh, you can unlock huge value. Which is true the financial markets adore franchise businesses because generally very low risk. Uh, the perception is that they're very low risk, so they're assigned higher multiples in the financial markets than than company owned operations.

dan-ryan_62_05-02-2025_144103: Hmm

nate-edgerly--he-him-_1_05-02-2025_144104: Um, they offer, we said before, disproportional growth rates. So, you know, the, the first conversation I have is like, what do you really want to do? What it, what business do you want to be in? Because if you [00:34:00] have a productive unit of economics, you can generally find the capital to support it.

I mean, that's what, what we

dan-ryan_62_05-02-2025_144103: But, but then do you, uh, do you coach them on helping them clarify which way they want to go?

nate-edgerly--he-him-_1_05-02-2025_144104: Oh, yeah. I, I

dan-ryan_62_05-02-2025_144103: wow. Okay.

nate-edgerly--he-him-_1_05-02-2025_144104: to, yeah. I mean, I, I love the franchise model because it's a service oriented model,

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: I do like the financial aspects of it for sure. I mean, I, know, like Tom, I'm, I'm motivated by those same, uh,

dan-ryan_62_05-02-2025_144103: So, but, but oftentimes if there's someone with a group of restaurants, you could, you and maybe a couple other companies like you could be their first, uh, experience of raising outside capital to fund the growth. And that changes their precious business that they've

nate-edgerly--he-him-_1_05-02-2025_144104: Oh yeah.

dan-ryan_62_05-02-2025_144103: created. So get, do you have a story about someone who really thought about it?

You helped coach them, and they're like, you know what? Thank you. This is awesome. I see the vision and where it can go, [00:35:00] but I'm, I wanna stay the way I am.

nate-edgerly--he-him-_1_05-02-2025_144104: Oh.

tom-donaldson_1_05-02-2025_144103: that's the, that's the normal story.

dan-ryan_62_05-02-2025_144103: Oh, that's the, okay,

nate-edgerly--he-him-_1_05-02-2025_144104: So the first thing that,

dan-ryan_62_05-02-2025_144103: Okay. Good.

nate-edgerly--he-him-_1_05-02-2025_144104: we, when we meet with businesses, small and medium sized businesses in this industry, the first thing we say is, you shouldn't sell any of your business if you don't have to.

dan-ryan_62_05-02-2025_144103: Mm-hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: Like,

tom-donaldson_1_05-02-2025_144103: is so good, why are you talking to me?

nate-edgerly--he-him-_1_05-02-2025_144104: yeah, if you've got a great business, I mean, like, figure out how to grow it and capitalize it in the most efficient way possible, you know, and, and you know, it's always shocking to people and they're like, wait a second, aren't you supposed to be selling me on, you know, like, why I should do business with you?

And it's like, well, yeah. Like if you see the value in doing business with us, with our experience and, and, uh, the capital that we can bring to the table, absolutely we would love to partner with great, great business leaders and great businesses. But if fundamentally, if you're an entrepreneur with an outstanding business model, I mean, I see all the reasons in the world to just keep that and grow it.

dan-ryan_62_05-02-2025_144103: Yeah.

nate-edgerly--he-him-_1_05-02-2025_144104: all, it makes all the sense if you have the [00:36:00] ability to do it, it's very, very difficult.

dan-ryan_62_05-02-2025_144103: Wow. Um, so, and just to, to, to the listeners, just thinking about. Allocating capital as as like an individual, right. So on one end of the spectrum you have, you know, CDs and savings accounts or money market, which, you know, pays a small return, a small interest rate, and then you can get into stocks and bonds, which is, you know, a seven to 10.

They're liquid. All those things are rather liquid. You can turn them into cash pretty quickly. Then you start getting into multifamily investments, which might do a six to 10 or 12% return. Then you get into hotels, which could be anywhere from like 15 to north of 20% returns. Where do you see restaurants in that spectrum?

And it, for investors that are investing in restaurants, it is illiquid, but that's the premium. You pay for that, taking that bigger risk. Correct. So how do, where do you see restaurants in that spectrum?

nate-edgerly--he-him-_1_05-02-2025_144104: return [00:37:00] on invested capital is the income produced by the unit fully loaded for overhead and administrative costs by the capital required to build the unit. And I like to look at that two different ways. I like to look at that without the lease. So what did it cost to build the. The inside of

dan-ryan_62_05-02-2025_144103: Mm-hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: And I like to look at it with the least capitalized, usually at like a, call it an eight times, capitalization rate. So I'll take a, the monthly rent and I'll multiply it by eight. And that's how much capital I've essentially borrowed from the landlord. Uh, under the circumstances. I like to see that not over levered on the lease or overexposed to, to lease liability unless I've got the financial wherewithal at the unit level to, to do that. That's why you often see, and it makes perfect sense for new restaurant concepts to sign dirt cheap leases, [00:38:00] unlike be real estate, right?

So

dan-ryan_62_05-02-2025_144103: Mm-hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: the typical story is, I'm gonna sign, I'm gonna sign be real estate because I don't want a big lease exposure. And then when they get lightning in a bottle, they'll move into more expensive real estate. It it more market because they wanna keep that. Capitalized lease liability at a, at a relative minimum. so going back, jumping back to the high level again, that return on invested capital metric that's really, really important. There's also, uh, an important metric called sales to investment ratio, which is basically how many customers are paying you for your meals relative to the amount of capital it requires to build the unit. And an important metric because it's really a capacity metric. It's, it, it tells you is the, the total productivity of the unit relative to the capital required, if I can operate it well, right? If I can

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: at a cost structure that makes sense, it's likely to produce [00:39:00] profitability, that gives me a good cash on cash return at the end of the

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Please check out their impact page in the show notes for more info.

dan-ryan_62_05-02-2025_144103: what t, what type of cash on cash returns do you typically look for? Do investors get paid out first and then, oh, I guess they wouldn't, 'cause they're kind of, they're more like coupons. They're.

tom-donaldson_1_05-02-2025_144103: Yeah, on this example right now, the investors would be just be holding notes. So they're, they're actually debt holders

dan-ryan_62_05-02-2025_144103: Okay, so they're a debt holder.

tom-donaldson_1_05-02-2025_144103: some point that, you know, in the future, once it's completely liquid, uh, they would convert into equity and, and, and receive, you know, the earnings as a normal investor.

dan-ryan_62_05-02-2025_144103: Okay. And then, um, for the sake of all the [00:40:00] architects and interior designers, um, in the hospitality space that listen here, um, I often find that there are some really great restaurants that are at that point where they can make the jump into the next, but the fit and finish of the space is not really what it should be.

And when they're penciling these things out, hotels and restaurants and bars need to spend a much higher amount of capital to do the build out. From an ar, from a design and construction perspective, that's scalable, will last, has a, has an impression, um. Are you at that point coaching them on, okay, you got the great food, you got, you're kind of here, but you're gonna have to spend more that's gonna lower your returns, um, in the short term.

But overall it's longer. Like how do you navigate those conversations to get them to spend more on the architecture and design of the place?

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah, so, so this is, I love this topic. Um, yeah. So, uh, one of the big challenges for a restaurant concept that's going into [00:41:00] new geographies is that typically they're working with a new contractor. They may be working with a new architect, right? So they don't have established firm-wide relationships. They haven't climbed the learning curve.

I mean, there is a learning curve associated with building these units. And once you've kind of got the prototype and you know what you wanna build, there's absolutely a learning curve. a learning curve for the restaurant. Operator, and there's a learning curve for the architects and general contractors. And so, it is a more expensive process. You typically have a lot of change orders, you have overrun, stuff like that. So how do you hedge those risks? Well, documentation is the key when you're, when you're looking to scale. So if you can present, for example, these are the, these are the three materials we've selected for the flooring, right? These are the three types that we've selected and the vendors that we work with. You know, this is the paint, these [00:42:00] are our paint colors, right? And you can have this. This book, literally a book of your fit and finish, you can provide that to service providers and it can help them climb that learning curve faster and it help keep your costs down in

dan-ryan_62_05-02-2025_144103: Mm. Okay.

nate-edgerly--he-him-_1_05-02-2025_144104: then the other thing you absolutely have to have is physical presence costs, get outta control. If you don't have physical presence on

construction sites

dan-ryan_62_05-02-2025_144103: an owner slash manager or as an investor.

nate-edgerly--he-him-_1_05-02-2025_144104: an owner slash manager,

dan-ryan_62_05-02-2025_144103: Yeah,

nate-edgerly--he-him-_1_05-02-2025_144104: owner, architect, uh, GC meetings are some of the most important meetings you can have and

dan-ryan_62_05-02-2025_144103: totally.

nate-edgerly--he-him-_1_05-02-2025_144104: frequency.

And they're, they're really critical. It always strikes me how, you know, in these built environments for hotels and restaurants in particular, FF and e is always the last line item on the budget, but it's always arguably the most important thing because that's what the, the guest or the, the customer are, is interacting with.

we have a saying in the restaurant business is the customer's not licking the light switches. [00:43:00] They're actually. They're actually focusing on, you know, what's in their immediate ecosystem, right? So,

dan-ryan_62_05-02-2025_144103: that's funny and I know funny. Um, another thing that you. Mentioned is as they're looking, they want to go into those B locations because of the liability of the lease. Um, I'm not a restaurateur, never been one, never played one on tv, but I was really struck, I read a book, I, uh, Danny Meyers setting the table, and when he would look at leases and I, he, he, when he first looked at leases for his initial restaurants, he saw these really long expensive a a class leases, or there maybe they were b 'cause the, they, the neighborhoods evolved as he put them up there, but he saw them as liabilities and I think it was his uncle or his dad who got him to see, while they are truly liabilities, but he got them to see them as assets.

And how do you negotiate and build upon that asset? Is that a hard way to get those, um, companies that you're [00:44:00] trying to potentially invest in to think about things as well?

nate-edgerly--he-him-_1_05-02-2025_144104: yes. Uh, it's a, it's a balance. It's a balance.

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: this

is like the, one of the best conversations that the, the accountants and the optive, one of the bounders can have, uh, is the balance between, the success of a unit and the financial liability associated with it.

tom-donaldson_1_05-02-2025_144103: as the, as the investor coming into existing leases, that conversation's always held as they want it to be considered. Oh no, you don't understand. This is our greatest asset as we have all these leases, and we of course are like, are you kidding me? Like this is a huge liability. We

want to, you know,

nate-edgerly--he-him-_1_05-02-2025_144104: You signed a 20 year. Yeah. You signed a 20 year lease at, you know, a million dollars a year, and it's like, oh my gosh. You know?

tom-donaldson_1_05-02-2025_144103: You have no idea.

dan-ryan_62_05-02-2025_144103: But then you also hear about these like very kind of more fine dining experiential restaurants that will open. It usually in Vegas, they've already been tried somewhere else, but they'll open in, let's say, Miami or even sometimes in New York, and they, [00:45:00] it might be their first restaurant or second restaurant, and they're spending 10, $15 million to build out this space.

And I'm like, how does that ever even pay for itself? But oftentimes it does because they just hit it the right way and they know their market, they know what they're offering. insane.

tom-donaldson_1_05-02-2025_144103: the opposite. I would say oftentimes it doesn't,

dan-ryan_62_05-02-2025_144103: But sometimes it does. The ones that I've paid attention to do.

tom-donaldson_1_05-02-2025_144103: But there's a lot of, you know, the other thing is, is you operators have ex success on their model and they get, their ego gets the best of 'em, and they wanna double the size. They wanna double, you know,

dan-ryan_62_05-02-2025_144103: Hmm.

tom-donaldson_1_05-02-2025_144103: of the build out and all these different things because they have had ex success at their, you know, previous box. Uh, but that next box is not proven, and it's very difficult to get someone who truly believes in their vision to, to not drop the $10 million on the build out. I mean, it, it's just because you've lost kind of at the beginning and getting back to what Nate said, you know, you're not eating off the ceiling. It's,

it is great to have a

dan-ryan_62_05-02-2025_144103: Right.

tom-donaldson_1_05-02-2025_144103: but like, doesn't need to cost a million [00:46:00] bucks.

dan-ryan_62_05-02-2025_144103: Well, just to think about one, for instance, um, like Carbone for instance, it used to be right up the street from where I lived. It was just an Italian restaurant. We would go there and now it's like, it's insane. It's in Vegas, it's in Miami, it's in all these other locations, and they spend so much money building, but I guess they have a proof of concept.

They have a following, and it's, it's a different Well, kind of deal. It's not necessarily a franchise, but it's,

tom-donaldson_1_05-02-2025_144103: thing

dan-ryan_62_05-02-2025_144103: it's definitely not a franchise, but,

tom-donaldson_1_05-02-2025_144103: out the door, uh, doesn't

dan-ryan_62_05-02-2025_144103: mm-hmm.

tom-donaldson_1_05-02-2025_144103: you appropriately spent on build out and you're returning, uh, money to investors. I mean, you could have a very matter of fact, it's very easy to fill a restaurant if you overspend and are not making money because, I mean, customers are smart.

They know where they're getting a good value. So if you're charging

dan-ryan_62_05-02-2025_144103: Hmm.

tom-donaldson_1_05-02-2025_144103: for a $12 salad, you're gonna have a line out the door.

dan-ryan_62_05-02-2025_144103: Yeah.

tom-donaldson_1_05-02-2025_144103: aren't gonna be very happy about it.

dan-ryan_62_05-02-2025_144103: And what about like, I, I see that this incredible growth in fast casual, like, I [00:47:00] don't know, over the past six or eight years, but from Sweet Greens, there was, there was this one Indian fast casual restaurant around the corner from my office in New York City called Inde, and I loved it so much. I introduced him to a friend of mine who has a fund and in and invests in things.

And I just looked on their website. I haven't been there in forever. They have so many freaking locations. Um, but are you seeing that fast casual thing kind of played out now, or is that still a thing, uh, where we are in the economy? Like what's, what's the, what's the big trend now that you're seeing?

Tacos are awesome everywhere.

tom-donaldson_1_05-02-2025_144103: a part of that, you know, we owned, uh, you know, chopped Creative salad when it grew from New York City to around the country. And,

and,

dan-ryan_62_05-02-2025_144103: Hmm

tom-donaldson_1_05-02-2025_144103: we're a part of that and we, we've ultimately sold it. But you absolutely, I think that's not really going anywhere because that model is just a, a much more efficient model and, and more of culturally appropriate than, you know, you know, the traditional casual dining. Um, but that being said, you still fight the [00:48:00] same, you know, you know, problems. You, you have a little bit better, easier labor issue. Uh, but, uh, those concepts are, are still hot.

nate-edgerly--he-him-_1_05-02-2025_144104: the quintessential fast casual is Chipotle, right? So,

dan-ryan_62_05-02-2025_144103: Totally.

nate-edgerly--he-him-_1_05-02-2025_144104: Panera, um,

dan-ryan_62_05-02-2025_144103: And they had, they both had, uh, IPOs and like went into the public markets, right. yep,

nate-edgerly--he-him-_1_05-02-2025_144104: that's right. Hmm. So those are like superstar outcomes.

Absolutely. I mean, Chipotle is a juggernaut. Um, it's a, it's an outstanding concept. um, so what you've seen with fast casual is sort of a, a fingering out of differentiation into different aspects of fast casual.

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: um, you, you see fast casuals are tilted more heavily towards culinary.

You see, um, fast casuals that have menu breadth. You see fast casuals that are, that have a narrow menu that just do like one thing only, um, and, [00:49:00] and try to do that at an extraordinary level. Um, I think you've seen a lot of differentiation. There's this desire on the part of, of a natural desire on the part of people to categorize What I've found in the restaurant space is there are no real, you know, it's kind of like. It's not a taxonomy like what you have in the animal kingdom or whatever. The, the, there's too much blurriness, you know,

dan-ryan_62_05-02-2025_144103: Hmm

nate-edgerly--he-him-_1_05-02-2025_144104: there's, you know, I've worked with concepts that have the, you know, DNA of Chipotle, but also fine dining, DNA, you know,

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: you know, the interesting thing about Chipotle is, early on it was really a value concept.

They've gotten away from that, especially since Covid. But in terms of like, you know, calories per dollar, I mean, this probably was one of the best values in all of the restaurant business better than the QSRs, because, you know, the QSRs have always been, you know, that's a metric for them. Like, you [00:50:00] know, what do you get for what you pay?

dan-ryan_62_05-02-2025_144103: And what does QS Army mean?

nate-edgerly--he-him-_1_05-02-2025_144104: uh, quick service restaurant.

dan-ryan_62_05-02-2025_144103: Oh, okay. Got it.

So I, I wanna create a comparison or contrast to the retail model. And I've talked about this before, but in like the early two thousands, I was reading Investors Business Daily, or the Wall Street Journal, I forget which one, but it was talking about the most high performing, um, retail stores per, and it was like dollars or sales per square foot.

I don't know how they do it, but at the top of that list was Tiffany's. And let's say it was, I don't know, $750. It was just under a thousand dollars, um, per square foot or however, I don't know. It was per month, per year, per day. I don't know what it was, but it was like a big number. And then at towards the bottom it was more like a, you know, a traditional department store or, or a Kohl's or something like that, that, or even a, a Walmart.

But it was like a really big breath. And maybe that was like, I'm making up this number $20. So it was, it was a huge, huge, huge [00:51:00] difference. And then Apple came around. And they, they'd never done retail before. They looked at it completely differently. Um, and then they did all these retail stores with Genius Bars and all this, and their number was like 3000.

Like they com. Granted, they're selling denser, uh, more exp, well, I don't know if you can say they're selling, selling more expensive products than Tiffany's, but they just blew the doors off by really looking at it completely differently. Would you say that, um, Chipotle or Panera looked at, um, the restaurant business totally differently?

Or is there someone else out there that's looking at it completely differently like Apple did to re uh, to retail?

nate-edgerly--he-him-_1_05-02-2025_144104: That's interesting. I, I have not seen anyone who's completely reinvented the restaurant business model. I, I've

dan-ryan_62_05-02-2025_144103: Mm.

nate-edgerly--he-him-_1_05-02-2025_144104: some concepts like, uh, preta Manja, um, which is, uh, was popular in, uh, urban environments where the food was basically already prepared. Um, [00:52:00] there's some other businesses out there that have followed this model. Um, and you know, I know Sweetgreen has done some stuff with automation, which

I

dan-ryan_62_05-02-2025_144103: Mm-hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: interesting. Sweetgreen kind of thinks to themselves as much of, a technology company as a hospitality business. Um, have mixed feelings about that, to be honest. Um, I, what I love the most about hospitality is the human connection.

So when you

get,

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: you know, too far away from that, I think it's a little, uh, it's, I, I don't know what the implications of that are. I

dan-ryan_62_05-02-2025_144103: But on, on, on the other side of this, like the sweet green argument, I get in my arguments with my wife about Sweet Green all the time. She loves it, loves it, loves it. But then I see as they came on, it was a great concept. Similar to Chopped, like maybe a step beyond, like they took the chopped idea, like to the next.

Step up, I guess, and they became way more efficient. And as they grew, their buying power grew, but their prices kept going up and up and up, and I just started to resent them.

nate-edgerly--he-him-_1_05-02-2025_144104: [00:53:00] Yeah. Uh,

tom-donaldson_1_05-02-2025_144103: they were selling, you know, $12 salads at $10 and had a very surprise.

dan-ryan_62_05-02-2025_144103: Yeah.

Yeah.

nate-edgerly--he-him-_1_05-02-2025_144104: yeah, what Tom said. That's pretty much, pretty much the situation, the, the, the economic equation for them just kind of. Didn't work. And they, and they ran really heavy GNA, they,

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: they had a lot of costs outside the store. They, so, sweet Green's growth story is really interesting.

From the very beginning, they knew they wanted to be a national change. So they, they, they didn't, they, they're two kind of mindsets about growth. One is, uh, grow like an ink blot, uh, where you can leverage operational brand scale, uh, through a geography

dan-ryan_62_05-02-2025_144103: Mm.

nate-edgerly--he-him-_1_05-02-2025_144104: that

you know well, or we had success in New York.

Let's go to la, let's go to Seattle, let's go to Austin, let's go to Miami. Let's go to, you know, Chicago, you name it. Right? That's a much more [00:54:00] expensive, early on. That's a much more expensive growth style you've got to, you know, you're in an unfamiliar market. Did you like it or not? The geography is challenging. the

dan-ryan_62_05-02-2025_144103: And you don't get those operational efficiencies or geographical operational efficiencies at all,

and you need a lot more capital to do it and way more people.

nate-edgerly--he-him-_1_05-02-2025_144104: Exactly. And, and that was Sweet Green's strategy.

dan-ryan_62_05-02-2025_144103: I.

nate-edgerly--he-him-_1_05-02-2025_144104: I think, um, you know, they did a lot, they spent a lot of money on branding and marketing. They were very effective creating awareness around Sweet Green and the offering. And so on a fully loaded basis, it was a very expensive concept to grow.

The presumption was, well, we would, we, you know, we Sweet Green will eventually recoup all of that investment because people are gonna love us and we'll have a national chain and we're the next, great thing

dan-ryan_62_05-02-2025_144103: Why do you need some really deep pockets to do that? I mean, they must have had some big private equity [00:55:00] or something.

tom-donaldson_1_05-02-2025_144103: Yeah.

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah.

dan-ryan_62_05-02-2025_144103: Who was the, do you know who?

nate-edgerly--he-him-_1_05-02-2025_144104: uh, it was a technology, it was a,

tom-donaldson_1_05-02-2025_144103: It was Steve

nate-edgerly--he-him-_1_05-02-2025_144104: uh,

tom-donaldson_1_05-02-2025_144103: the A-O-A-O-L, uh, a

dan-ryan_62_05-02-2025_144103: Oh,

tom-donaldson_1_05-02-2025_144103: Old money came in and

dan-ryan_62_05-02-2025_144103: That's so funny. A OL is considered old money now. Oh my God.

tom-donaldson_1_05-02-2025_144103: come from restaurants. other money, I guess is a better,

better way of saying it.

dan-ryan_62_05-02-2025_144103: so. As you kind of are looking at the world right now, um, and consumers are kind of starting to put the brakes on things and everything else from a macroeconomic perspective, I, I think restaurants would be a real canary in the coal mine. Um, for macroeconomic trends. Recessions, call them what you will, um, how do you take what you're seeing in front of you as like a macroeconomic dashboard and still use that, but also find these gems that can perhaps grow through it.

Like what's your strategy and what are you [00:56:00] seeing at macro right now? And then does that change your strategy about who you raise money for?

nate-edgerly--he-him-_1_05-02-2025_144104: Yes. Uh, so, you know, the, there's a natural relationship between the degree of uncertainty in the market and the basic, durability of the business model, right? So, um. Right now I'm very biased towards that have high unit volumes and large store level EBITDA margins uh, and, and require less capital to build a new unit. So those are kind of my three that I want to check

dan-ryan_62_05-02-2025_144103: So give us some parameters for that. Like high unit volumes. What do you mean when you say that?

nate-edgerly--he-him-_1_05-02-2025_144104: uh, north of so i'll, so it's kind of interrelated between the three, but I'll give an example. That's a coherent example. So,

uh, $2 million plus unit volumes, [00:57:00] 18 to 25% store level EBITDA margins and less than $1.2 million to build.

dan-ryan_62_05-02-2025_144103: Wow.

nate-edgerly--he-him-_1_05-02-2025_144104: an economic equation that makes sense.

dan-ryan_62_05-02-2025_144103: And who's an, is there an example of someone out there that like fits that?

nate-edgerly--he-him-_1_05-02-2025_144104: Uh, oh. Yeah. I mean, Chipotle is a great example. I

dan-ryan_62_05-02-2025_144103: Uh, okay.

nate-edgerly--he-him-_1_05-02-2025_144104: they have that equation nailed. Um,

yeah, there, there's some others. I mean, you know, Chick-fil-A has that in

tom-donaldson_1_05-02-2025_144103: Yeah,

nate-edgerly--he-him-_1_05-02-2025_144104: way, better than that even, uh, I think their average unit volumes are like six or 8 million. I mean, it's just ridiculous. Um,

dan-ryan_62_05-02-2025_144103: But yeah, it's crazy. Everyone buys chicken, so, but Chick-fil-A is, that's franchise and Chipotle is not franchise. correct.

nate-edgerly--he-him-_1_05-02-2025_144104: correct. Yeah.

dan-ryan_62_05-02-2025_144103: So that's like two giants that went completely different ways and have had equal success

tom-donaldson_1_05-02-2025_144103: just a

nate-edgerly--he-him-_1_05-02-2025_144104: yes.

dan-ryan_62_05-02-2025_144103: or,

tom-donaldson_1_05-02-2025_144103: growth.

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah. the, the Chick-fil-A model is fascinating. It actually is, [00:58:00] a. Very unique franchise model among franchises. The way they structure that, I won't go into the details of it, but it's, it's different from like a subway, from like a Dunking Donuts, you name it. I mean, it's just, uh, it's, very different in the way they structure that.

It's genius, really. I mean, and it's great for the operators, it's great for Chick-fil-A corporate. It just, it's a really powerful economic equation. So,

dan-ryan_62_05-02-2025_144103: I think, I don't know all the details that we don't need to get into it now, but I feel like they figured out a way where those franchisees are investing a lot of money into building out these things. And you ha there's like a waiting list and you gotta, they have like, I don't know, you have to like check all the boxes from a Chick-fil-A perspective, but they've really figured out a way to where everybody wins.

The people working there, the franchisees, uh, the, the brand itself. It's really, it's really incredible and the growth that they're having is insane.

tom-donaldson_1_05-02-2025_144103: franchise model is a little different than most franchise models in that their franchisees [00:59:00] are typically just one unit holder. And, you know, if you go to a McDonald's or a Wendy's or something like that, you've got franchisees that may have hundreds of,

of

locations. But, uh, pre, pretty much across the board, Chick-fil-A is one unit per franchisee. So

it's almost

dan-ryan_62_05-02-2025_144103: And there's,

tom-donaldson_1_05-02-2025_144103: And it gets back to what Nate was mentioning, is that the franchisee owner slash manager can then be in the store.

dan-ryan_62_05-02-2025_144103: oh yeah. So they're almost like going back to the beginning of the conversation. That owner franchise, or

GPGM.

tom-donaldson_1_05-02-2025_144103: a difference. And so

dan-ryan_62_05-02-2025_144103: And they got their hand on the till and everyone

tom-donaldson_1_05-02-2025_144103: Exactly.

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: is by design. That is

dan-ryan_62_05-02-2025_144103: Yeah.

nate-edgerly--he-him-_1_05-02-2025_144104: wants. Yeah.

dan-ryan_62_05-02-2025_144103: Huh.

tom-donaldson_1_05-02-2025_144103: as an investor, you know, looking for a franchise, uh, you have to realize upfront, if you're getting a Chick-fil-A, obviously there's a huge wait list. So there's, there's no shortage of them, but, and you're gonna make a ton of money, uh, for one unit. Now, investors that buy a hundred McDonald's have a different mindset.

They're [01:00:00] not probably in any stores, uh, daily.

dan-ryan_62_05-02-2025_144103: Right. I mean, well, you can also tell the difference when you walk into a McDonald's versus a Chick-fil-A.

Yeah. well, as you are looking out and like finding places to invest in this environment, and thank you for sharing those metrics, like what's exciting you most about what you're seeing in the medium term to the long term?

tom-donaldson_1_05-02-2025_144103: you know, getting back to one of your other questions that, that leads into this is, you know, the, the canary in the coal mine situation right now, I think we are getting ready, in my opinion, you're gonna go through a somewhat of a slowdown, if not an outright recession. And so it's gonna separate these good operators and good, uh, you know, management teams from, you know, you can have a, a thriving brand with a line line out the door, but if they don't have the efficiencies and the processes and everything nailed down, uh, they're gonna be, that's where it gets uncovered, right?

Like when, when the times are good, you know, [01:01:00] even a bad operator can get away with it because people are just showing up and, and paying.

dan-ryan_62_05-02-2025_144103: Mm

tom-donaldson_1_05-02-2025_144103: you know, when things get tough, uh, those, those processes and, and you know, efficiencies that they're not, that are not in place, it crushes these guys. And so you're gonna

dan-ryan_62_05-02-2025_144103: mm.

tom-donaldson_1_05-02-2025_144103: lot of. Uh, uh, during, during, as always, in a recession, you're gonna see a lot of tough, but, but we're in an interesting time because we, we went through Covid, which Covid was just a very weird spot for hospitality businesses. They got a lot of free money from the government. They kept a lot of people in business longer than they should have been.

It just under normal circumstances. Uh, and then you, you had everybody come, come roaring back to restaurants once when they, when they, you know, the, the everything subsided. Um, and now I think you're seeing a lot of players that have had the benefit of that if they either made it through Covid, uh, or, uh, you started after covid, um, or refinanced or bankrupted themselves and came back out. Um, you're [01:02:00] gonna see in this next slowdown another wave of, of hard time. And a lot of the restaurants never really got fully back on their feet. so, uh, I think, uh, there's gonna be some tough times

dan-ryan_62_05-02-2025_144103: And is that where your access to dry powder can really come in handy?

tom-donaldson_1_05-02-2025_144103: I think

for, yeah, for us, a recession as investors is not necessarily the worst thing. A, if

dan-ryan_62_05-02-2025_144103: Mm-hmm.

tom-donaldson_1_05-02-2025_144103: correctly, our, our investments are the ones that are going to be, uh, you know, the winners there. Uh, but, but b, it gives us an opportunity where our buying power, uh, can actually be the, the, the life raft that, uh, you know, an otherwise good chain or good brand needs. and, and I mean, the, the tough times, it really, I mean, it brings, they, they can be silver linings in all those. To give a good story. Uh, we own a, uh, a regional brewery that only sold, sold draft beer, uh, when Covid hit. And so they were only selling into restaurant chains in their own tap rooms. Uh, well, they went from a hundred percent [01:03:00] capacity to zero overnight due to the fact that, you know, everybody's closed.

So they had to let everybody go, uh, and just effectively just trying to, you know, reinvent their business model. But luckily, uh, you know. Good management team in place. They were part of a larger holding company with us. Uh, and they were then, less than two months were back at full capacity, um, you know, only in, uh, wholesale, in, in, in grocery stores when cans.

So they brought in mobile canners, turned everything around and ended up being a great story because only selling draft beer. There was no data on the velocity of their sales, which is a

huge

indicator for a brewery. And so the, in the beverage industry, that velocity of sale is, is the, by far, the biggest metrics.

And they didn't have it. Well, they found out that they had the, the second highest velocity brand on the East coast, uh, almost immediately after Covid. And it changed everything for 'em. So then at post covid, they were able to, to go back, not even [01:04:00] post covid during covid went into a huge growth mode. Uh, and so it was a great story coming out of what was a horrific, uh, situation.

dan-ryan_62_05-02-2025_144103: Cool. And then Nate, how about you? What's exciting you about medium and long term?

nate-edgerly--he-him-_1_05-02-2025_144104: so I, I'm really interested. I, I, so I think that what we're gonna see, is what Tom described, which is sort of a thinning out. Um, it's what we would expect to see under the circumstances, um, because restaurant businesses, most businesses are gonna be. Experiencing cost pressures and potentially, um, weakening consumer demand.

We're seeing it with the most recent Q1 data that's come out of the QSR sector. McDonald's, uh, was in the headlines the other day, uh, with their negative same source sales. Um, of course, as Tom mentioned, this is on the back of a huge surge over the past few years. So they've had extraordinarily high same store [01:05:00] sales, uh, coming out of 2020. Uh, so some

dan-ryan_62_05-02-2025_144103: Is that international or in the us?

nate-edgerly--he-him-_1_05-02-2025_144104: uh, it's, it's across the board, um, but

dan-ryan_62_05-02-2025_144103: Oh.

nate-edgerly--he-him-_1_05-02-2025_144104: in the

us. Um, and so what you're seeing is kind of a, kind of a differentiation, uh, kind of economic demographic profiles, in the restaurant space. So you're seeing, you know, the QSRs have a heavier customer base in lower income. Um, and obviously the more expensive concepts, higher price points, et cetera, are fairing a little bit better, um, than, uh, the ones that have, you know, uh, more challenge consumer profile. So, um, where that points me is to the concept of value. So I think that over the past few years, companies got a little [01:06:00] with pricing

dan-ryan_62_05-02-2025_144103: Yeah,

totally.

nate-edgerly--he-him-_1_05-02-2025_144104: a whole lot of, I mean, you know, they had windfall like profits, uh, coming outta covid. and uh, I think that's gonna catch up to 'em. all the concepts that I worked with in that period, I was like, let's, let's slow our role. Like we don't need to, let's, let's tail trail the market with respect to pricing because we don't want to be. When the tide goes out. 'cause the tide always goes out.

We don't wanna be caught with a bad value equation and the customer saying, what am I really getting for what I'm paying here?

dan-ryan_62_05-02-2025_144103: Hmm

nate-edgerly--he-him-_1_05-02-2025_144104: I, you know, with all that said, I'm very attracted to concepts that have a strong value equation where I can clearly see that the customer perceives value. Whether it's the quantity, food, quality of food, a combination, the overall experience in the unit disproportionately valuable to the customer, relative to what they have to pay for it.

dan-ryan_62_05-02-2025_144103: Hmm.

nate-edgerly--he-him-_1_05-02-2025_144104: And in order to offer that, it takes really sound, financial engineering on the backside. You're not paying too [01:07:00] much in rent, you're not paying too much for build out, you know, so you've been very conservative in those areas to allow for a little more elasticity in the, in the, in the p and l side of the equation. So that's what, that's what I'm looking for right now is, is those businesses and they're out there

dan-ryan_62_05-02-2025_144103: Another question on the investor side of things. Um, I know you have your internal capital that you're allocating, but you're also, if you go on your website, you're looking for accredited investors to invest along with you. Um, not many people know about this, and it's something I found out about six or eight years ago or maybe, maybe more.

Um, it's this idea of like a self-directed ira. Do you guys come up with those? And I don't know if any listeners have heard of it, but it's actually pretty cool. So for stuff like where you get a, a coupon or like that would get tax at ordinary income. So I that 10 to [01:08:00] 12% return on a, on on debt, really, you can, you can take some of your 401k.

Sep Ira. I'm not a financial advisor. I don't, I'm not saying do this, I'm just saying from my experience, um, basically create a self-directed ira. Many of the banks and everything don't want us all to do that because they just want you to be part of the assets under their management. 'cause they get paid, they make a fee off of that.

But it's actually quite an interesting way to allocate some capital and try out some things because you can get the ordinary income, but it's shielded from tax. And then if and when it ever converts, um, you can also, um, those gains are shielded there for when you're retired. So it's, again, it's a riskier profile.

Don't take all your, all your money to do it. But like, it's interesting for kind of like if you're trying out and testing out some asymmetric returns, do you have a lot of investors that know about that? I find that most people have no idea about self, self-directed Iris.

tom-donaldson_1_05-02-2025_144103: think there's a, [01:09:00] there's, once people know about it though, it is something they absolutely look into, and that is actually

dan-ryan_62_05-02-2025_144103: Hmm.

tom-donaldson_1_05-02-2025_144103: easy to do, is all, all you do is you simply, uh, contact, you know, whoever you're trying to invest with and, and have them, you know, there, there's, there's specialized companies that help, uh, you take that, the money that's otherwise in a t Rowe Price, kind of, I retire in, you know, 2045 fund. Um, and then just take a portion of it and have it directed into, uh, this investment. And

it just has to be

dan-ryan_62_05-02-2025_144103: Hmm

tom-donaldson_1_05-02-2025_144103: you know, with a, a, a proper trust provider that can do it for you. But yeah, it's, it's, I, I don't think a lot of people know about it, but it's a, it's a great way of testing out investments that, that you wouldn't otherwise be able to access.

dan-ryan_62_05-02-2025_144103: Interesting. And do you have a lot of, um, investors who are using that vehicle to get those coupons with you?

tom-donaldson_1_05-02-2025_144103: easy, uh, we actually have it all set up to where people can do it.

dan-ryan_62_05-02-2025_144103: Huh? Interesting. Um. This has been a super fascinating [01:10:00] conversation for me. I'm sorry if I fumbled around the beginning, but like I'm a little bit like I shared with you out over my skis, but I just think that for our listeners who, whether you're architects, designers, working on restaurants, or whether the listeners are thinking about investing in restaurants, I just think it's kind of a cool thing to think about as a, as a higher risk, higher reward, potentially, um, investment and just seeing the whole big picture, especially for the architects and designers, to just also think about the constraints and kind of returns on the projects that they're getting paid feed on, getting paid a fee on to just think about the bigger picture and then that the capital class, uh, that's involved in all of these projects that we're all working on.

tom-donaldson_1_05-02-2025_144103: and, and I would summarize it to where I think a lot of people view restaurants as, like you said, a high risk, high reward. I think that because most restaurants are one-offs, you know, one-off units, I think they're, there's a, there's a chance to look at these, you know, holding companies [01:11:00] that have not only larger chains, but also multiple, you know, brands and chains within the holding company. Those are. Substantially less risky. You're looking at more, you can, you can access the, the, the high rewards at a less of a risk profile because you're not facing a lot of the idiosyncratic risks and the diversification. Um, and, and a lot of the things that put these one-off units out of business. And so I

dan-ryan_62_05-02-2025_144103: Hmm.

tom-donaldson_1_05-02-2025_144103: market, when you hear a restaurant, you're like, yeah, I've got a buddy who, who opened up a place and, you know, lost his house. That's a normal story. not a normal story to see a large diversified holding company losing money when it makes investments in restaurants.

dan-ryan_62_05-02-2025_144103: Yeah. Huh. Um, Nate, any closing thoughts from you?

nate-edgerly--he-him-_1_05-02-2025_144104: yeah, I mean, I, you know, I, I love the restaurant business. Um, know, as we've talked about, I, I think that, uh, and I love food and beverage, I love all aspects of it. The [01:12:00] hospitality aspects, the design aspects. I mean, it's all endlessly interesting. It's one of the most comprehensive, uh, business models in terms of what it touches.

I mean, you have to. an expert marketer. You have to be an expert designer. Like you've gotta, you know, the, the, the model necessitates that you answer these critical questions. It's not like some software and sell it to corporate clients. I mean, it's really, um, it's really just a rich and interesting sort of business model. you know, like Tom said, I think that our strategy is, uh, tried and true uh, you know, it, it mitigates a lot of the risks that are associated with this industry. And, um, I think that, uh, know, I think that the best days are ahead for the restaurant industry in general. Um, I think we're gonna see increasing emphasis [01:13:00] on hospitality in the context of restaurants.

People want human connection. They want experiences. Um, and, uh. Yeah, I think we have a lot to look forward to.

dan-ryan_62_05-02-2025_144103: Awesome. Um, if people wanted to learn more about you or connect with you or learn more about Enzo Group, um, what's a good way for them to do that?

tom-donaldson_1_05-02-2025_144103: Best is probably starting off at the website, enzo group inc.com. Uh, that'll probably get you everything you need as far as contact information, et cetera.

dan-ryan_62_05-02-2025_144103: Cool. We'll put it up, uh, there and we'll put all your LinkedIns and everything else in there and, uh. I just wanna say thank you for helping me understand the restaurant business from an investor perspective, um, and the challenges there of scale and growth and returns. Um, so I'm appreciative because I love, one of the reasons why I love doing this podcast so much is I get to learn and share that learning with others.

So I just wanna say a heartfelt thank you to the both of you.

tom-donaldson_1_05-02-2025_144103: Well, we appreciate you having a song.

nate-edgerly--he-him-_1_05-02-2025_144104: yeah, thank you. This has been a [01:14:00] great experience and, uh, interesting conversation, so thank you.

tom-donaldson_1_05-02-2025_144103: The next one

dan-ryan_62_05-02-2025_144103: Awesome.

tom-donaldson_1_05-02-2025_144103: at a restaurant, maybe

even having a

nate-edgerly--he-him-_1_05-02-2025_144104: Yeah,

dan-ryan_62_05-02-2025_144103: I think so. I think that would be a great, a great goal. Um, and we'll have to follow up on that or after we stop recording we can talk about that. Um, but also I want to thank my listeners, thank our listeners. And because without you, I wouldn't be talking to these great guys and helping you kind of figure out.

A better understanding for our hospitality industry. It's so multifaceted. There's so much there. So please if, if you think someone else could benefit from this, pass it along. Don't forget to like and subscribe and leave comments and feedback. It helps with all the distribution so that we can continue to impact all of our listeners.

So thank y'all