Debt, lawsuits, investor woes -- and a vision: That's how Saxbys began

Nick Bayer's Saxbys Coffee story sounds almost like a fairy tale. Blue-collar background, tapped for an Ivy League education, deciding he wants to run his own business, miraculously landing a job (thanks to that Cornell pedigree) in a business consulting firm to learn business from the inside. All that is true, but there were also lawsuits, struggles with investors, being so broke that rent became a challenge.

I picked out a few highlights from the Leadership Agenda interview published in Monday's Philadelphia Inquirer, but what follows below are longer excerpts from Bayer's entrepreneurial journey. They make excellent reading, so grab a cup of coffee and ...

"I didn't have an entrepreneurial education," Bayer said, "so I made a lot of mistakes. But this wasn't a mistake: Quitting my consulting job, emptying my back account, running up $150,000 on my American express card. It was a different age. I was 26 years old. You pay that minimum amount and magically, my limit kept going up, thank God. I would never have gotten this business off the ground if they hadn't done that. You couldn't do that today. Nowadays, there is no way you can do it. I never forget the day I opened that statement and I owed $150,000, but I didn't lose a minute of sleep on it. I had this vision. I was so driven and determined to accomplish it, that I knew things I would work out.

Question: So many entrepreneurs begin on their credit cards.

Answer:  Absolutely. That was my only way. I probably had $60,000 in savings at that point. I was too proud to ask any family or friends for money. I would have never done that to my parents. My parents were starting to really churn forward and be able to have positivity in their life from a financial perspective and I would have never, never put that at risk. I was a young person. I could tolerate that risk. If I failed, I'm 27 years old. I tried the entrepreneurial thing. I have an Ivy League degree. I'll land back on my feet. That's what I would tell myself.

Q: You incorporated in 2005 and opened in Atlanta, all with your own money.

A:  My original idea was to franchise for two reasons. One, I love helping entrepreneurs. I always have and that's what franchising gave me the opportunity to do. But two, I didn't have the capital or the access to capital to build more than that tiny one in Atlanta, so if I was going to grow, franchising was going to be the only vehicle. And look, I was not, ready. I thought I was ready to be a great franchiser, but this company was not ready to be franchised.

Q: Sounds like a plan.

A: So, advice I give young people: People say I want to open my first unit and then I'm going to start franchising it, but I say, `You are going to open your first one and then you are going to run it for a year. Then you are going to call me up and we're going to go through your financials. We're going to look at it, and then my encouragement -- I'm going to tell you right now what my encouragement will be -- run it a second year. Watch how much better it's going to be the second year. And now I'm going to encourage you to run it a third year. Then, after year three we can talk about franchising.'

They say, `But Nick, you didn't do it that way.'

Q: Good point, that was my question. From what you told me, you got an investor in the nick of time. What happened?

A:  I was out of personal resources. I had run the business on my own money without collecting a salary personally for two years. I was literally tapped out. I couldn't go any farther. Finally, after two years, I sat down and wrote a business plan By that time, I already had four cafes open, one small little corporate one, three franchises. We had sold a bunch of franchises. I had a pretty good feel for the business by that point. That was the one advantageous point of writing a business plan then. It was based on reality. But, I realized that based on the trajectory of growth on the franchise curve, I was two years away from actually being able to at least break even and cover my overhead. And then profitability would come. That was the business plan I pitched. I used Cornell connections. I went to 19 different private equity capital funds.

Q: How did that work out?

A: I had word that a private equity company in Chicago wanted to meet with me. They had read my business plan. So I'm flying there and I have to pay rent on my apartment, and I have to get this flight, so fortunately, I had accumulated all these miles. It was dire.

Q: So did you get the funding from those Chicago people?

A: No. I had gone to 19 different meetings and the last gentleman was named Larry Kolgoynt with Winona Capital Management in Chicago. He's a legend. He's so successful in investing in our space. He pulled me aside afterwards and said, `Nick, there are a few rules in investing and number one, we invest in people. I would invest in you. I like you. I would bet on you. Two, we have to feel good about the industry you are in. We love the coffee industry. Coffee industry is booming and we think there's a lot of opportunity to grow. Three, you have to look at the dollars in terms of the deal.'

Q: I detect a problem here.

A: At that point, I couldn't show comp sales. At that point, none of my cafes had been open 366 days. He said, `It's just too early Nick. We invest in $25 million increments.' I was trying to raise $500,000. He said, `What would you do with $25 million?'

I knew with the first $500,000 exactly how I'd use it. `The other $24.5 million, probably nothing good,' I said. He laughed. `That's part of the reason I like you. You're candid. You're just too small for me right now.' He said, `Nick you have to find an angel investor.'

I literally said to him, Larry, what is that? What do you mean?

Q: Wow. You didn't even know the term. So did you find an angel?

A: Literally, the next day, my best friend from college had a property he really wanted to make his first Saxbys. It was in Lansdale. He said, `Nick, I really want this. We can be successful. My landlord won't take the meeting, but I know if I tell him the CEO of this emerging company is coming to Philadelphia, he'll meet.' So, instead of flying from Midway to Atlanta, I flew to Philadelphia. I went with my best friend, who is now my CFO and we went and pitched this landlord who ran that shopping center. I said, `Here is what Saxbys is doing. We would be so grateful if you give us this lease. We could open up our first Saxbys in this market.

He said, `Done, it's yours.' But, he said, `I'm more interested in this business. How can I get involved in the bigger business?'

Q: Your heart must have been in your throat.

A: I said, `Well, if you want, I have another pitch to walk you through.' And literally, an hour later, he said, `How much are you looking to raise?'  I said, `$500,000.' He said, `I'll be your investor.'

Literally, it was like that, I had 19 private equity meetings over the course of the previous year and I went through so many pitches. I put my suit and tie on and I went to all these pitches and literally, in one hour, he said, `This looks pretty good.' This is just what Larry had told me, you need to find someone who is entrepreneurial.

Q: Wow. You told me he was a real estate investor in shopping centers based in the Philadelphia area.

A; Originally, he was going to just invest in the business and I could stay in Atlanta and grow the business there. But he called me one day and said, `I know real estate and I know real estate in Philadelphia. Real estate is going to be critical to your business. I can teach you real estate in Philadelphia, but you need to move here.'

Q: By that time you moved here at the end of 2007, we were entering the recession and real estate was tanking. That couldn't have been good for your investor or you. You told me that the investor didn't end up investing as much you hoped he would, but even so provided a lot of help.

A: We got stability. I started getting a paycheck for the first time. I had gone two years without. I started having normalcy. I could start hiring some people. We could start becoming good franchisers.

Q: Then more trouble struck.

A: We were sued by a former business partner of mine.

Q: You connected with him because he was the owner of a coffee shop in the suburbs of Denver, the place where you got the inspiration to go into the coffee business.

A: That was my bridge into the coffee industry. He knew the coffee industry and I was going to strategically grow this business. He became a business partner. He was never an investor. He had equity in the business because of his knowledge of the coffee industry. The transition of one ownership group to the one that was based here in Philly was bad. It didn't go well. It was totally legal. It was done according to bylaws and organization. But, it hurt the old partner's feelings

Q: That hurt was expensive, wasn't it?

A: That litigation taught me so much about business and most importantly, to rely on human interaction. Get to know people individually before you go in business. I literally sign every lease face to face with the landlord, so they get to know me and I get to know them.  Then I at least have that interaction to rely on. So when things go wrong, and they will, they will always go wrong, I can get back on the plane, I can walk across the street and I can sit down with someone and say, `Let's talk about our grievances. I want to resolve things without going into the court system because nobody wins that way. Nobody wins in the court system. I won [the partnership] court case. Over all, it cost us four years and $2 million. I won the case. What did I win?

Q: What did you win?

A: Four years of angst. Four years of that black cloud hanging over my head. Two million dollars that I could have invested into this business. The fact that we had to file a reorganization to deal with this. What did I win? I didn't win anything.

Q: Sounds more like losing. But what did you gain at the end?

A: What we won was a free start. A new start. A fresh free start is what we won.

Q: At one point you considered just throwing up your hands and walking away from the whole mess.

A: I could have very easily walked away. People counseled me and said, `Why would you do this?' Take everything you've learned and go in a different direction. Start a new company. You've learned so much. You have a good Rolodex of people, yada, yada.'

But I believed in the company and secondly, I had about 20-plus franchisees who believed in me. If I pulled the plug, I'd be pulling the plug on them. Again, my one asset is my people skills. I could not do that to them. I had a very good friend, a good friend of one of my college buddies that became one of my first franchisees, Saxbys in Georgetown. He flew up to see me when we were in the midst of all this and he's the one who reminded me, `Nick, I know you are fighting with the old partner on this. You guys are being somewhat selfish and are thinking about only yourselves. I and [the other] franchisees invested our life savings in this.'

That was the light bulb that clicked on for me in this. It's worth fighting this fight and it's worth winning this fight.

Q: Wow, a nightmare. Then what happened?

A: It sounds so weird to say, but this was probably the best thing that every happened to this company, getting the free start. Coming out of reorganization, MVP Capital Partners (in Radnor] group invested in us. It was taking a fresh start,  taking five years of making a few good decisions, a lot of bad decisions and then having a financial partner that said, `We invest in entrepreneurs. We believe in you.'

Q: How did they see your experience?

A: They said, `You are an experienced start-up. Let's use the experience, and treat this as a start-up business and build it the way we want it. That's how we've approached this business."

At 28 cafes now, Saxbys plans to open 10 this year, including at least two in Philadelphia. Bayer is projecting revenues of $15 million in 2015. The company, which started as a franchising concept, is transitioning to more corporate-run cafes.