Khan-fidence

After transforming two moribund Church’s Chicken franchises, Aslam Khan thinks he’s ready for a bigger stage.

By David Farkas, Senior Editor -- Chain Leader, 2/1/2005

President and CEO Aslam Khan brought Falcon Holdings’ 101 Church’s Chicken units back to profitability through reimaging, training and technology-driven controls.

Khaled Habash now laughs as he talks about the day in December 1999 when President and CEO Aslam Khan announced that the new company was moving headquarters to Oak Brook, Ill. Only two weeks earlier Khan had assumed control of money-losing Atlanta Franchise Development Co., a Church’s Chicken franchise whose offices were in Atlanta. The restaurants, however, were in the Midwest.

“On Friday at noon, we started loading computers, files and furniture on U-Hauls,” recalls Habash, chief operating officer of Falcon Holdings. “Within 15 hours we were in Chicago. It was tough, but on Monday a few of us were working.”

That’s Khan for you. To hear him talk about running a business, almost nothing seems beyond reach. He has, after all, since turned around the franchise—$5 million in the hole when he arrived—and made a run at acquiring the franchisor. Khan can picture himself operating a large restaurant chain, pointing to his industry know-how and sophisticated reporting systems as proof he is capable.

For the moment, however, he merely boasts that Falcon Holdings is in such good shape operationally that it could add 38 restaurants without appreciably driving up G&A costs.

Maybe growing up dirt poor in northwestern Pakistan and rising to manage the American Embassy Club in Islamabad by age 30 instills such confidence. He arrived in Los Angeles in 1986 after living briefly in Budapest.

“Sometimes you just have to act quickly,” Khan says of the move five years ago.

“I was sitting in the [former] company’s penthouse office in Atlanta looking out the window. Suddenly I realized I don’t belong here. I’m a chicken man!”

Good Move
Not that Khan doesn’t appreciate the finer things success has brought him: Lexus, private club membership, expensive tailoring. With his rimless glasses, beautiful suits and silk ties, the 51-year-old chief executive could pass for a business professor. But appearances are deceiving. Khan is a dyed-in-the-wool operator who still monitors grease buildup on store counters. “I’m a clean freak,” he says. “I like neat and clean restaurants with friendly environments.”

That point hasn’t been lost on the financial community. “Some CEOs are full of crap. They tell you they are in their stores every week. Well, Aslam actually is,” declares Wells Fargo Managing Director Brian Roach, who helped Falcon Holdings refinance an existing loan with a $22 million credit facility last summer. Khan and his backers, New York-based Sentinel Partners, assumed an expensive loan in the deal to acquire the ailing franchise. The company has little debt.

Today, Khan operates 101 Church’s Chickens in Illinois, Indiana, Michigan Ohio, Missouri and Virginia, chiefly in low-income neighborhoods. Church’s counts African-Americans and Latinos as its best customers. In fact, many of Khan’s unit managers are blacks and Hispanics. Most of his senior staff, like Khan, is from the Middle East.

Since taking over the territory five years ago, Khan has added four restaurants and sold two underperformers, in Chicago and Detroit. “CVS wanted them so badly we made out pretty well,” he says.

Crucially, he brought the failing system back to profitability through reimaging, training and tight technology-driven controls. Last year was the best so far. Overall same-store sales rose above 5 percent, though some markets did much better, the numbers-shy company says.

Khan says he distributed $1 million worth of store-level bonuses and awarded half the store managers in Detroit’s 19 units with IBM ThinkPads. “Bonuses are his strong point. He’d give managers one every period, like getting an extra paycheck every month,” says Best American Hospitality President Cameron Habeeb, who worked for Khan in Los Angeles in the late 1990s. “Everyone was extremely motivated.”

“We finally did what we always wanted to do,” Khan explains. “We not only have great success in the numbers but in turning our people into knowledgeable businesspeople rather than general managers.”

The Motor City—once the company’s toughest market—now accounts for 40 percent of operating income, Habash says. St. Louis and Indianapolis also contributed, pushing EBITDA up 16 percent in 2004. “If you see our P&L, you’d be astonished,” Khan says. Company officials, however, won’t disclose specific dollar amounts for operating or net income.

Support Group
Sentinel Partners, which owns two-thirds of Falcon Holdings, demonstrated its confidence in Khan, who owns the other third, last spring when it bid $360 million for franchisor Church’s Chicken, intending to install him at the top. “Aslam has a great deal of passion for the brand and also a great deal of knowledge,” declares Sentinel Managing Partner John McCormick.

“If I were to go to Church’s tomorrow as CEO, I wouldn’t change a bit in their plan,” Khan explains. “I’d tweak. Don’t alienate them [by showing] you are better. Show them they can do a little bit here and there.”

Khan and his backers, however, were outbid by Crescent Capital Investments, an Atlanta-based private-equity company and an arm of First Islamic Bank in Bahrain, which paid $390 million for 283 company units and franchise rights. The deal closed Dec. 30, 2004.

Harsha Agadi, Church’s new president and CEO, calls Khan a “model franchisee” but doesn’t sound impressed. “Aslam’s stores no doubt do extremely well, but that doesn’t mean we will sit and wait for him to beat us,” he says.

Khan says his restaurants beat corporate-run stores by two or three points “in every category.” Agadi and former Church’s Chicken President Hala Moddelmog, whom Agadi replaced, refused to comment.

Agadi, however, is in awe of Khan’s reporting system. “It’s one of the best I’ve seen,” he says. “If sales are up or down in a given day or even hour, he knows it. If you are doing that with 10 stores, great—but with 100, it’s fabulous. Only a handful of chains are at that level.”

Information, Please
No surprise then that Falcon Holdings’ information technology department is a few feet from Khan’s office. According to CIO Abdallah ElSheikh, the built-from-scratch system is “very transparent,” allowing users of the company’s intranet to glean huge amounts of data. The system collects the usual stuff—sales, discounts, voids, overages—from POS machines. Yet it also posts information on taxes, cash variances, nonresettable gross sales, white-meat vs. dark-meat consumption and other data that help laptop-equipped supervisors manage costs, ElSheikh says.

“Nothing in our company is subjective,” says Network Manager Mahmood Ahmed. ElSheikh says he monitored data from a cyber cafe in Saudi Arabia during a pilgrimage to Mecca last year. Such attention to detail dropped food costs to 30.7 percent, despite the fact chicken prices rose 16 percent, officials say.

Both executives are helping Detroit store managers learn to access reports on their new computers. “The managers see the laptops as our generosity. But it’s partly selfish, too. We want them to make better decisions for us,” says Habash.

Success in Detroit as well as St. Louis and Indianapolis has brought financial stablity. Khan can now afford to think about expanding. It could prove crucial. While landlords lease 50 of the units, Falcon Holdings owns the rest, which it will likely sell in a sale-leaseback deal. That would leave the company with considerably less cash flow, limiting its borrowing power. As of press time, observers nonetheless believed a deal was likely.

“Buyers are paying top dollar these days. It’s a good time to monetize real-estate assets,” offers CNL Executive Vice President Robb Chapin, whose company has managed $275 million in sale-leaseback deals this year.

“Anyone who owns real estate in this environment and is doing financial engineering must entertain a sale-leaseback,” declares Mark Saltzgaber, a venture capitalist and board member at Lone Star Steakhouse & Saloon.

Sentinel’s McCormick claims no decision has been made to sell the properties or to formulate an exit strategy—another looming transaction. Khan expects Sentinel to “do something” in the next year or two. “It’s just the nature of the beast,” he says. Meanwhile, any infusion of capital will be used to retire existing debt and expand, he says. The company is paying for the reimaging of its 28 Chicago units out of cash flow. It might also open three or four units in 2005 in Ohio and Indiana.

Company officials are not worried that taking on new stores will push up G&A.

“If we added 38 stores, we would probably have to bring a [part-time] person back into accounting,” says CFO Giovanna Frangella-Koning.

Let’s Make a Deal
Yet Falcon Holdings may end up with more Church’s units should the franchisor, which has the first right of refusal, not want to buy the restaurants back from ailing franchisees. Frangella-Koning figures three times earnings is an appropriate price range these days. She and Khan say they consider a deal a week and have visited several companies. But so far, Falcon Holdings has made no commitments.

Khan only wants to buy distressed properties with potential. No surprise: His reputation stems from turning wrecks into winners. “When we met Aslam, he was running 50 [Church’s Chickens in Los Angeles],” recalls McCormick. “He had turned those units from worst to best. We backed him in a 100-unit deal. He turned those stores from worst to best—and the step up was seamless.”

But even if Falcon Holdings doesn’t make an acquisition this year and even if its 51 stores are sold in a sale-leaseback arrangement, Khan could still be sitting in the catbird seat. The company’s balance sheet remains healthy, and Khan’s reputation as a turnaround specialist is spreading. Says Chapin: “We would look hard at anything he is doing.”

Yet Khan, who has worked for Church’s for 16 of the 18 years he has been in this country, already sounds confident about his future. “I’d like to run Church’s at some point,” he says. “If not at this point, I may be part of Crescent Capital’s exit strategy. I’m going to position myself to be part.”