The year was 1958. Former TV-motion picture specialist for the government turned entrepreneur, Al Lapin Jr., started a small pancake shop in downtown Los Angeles. Flipping flap jacks himself, he turned International House of Pancakes into a success from scratch.
A year after opening International House of Pancakes, he began franchising the brand. By 1961, the company had eight owned operations and eighteen franchisees. That, however, wasn’t enough for Al.
The conglomerate craze, pioneered by Harold Geneen at ITT, was just underway. Lapin learned his “ABCs in operating the pancake franchise” and thought that he could successfully apply his winning franchise formula to any franchise model. Any industry would do for his company, later renamed International Industries, and he was in a hurry.
From 1962 to 1965, the first year that Industrial Industries became trading on the AMEX, the company grew revenues from $4 million to $20 million and profits quadrupled. Over a few short years Lapin acquired a sprawling web of franchising operations from Sawyer College, a franchise chain of for-profit schools, to First National Credit Bureau, a chain of credit collection businesses. Including International House of Pancakes, International Industries ran twenty four franchising operations in all by the late 1960s.
Lapin looked to be an intelligent fanatic having successfully rode the franchise acquisition wave. But when you are partnering with someone riding a wave, you need to have a good feeling if the operator is lucky and able or lucky because they are able. The former is not enduring while the later is. And when you notice someone on a large wave trying to paddle faster, they likely are just lucky and going to fall.
By 1968, Al Lapin was trying to paddle as hard as he could. His acquisitions became far fetched and foreshadowed what was to come. That year he swapped $100 million in International Industries’ preferred stock for a closed-end fund named Champlain National Corporation. The shell held $40 million in cash and 197,000 shares of Norfolk & Western Railway. During the announcement of the acquisition he announced, “The world is for sale these days; all you need is the downpayment. Now I’ve got it.”
Al wasn’t joking. In 1969, shortly after the merger with Champlain National was completed, he made a $221 million bid for Ramada Inns. The price was roughly 60 times Ramada’s 1968 earnings, a hefty price. Ramada’s founder and CEO M. W. Isbell had recently retired although came back after his replacement died nine days after his appointment. Fortunately for both companies, Isbell balked at Lapin’s deal.
Rapid expansion had put International Industries in a corner. Any adverse market conditions could severely impair the business which came in 1970. Lapin had to change revenue recognition from when the initial franchise agreement was made to when the retail unit was actually opened. Shares fell from a high of $58 in 1969 to $19. Then, several European creditors called half of the company’s loans leaving the company with few options. Lastly, a class-action suit filed by franchisees charged that the company forced them to pay inflated prices for equipment and supplies.
Similar to what happened to Harold Geneen at ITT, Al Lapin was trying to take a shortcut in growing International Industries. Instead of growing International House of Pancakes only, at a manageable rate with internally generated capital, Lapin opted to using large amounts of debt to acquire other franchise businesses. He was at the mercy of his creditors. The overheated growth eventually led to growing pains, huge losses ($35 million in 1974) and sent the company near bankruptcy. Lapin resigned from the company in 1973.
International House of Pancakes (IHOP)
Now if Al Lapin took the slower route, he could have turned the International House of Pancakes into the IHOP that we know today.
After Lapin resigned from International Industries, Freidrich Jahn, the founder of Austrian food chain Weinerwald, took the company private. He too added to International Industries’s, then known as IHOP, debt and could not turn the business around. Eventually the Swiss holding company Svido-Abwicklungsgesellschaft, consisting of Jahn’s creditors, acquired IHOP.
Kelso & Co. eventually bought IHOP in 1987 and turned the company around. Interestingly, Louis Kelso, the founder of Kelso & Co., was the originator of the Employee Stock Ownership Plan (ESOP). In turning around IHOP, Kelso & Co. utilized all of the key ingredients among intelligent fanatics: promote an ownership mentality, focus on quality leadership teams and innovation. All characteristics helped further grow IHOP into the company we know today.
Since IHOP’s 1991 IPO, the company, now known as DineEquity (DIN), has returned 11.87% compounded annually. Over the same time frame the S&P 500 returned only 7% compounded annually.
Tortoise and the Hare
In the fable the Tortoise and the Hare, the rabbit outruns the turtle in the short run, but in the long run the turtle wins. Al Lapin was the perfect Hare and can be contrasted with the perfect Tortoise, Warren Buffett who has taken his time in building Berkshire Hathaway.
Al Lapin grew his net-worth from $3,200 in 1951 to $50 million in 1969. Contrast this with Warren Buffett’s net worth growth from $20,000 to $26 million over the same time frame. Lapin’s net worth took a different direction than Buffett’s. By 1971, his $50 million fortune shrunk to $50,000 and after three failed franchise businesses – Uncle John’s Family restaurant, Quickprint of America and Pizza Playhouse – he declared bankruptcy in 1989. Buffett on the other hand was worth $4 billion.
Al Lapin Jr. story reminds us once again, there are no shortcuts to long-term business success.