Co-Founder and Chief Investment Officer of The Bakery Shop Mr. Sameh El Sadat talks to Law Today about his company’s strategic growth, overcoming challenges and the importance of long-term credibility in establishing a successful business.

TBS is a huge success story and your organisation is famous for its rise to prominence in the Egyptian market. Which factors in your business model, your strategy and your approach do you think were most instrumental in making this happen?

There were many things. Firstly, speed of execution. Three of us, childhood friends, had the idea to start our business in March 2008 – myself, Tarek El Nazer and Basel Mashhour. There weren’t a lot of bakeries in the market so we wanted to introduce a new bakery that would become synonymous with the best croissants in Egypt. It took us four months to put everything together and open our first shop.

Secondly, bringing on board our know-how partner as a partner. None of us had a bakery background so we wanted to bring on board someone with strong know-how willing to start a small business on the side. In April or May 2008 we were introduced to Yasser Abdel Sallam, who at the time was the head of the bakery business in the Four Seasons hotel.

Our priority in positioning at the beginning was marketing rather than scaling. So we targeted the North Coast in the summer, opened our first store and it was a great success from day one. It was an emotional thing for us, starting our own business. After we concluded the summer vacation we came back to Cairo, and we knew we had to take certain steps to make it grow.

We did two main things: Tarek and Basel were courageous enough to leave the corporate life early on. You know that in Egypt, for a business to succeed the owner has to be there. Then we saw that our branding wasn’t strong or professional enough, so we reinvested all our profits from that first summer into creating the TBS brand that you see today. We were very lucky that we bumped into a branding freelancer who created a very good brand.

We started looking for locations – the first being in Zamalek opposite the Gezira Club. We wanted to remain in our target market so we went to AUC where we were introduced to Cilantro, at the time the biggest coffee chain in Egypt, with all the food rights of AUC. Cilantro liked the idea of opening a TBS in AUC very much and we were approached by the owner to acquire a stake in the company. We ended up taking a decision which I can see now looking back was the right decision but which was very risky – we sold them 51% of the company. Because of value-added discussions with Endeavor, who flagged to us the risk of selling 51% of the company too soon, we were determined to one day get these shares back.

Working with some of our lawyer friends advising us on how to draft the SPA (Shareholder Purchase Agreement), we went into the partnership and we as the Founders then owned 49%. Our rationale for doing this was that instead of focusing on building a manufacturing facility and back offices, we would focus on building the brand and offload all those services to Cilantro. It was a great milestone in our lives; it gave us a quicker learning curve and it helped us grow and scale rapidly.

In the years that followed, a lot of changes happened. Yasser decided to leave the Four Seasons and join TBS full time. Tarek and Basel told him to come on board because being an owner focused on quality he would maintain the key value proposition. I moved to Dubai and stayed there for four years with the Abraaj Group, working in Turkey and on deals in different parts of the MENA region.

2013 came and Cilantro started having some operational issues due to management changes. I was almost hitting the ten year mark in my career, so I took a somewhat risky decision. I moved back from Dubai with one target in mind – to buy back the 51% acquired from us by Cilantro in 2010.

Tarek, Basel and I worked on a plan for how to buy back the 51%, which the owner of Cilantro really couldn’t turn down because he made almost ten times his investment in three years. He agreed to the offer and gave us six months to secure the cash. We met with about four investors and were very transparent about the fact that we were buying 51% and giving up only up to 49% of the company.

A lot of people were interested but the best offer we got was from HM Partners, who took 40%, so we the Founders got back the majority. At that time the revenue of TBS was 35 million pounds, with EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of around 2.5 million, and we had around 15 stores. Now in 2016 our revenue is around 100-120 million pounds and our EBITDA is 12-13 million. This is in the worst three years in Egyptian history, following two Revolutions, devaluation and people leaving the country. I’m very proud of this story and this is why our team of 700 employees is very loyal – because we have survived so much together.

If you could go back to 2008 or 2009 and give yourself advice on how to overcome any legal and commercial challenges you faced in establishing and growing TBS, what advice would you give?

TBS stands for The Bakery Shop, but it also stands for Tarek, Basel and Sameh. If I could go back I would have added the Y, to include Yasser because he was the know-how partner that started this with us. Yasser is very ethical and dedicated; he infused the Four Seasons culture of excellence inside TBS.

Procedures and bureaucracy are big challenges in setting up a company. Obtaining relevant permits is an issue and to get the licence for our factory we had to pay millions of pounds; taxes don’t encourage small companies to grow. The regulatory environment in Egypt paralyses people from starting their businesses. But with hard work, if you crack it, it turns into a barrier for entry for anyone coming after you. Being an entrepreneur in this market requires you to do anything ethical to get to what you want. As long as you get there, it can be done.

But we adopt a long-term view. We are building the company to be a proud and strong local player that perhaps in time will be regional or even global. I am mainly involved in the investment and finance side of the business. We went to KPMG because we wanted top-notch auditors, and we went to E&Y and PWC for our taxes. This was our mind set in 2008; we wanted to build an organisation that we would one day proudly be able to say was 100% Egyptian as a brand. We are not after quick wins; we are interested in long-term credibility.

The choice of a legal firm – or the lawyer himself – dictates a lot. We were blessed to have lawyer friends when we started, who are now working as in-house lawyers or in the country’s best law firms. Choosing the best corporate lawyer or having the mind set to accept input from lawyers is very important. TBS has been working with one lawyer for the last ten years and no matter where he goes, we follow him. Being entrepreneurs has made us bolder in trusting in the relationship rather than the brand name. If we have a strong relationship with the lawyers, we would follow them anywhere. Two such super lawyers are Mohamed Gabr and Ehab Taha.

Which qualities and skills do you prioritise in your lawyer?

Firstly, if he is ethical. If he is on my side, no matter what the net worth of the person on the other side of the table, and if he will give me the proper advice, not so as to generate business for himself. And those people I have named have proven themselves ten times in a row.

Secondly, commercial sense. A lawyer might be working in my best interests but might not be able to get a deal done. There are many excellent lawyers who know the law. But sometimes you draft agreements, put them in a drawer and they never come up unless for example you have an exit event. If you then see a hurdle in one of the clauses that restricts something from happening because of legalities, you have a problem. Not all lawyers have the commercial sense to satisfy our business leads in legal terms. Egyptian laws are already very restrictive; we don’t need another layer of complication from someone in the field.

Was there anything that was particularly restrictive when you were starting out and how did you overcome these restrictions?

None of the shareholders’ agreements in today’s world, which take into account investment, value creation and exit, are recognised by Egyptian law. Hence we needed to move offshore; all businesses that you see in Egypt are working offshore. We started the offshore company very early and setting it up was easy and fast. With the dollar rates today it is becoming more expensive but we need to invest this money because we are getting into partnerships with people and we need to have proper agreements to refer to so that if anything goes wrong we know who owes who what. We invest this money because Egyptian law does not allow us to do this here. If Egyptian law allowed this and it was fast and efficient, why would I go offshore? We need this flexibility but we are an Egyptian company and we operate using Egyptian currency with no intention to repatriate profits outside of Egypt.

These are problems that need to be solved immediately. I love this country; I was living the shiny life in Dubai and I chose to come back because there are great resources here but they need to be utilized properly.

About a year ago, Springboard Investment Management Ltd. advised TBS to acquire The Four Fat Ladies. How has this acquisition helped the growth of both entities?

This was a strategic decision to grow the company away from croissants. Our product mix today in TBS and in Delicious Bakery inside Seoudi supermarket is all bread, croissants, sandwiches; but we don’t sell pastries. Our decision to acquire The Four Fat Ladies enabled us to include the pastry range in our business. They are a good brand, started by three ladies who had excellent products, so we invested in and proudly integrated them. The owners are extremely focused on building the brand and everything else is being built by the team here. The idea was to replicate the success of TBS with a new brand. Now we have three stores open and two under construction.

Can you discuss TBS’s strategy with regard to franchising?

At this moment we have 42 stores, all fully owned and operated by TBS. We were completely against franchising – the stories we had heard in the market said that if you franchise a brand it begins to lose its value. We were approached by the biggest Saudi real estate players and by entities in the UAE to franchise. We have put these plans on hold because we believed we were not ready yet for this stage; there is still opportunity in Egypt to grow. However we were approached by Total, the French retailer. Total has around 270 stations and they are growing. They had a good value proposition. They suggested giving a master franchise – not in one store but in all those stores. This made us think because it is still in the Egyptian market; we could supervise our brand carefully but they were giving us the scale we needed. So we invested in the production facility to make it ready for Total and the huge expansion plan they have, and we started with them three years ago. Today we have nine stores – and three or four under construction. After we looked at the 270 stations we told them we would be very happy to join them in 70 stations that fit our brand. So we signed for the 70, we opened nine and starting 1st January 2017 the existing nine will be franchised and operated by Total. Internally we are now working on a different brand that will allow us to discuss with Total taking all 270 stations. That is the kind of franchise we are interested in. We are interested in bulk deals and people who add value.

Does the group plan to further TBS plan to expand locally and regionally?

Yes we are planning to spin off different categories of brands into different cities and to go regional but we are very selective on regional opportunities. A lot of people come and flash money in front of us but we want a value-added local partner. EFG Hermes is currently offering us valuable advice on teaming up with the best company for our expansion plans.

Do you see any remaining gaps in Egypt’s food & beverage market?

There are huge gaps, yes. I came back from Turkey last week, after meeting the top bakery owners there. The demographics of the two countries are similar but if you use Turkey as a comparative market I can tell you that in Egypt we are at maybe 5% of where we should be. All those bakery players are running after us to partner up in Egypt. Why? Because we have the platform and the market opportunity is huge.

How do you think the Egyptian legal industry could effectively support the growth of more food & beverage businesses so that they could scale in the way TBS did?

The regulatory frameworks need to accept flexibility. 99% of the food concepts in Egypt open one or two stores – five at the most because of huge burdens. One of them is the legal framework.

I encourage private lawyers to give back, to freelance at discounted prices, do pro-bono work. They should incorporate a social mind set; they should give small companies free advice on how to grow. Sara Hinton in Ibrachy & Partners, a British woman who has been in Egypt for many years, stood with me in past situations and now today we work together on deals worth 300-500 million pounds. So it’s an ongoing relationship.