Special Report | September 2017 | By Nicole Duncan

How Back Yard Burgers Returned from the Brink

Reaching 30 is no small feat, but Back Yard Burgers has hit the milestone with renewed energy—and a fresh infusion of capital, to boot.
Muhsin Muhammad (left), Edna Morris (second from left), and Denis Ackah-Yensu (right) are managing directors at Axum Capital Partners, a Charlotte, North Carolina–based private equity group that invested in Back Yard Burgers. The burger chain is helmed by CEO David McDougall (second from right). Libby McGowan
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The more a brand has been around the block, the greater number of bumps, booms, and bruises it has earned. With each passing year, the challenges shift—from a fledgling operation finding a foothold to a legacy brand fighting to stay relevant, and everything in between.

In the three decades since Lattimore “Lattie” Michael first opened a double-drive-thru restaurant in Cleveland, Mississippi, Back Yard Burgers has had quite the ride. From the start, it differentiated itself from the competition by invoking the ever-popular back-yard grill experience with its simple menu of made-to-order Angus beef burgers. That focus has remained largely unaltered, but along the way the brand has had its fair share of triumphs and failures; detours and course corrections; soul searching and persevering.

It’s not as old as White Castle (which is quickly approaching its centennial) or as ubiquitous as Mickey D’s, but Back Yard Burgers has reached 30—something that might have appeared unlikely just five years ago. Even in its darkest hour, the brand had a certain appeal that beckoned industry leaders to restore and rebuild it. Thanks to their efforts, Back Yard Burgers is on the upswing; in July, Axum Capital Partners acquired a controlling interest in Back Yard Burgers, setting it up for renewed growth.

Back from the brink

One of the first industry vets to see potential in the then-battered brand was David McDougall. “I came on board with Back Yard Burgers in January 2013. The company at the time was in bankruptcy. Sometimes people asked me, ‘Why would you step into a role like this?’” he says with a laugh.

Indeed, Back Yard Burgers was perhaps at its lowest point just ahead of McDougall’s arrival. Dozens of locations were shuttering, the C-suite was peppered with assault allegations, and fan favorites like the seasoned fries had been cut from the menu. When the brand did file for Chapter 11 in October 2012, its total assets were about $13 million and its liabilities roughly $62 million (the vast majority of which were unsecured claims).

The combination of these factors branded Back Yard Burgers with a buyer-beware label in some eyes, but not the ones that mattered. Pharos Capital Group purchased it and installed McDougall.

Although the then-new CEO had an illustrious career in foodservice, including years at Cinnabon, NextCen (Marble Slab, Great American Cookie), and finance-cum-franchise consultancy FranIntel, the new owners gave him about six months to show progress.

“You certainly know that you’ve got a short runway and that we clearly had to get things moving in a more positive direction,” McDougall says, adding that 70 percent of companies that file Chapter 11 go out of business within five years. “There’s a lot of repercussions that come from it, just from a stigma placed on a company.”

What followed was nothing short of a hyper-accelerated, top-to-bottom makeover. Under McDougall’s direction, Back Yard Burgers made a host of changes ranging from infrastructure and franchising to menu and supply chain. It looked at every vendor in its system and had to reduce purchases in some cases. McDougall says he was shocked by how many still chose to stand by the brand; without the support of so many key partners, he adds, the outcome could have been very different.

“One thing that is true about the restaurant industry is that it is very difficult to extinguish a brand name,” says Hudson Riehle, senior vice president of research and knowledge at the National Restaurant Association. “These brands really do have a legacy staying power. There can be extreme consumer loyalty.”

At the core, Back Yard Burgers’ profitability was in need of improvement, both in terms of unit economics and franchise operations. Since the brand hadn’t conducted consumer research since 2008, it quickly commissioned a third-party service to run focus groups and interview both operators and customers. Those insights informed the brand architecture and put a new strategic plan into place. Back Yard Burgers revamped its menuboards, packaging, and, perhaps most notably, its menu strategy.

Under McDougall’s predecessor, the brand had reduced the size of its signature Black Angus beef burgers from one-third pound to a quarter pound. It had also nixed the seasoned fries—something that didn’t sit well with customers or operators.

“You have to have those core items. Other than improving the quality of the ingredients, they’re not to be touched or messed with,” McDougall says. Shortly after joining the brand, he met with general managers. One after another told him that customers were “ticked off” that seasoned fries had been removed from the menu. They were quickly reinstated. “I think it made as much of a difference in the morale of the field because they were certainly feeling a little down and out,” he adds.

A deal in the making

McDougall stayed with Back Yard Burgers far beyond that initial trial period. Although the brand did not disclose financial data for this story, McDougall has, by all acounts, shepherded in a new era of success through menu improvements and a renewed focus on franchisees. Still, one obstacle has prevented Back Yard Burgers from breaking through to the next level: capital.

Enter Axum Capital Partners, a private-equity firm founded in 2010. The young company may lack the breadth of players like Roark Capital or Catterton Partners, but it uses that small size to its advantage. The five-person team pools expertise in operations, mergers and acquisitions, and investing. Axum is also painstakingly selective in choosing investment opportunities.

“When I first got into private equity, someone said, ‘When you’re looking at something, what do you look at? The horse or the jockey?’ … When I look at Back Yard Burgers, I think there’s a very strong horse,” says Edna Morris, one of the managing directors at Axum. “We took our time in both getting to know [McDougall] and getting to know the concept, and we think the jockey’s good, too. The horse and the jockey—I think we’re getting both on this one.”

And if anyone has an eye for the proverbial horse race, it’s Morris. With more than 30 years in the restaurant industry, she is the expert in residence on the restaurant scene at Axum. Among other positions, she has served as president of Darden, Quincy’s Family Steakhouse, and the James Beard Foundation.

It was through an industry contact that Morris first learned of the opportunity to work with Back Yard Burgers. She and McDougall had both worked at Advantica back when it owned Denny’s. After a series of phone calls, McDougall visited the Axum office in Charlotte, North Carolina. The process was anything but hasty, with both parties taking the time to become thoroughly acquainted.

In recent years, the limited-service space has been flush in venture capital. These angel investors favor hot new concepts, particularly those in the emerging class of fast casual 2.0. Private-equity firms, however, have taken a more measured approach; they do not simply pump cash into a corporation, but most often purchase and manage it. As a result, such firms are more cautious and take a longer view in measuring success. This strategy rings clear as a bell for Axum.

“Some people are not interested in the restaurant business because they think it is fickle, capital intensive. … Some people find it too long-term for returns,” Morris says. Because Axum plays the long game, it is not so easily bedazzled by glitzy new brands. Instead, it looks for established companies—even some that have been through the ringer.

“I’ve met with people who have three restaurants, and they’re so excited and passionate and their restaurants are great, but it’s so new. We’re more comfortable with proven,” she adds. “Even though there might have been some mishaps over the years, we understand them, we understand why they happened; hopefully we don’t repeat them.”

Playing the middle ground

Not a flashy fad, Back Yard Burgers touted a unique position in the limited-service industry. Within the burger category, most brands fall into one of two camps: the traditional fast-food burger chains and the better-burger fast casuals. In the past, Back Yard Burgers has struggled to define itself. The brand even stated its intention to grow as a “fast casual” back in 1997, long before the onslaught of Five Guys, Shake Shack, and their ilk. It was around then that Back Yard Burgers began converting stores from a drive-thru-only format to include dine-in space, as well.

At the time, the move was a great success, ending two years of decreased same-store sales and providing a much-needed boost to under-performing markets. By all accounts, the 10-year-old Back Yard Burgers was poised to be one of the fast-casual forebears, bringing a new dimension to quick service. But by the time the 20th anniversary rolled around, the brand had pivoted away from the fast-casual label and instead named fast-food chains like McDonald’s, Wendy’s, and Chick-fil-A as its top competition.

Like many businesses (and people), Back Yard Burgers has begun to emerge from the identity crisis of its teens and early 20s. Under today’s leadership, the company has returned to its roots, emphasizing its key points of differentiation in the crowded burger field.

“One of the things that’s very valuable with this brand is the name. When people think about a burger that was served in their back yard and what that means, it’s pretty significant,” says Muhsin Muhammad, a managing partner at Axum. Muhammad is a former NFL wide receiver for the Carolina Panthers and Chicago Bears who now specializes in deal sourcing and investment selection. “If we can deliver on that promise both in terms of positioning ourselves between being a convenient burger option and also from a quality standpoint … [then] I think we have an opportunity to separate ourselves from the competition.”

For many consumers, quality and price have become mutually exclusive in the burger segment; you forfeit quality for a bargain, or you pay double digits for a premium patty. But Back Yard Burgers is working to wedge itself into the middle ground, where a small enclave of brands resides. Five Guys hangs its hat on a no-frills environment and a mostly static menu while In-N-Out Burger puts a California spin on the fast-food staple. Both balance quality with cost, and both boast a rabid fan base.

“It is a better burger, but at a [quick-serve] price, and I think that’s huge. There’s plenty of room for that. Consumers are looking for value, but they don’t want cheap food or something that doesn’t taste good,” Morris says. “Whether it’s Shake Shack or Farm Burger … I think Back Yard Burgers can stand up to any of those, but at a very attractive price.”

And, like Five Guys and In-N-Out, Back Yard Burgers makes an appeal to simplicity.

When Axum was first familiarizing itself with Back Yard Burgers, Muhammad visited the restaurants for an authentic guest experience. He also talked with some of the operators to gauge their sentiments. The takeaway was overall positive.

“You have some of the infrastructure in place as far as management, and all of the systems and tools that the brand has have been developed,” Muhammad says. “The resiliency of this brand, being able to withstand a lot of different turns and changes in the economy, shows it has some substance, has some stability, and a loyal following. There are quite a few things that come with 30 years of experience, and I think we value that.”

The next chapter

At its largest, Back Yard Burgers numbered more than 180 stores across 22 states. It has since whittled down to 55 (32 franchised and 23 corporate-owned) in 11 states. With a revitalized system and a fresh infusion of capital, the brand is ready to expand again. Morris says Back Yard Burgers has enormous potential, beginning with existing markets where the brand is known but not yet saturated.

Amid financial struggles, the burger chain didn’t make a strong push to sell franchises. It’s something McDougall says the company will now put more effort toward, but corporate must also lead by example.

“I like to think of us as the largest franchisee of Back Yard Burgers,” he says. “The same thing that any franchise partner deals with day to day, we’re dealing with, too. I do think that gives some franchise partners some comfort, to know we’ve got skin in the game.”

Axum’s support will also jumpstart remodels and technology initiatives, which the brand has wanted to implement but hitherto lacked the capital. The details of these future initiatives are something McDougall and other brand leaders will iron out with the new board. As Muhammad says, Axum will be actively involved in Back Yard Burgers, serving as an extension of the management team and providing expertise.

In addition to a number of industry contacts and resources, Axum has another restaurant chain, Wild Wing Café, in its portfolio. Morris says she is pleased the firm will now have two restaurants, allowing the leaders to collaborate with each other.

Crossing the 30-year mark and looking to the future, Back Yard Burgers by all accounts has an abundance of potential. Since foodservice remains an industry perpetually in a state of flux, it is almost certain to face more victories and adversities in the years to come.

The brand has proved itself tough enough to roll with the punches and capitalize on what makes it unique. So, at least for now, the future is a bright and sunny one.

“At the end of the day, getting to 30 is a pretty special thing. A lot of companies never achieve that. They don’t even get to 20,” McDougall says. “Back Yard Burgers had some great successes; it also had a few setbacks, and that’s no different than people in life. Everyone is looking forward to what the future holds and what the future can be.”