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BirchStreet Systems Plans to Expand through Minority Investor

In the funding desert, Newport Beach-based BirchStreet Systems Inc. is a bit of an oasis.

The maker of software for hotels and restaurants recently landed an undisclosed minority investment from Dallas-based private equity firm PlumTree Partners LLC.

“If this had been a venture deal, we would not have taken on the assignment,” said Todd Furniss, managing director at PlumTree. “We felt that the company had more legs.”

BirchStreet has big customers, “real revenue” and operating profits, he said.

During a time when private equity dollars have dried up considerably, BirchStreet is a compelling investment for one other reason,its product saves companies money, according to BirchStreet.

“I can walk into the CEO’s office of any of the biggest hotels in the world and when I tell them, ‘I can save you money,’ the next response is, ‘Sit down,'” said BirchStreet Chief Executive John Davis. “That’s all anyone wants to hear.”

Birch Street’s software, which can be used over the Internet, cuts hotel and restaurant chains’ procurement costs by ensuring that they are taking advantage of contracts set out between their corporate parents and suppliers.

“What typically happens in a hotel company is that the home office negotiates the best deal possible with a supplier,” Davis said. “Our software basically forces compliance. The only vendor you can buy from are those that have negotiated a deal with the hotel chain’s home office.”

Hotels with a full service restaurant can easily spend some $100,000 per month stocking it with food, drinks and other supplies, he said.

The software can shave 8% to 15% off a hotel company’s expenses, according to Davis.

“That’s significant,” he said. “The software gets compliance and complete visibility to the management team about what people are buying against the (hotel’s) budget.”

Saving on fixed costs is appealing to the hospitality industry, which has been especially hurt by the recession.

“Everybody in every industry is looking for ways to reduce costs,” PlumTree’s Furniss said. “Those are very serious numbers for these companies.”

BirchStreet’s software also saves on labor by automating common business tasks such as ordering, inventory management and accounting.

“By processing payments, you don’t need a bunch of account payable clerks,” Davis said. “It’s a wonderful control in this environment, where things aren’t doing as well in the hospitality industry.”

BirchStreet counts as customers some of the biggest hotel brands, including Hyatt, Hilton, Omni, Red Lion and Marriott, among others.

The company, which started in 2001, charges by the room for its software, because larger hotels have more complex ordering processes.

BirchStreet was doing well on its own.

“(They) didn’t need the money, but wanted the money to fund a bit of growth,” Furniss said.

PlumTree may contribute more capital in the future to fund expansion.

BirchStreet doesn’t disclose sales but is “very profitable and growing,” Davis said.

The funds are set to be used to add more salespeople and expand BirchStreet’s products into new markets, including healthcare, schools and others.

It’s also looking at selling to hotel chains abroad.

BirchStreet has some 40 workers. Most are here, with some in Dallas and India.

During the past year or so the company has been focused on bringing on more seasoned executives, managers and salespeople.

Davis, 57, is a BirchStreet investor who came out of retirement to run the company. He commutes to Orange County and lives in Dallas.

“I put my money in,” he said. “They seemed to have very good software but needed some experience in sales and in growing a company,professional management more than anything else.”

Davis has a long history in the hospitality industry.

He’s the cofounder of 1-800-Flowers.com Inc., a toll-free ordering company for the florist industry that he helped start in the early 1980s.

He started ATC Communications Inc. in 1984, a telemarketing company that he sold in 1988.

Davis later helped start Pegasus Solutions Inc., which ran a then-fledgling technology that helped hotels book reservations over the phone and later, online.

Pegasus went public in 1997 and then was taken private in 2006.

He stepped down as chief executive last year with the intention to retire,until he learned of BirchStreet.

“Their niche was in the hospitality and hotel industry, which is where I spent the past 20 years,” he said. “I kind of knew all the big players and I knew how to sell. It seemed like the perfect match.”

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