This is a very interesting topic and one that I hear discussed often. Depending on your perspective, timing, growth strategy, the amount of capital required, type of concept, sensitivity to risk, geography, personal financial situation, unit-level economics, corporate structure, and capital requirements, among other prerequisites, the answer is different. And, so will the answer for each business cases. Each business case, or business model will affect the corporate finance strategy and could affect the outcome.
I would like to provide perspective and suggestions as respond to questions and comments over a series of blog postings on this subject. This is just the first in a series...perhaps a regular feature offered exclusively on fohboh.com.
This post will open up four common business case scenarios for discussion:
1. One restaurant operating and a ton of people are pestering you to open a second location.
2. Several locations are now operating and your are considering venturing into an entirely new market.
3. You've developed a new concept and have a vision for a chain.
4. First restaurant venture.
So, if I've missed your case, please send t to me and we'll add it to the list.
One restaurant operating and a ton of people are pestering you to open a second location.
The first thing to remember is that you are in charge. It's your business, your money, your risk...and your potential reward. Consider the following:
If the answer is no, then congratulations! You have enormous self confidence, discipline and character.
- What is your vision and your personal plan. Will operating two or more restaurants be worth the effort? What are your motivations. Are they aligned with your business plan? Your personal growth plans? What will opening a second unit do to your family life? Is it worth it?
- List pros and cons...include time, money, risk, rewards, family, friends, fun, ego, etc. Then ask yourself again f this is truly what you want to do.
If the answer is yes, then congratulations! You have enormous self confidence, discipline and character.
The second thing to consider is real estate. Almost everyone has heard the saying "location, location, location" when it comes to selecting a site for retail and restaurants. I strongly encourage you to make that a mantra. I cannot emphasis the value of good real estate enough. Location is critical and is so under valued. Now having said that, a great location does not always mean at the corner of main and main, or at the Mall of America or on Rodeo Drive in Beverly Hills. It does mean, however, that you better be damn sure of the facts. Real estate site selection is an entirely separate book. I'l try to address this later and bring in more experts to discus this. But, also, I challenge you to create a real estate forum to list qualitative and quantitative elements of a great site.
Next, consider the economics involved in developing another restaurant and the impact on your customer base, employees and vendor relationships.
Finally, take the time to write a business plan and include several pro forma scenarios. Evaluate how many meals you need, based on your current average guest check, seats, and other historical data to determine your break even. Later in this series, I'll add a financial model that will help your with crunching the numbers.
For this type of expansion, finding a good banking partner will be your best option. That, combined with aggressive landlord credits (TIs), perhaps even including a reasonable about of capital raised via a partnership or LLC. Some vendors may be willing to assist you and buying used equipment and furniture is still the best idea. Going from a single unit to a second restaurant is still considered bootstrapping. Please avoid the romantic notion of building a prototype just yet. Prototypes are expensive and you are not ready for that after just one restaurant. Buy used. Keep it simple and be cheap. Re-examine the reasons why restaurant #1 worked in the first place and reflect on your fixed costs. Make it easy to cash flow.
1. Test your own ambitions. Is this the right decision for you and your family, at the right time.
2. Feasibility analysis will bring clarity.
3. Location, location, location; repeat this mantra.
4. Write a plan, crunch the numbers and know what you need to capitalize.
Two key success factors in the restaurant business are (1) low overhead and (2) minimal leverage.