Opening a first restaurant is a true labor of love; between the high costs, the stress, and the many moving pieces that need to fall in exactly the right place, this path requires serious passion and commitment. That’s why it’s so exciting to see your efforts rewarded by a popular and thriving business. Because restaurateurs aren’t the type to sit on their laurels, many feel inspired to expand their successful restaurant to a second location. Growing your restaurant’s footprint calls for a great deal of planning and some specific strategies that help you realize its potential without overextending yourself.
To help you make those decisions, we asked a group of professional restaurateurs and legal experts to provide their best advice for scaling to your next location.
Taking Reasonable Financial Steps without Overextending
The first step should be to sit down with a financial manager or accountant to do a thorough evaluation of your on-hand capital. Barry Goff, founder and managing partner of Artistry Restaurants, a restaurant group with more than 50 locations in Florida, Alabama, Mississippi, South Carolina, North Carolina and Texas, tells us that his group’s decision of whether to open a new restaurant “is primarily a question of capital allocation and finding the right location.”
We’ll talk more about location scouting shortly, but in terms of capital allocation, Goff explained that “if we have sufficient capital available (whether equity capital and/or borrowed funds) to invest and we believe an investment in a specific location is the highest and best use of that capital in terms of generating cash flow and/or increasing the value of one of our brands, then we will open the new restaurant.”
Goff said that his company always tries “to use available capital to create value for the brand without placing undue risk on our existing restaurant portfolio.” He goes on to say that his team evaluates their capital allocation by “understanding both the net investment required to plan, build, and open the new restaurant (after deducting any tenant improvement allowance) and the projected financial return the restaurant is expected to produce.” Because Artistry Restaurants is a larger company with many locations, his team can look to the other restaurants in the portfolio to find a reasonable comparison for any new project.
In terms of specifics, Goff said that “generally, we target investments where the projected net cash flow generated by the restaurant is sufficient to return 100 percent of our capital investment within three years or sooner.” He recommends a three-year “payback period” because “it incorporates most of the variables we consider important in evaluating any restaurant investment, sales, restaurant-level profitability, build-out cost, etc. Of course, we also factor in what we believe the new restaurant opening will contribute to the eventual sale price of the brand down the road.”
He emphasizes the importance of considering “all costs, including but not limited to legal and architectural fees, construction costs, FF&E, small wares, AV equipment, hiring and training costs for your team and all pre-opening and marketing costs you believe will be needed to create brand awareness in the market.”
Of course, most restaurants can’t expand purely through their on-hand capital. Lenders and growth partners often need to enter the equation, and Goff has some tips on how best to choose these collaborators.
“For both debt facilities and equity capital arrangements, it is crucial that operators carefully consider their tolerance for risk, the unique attributes of their brand, and their long-term goals in order to avoid misalignment with their lenders and equity partners,” Goff said.
He also urges restaurateurs to take their time when making these decisions; “scaling effectively sometimes requires owners and operators to briefly step away from the day-to-day grind of running and expanding their brand so they can invest time and energy in creating alignment and building strong relationships with their lenders and equity capital partners.”
For independent restaurant owners looking to expand from a first location to a second (or from locations one and two to location three), the process can play out a bit differently than it would for a large organization like Artistry Restaurants.
Adrienne Cole, owner and founder of the Marigold brand of restaurants in Louisville, Ky., which currently operates House of Marigold and other related concepts, tells us that she didn’t wait for her restaurant’s finances to be in perfect shape before making moves to expand.
“We don’t expand because everything is perfectly in order. We expand because we believe in the opportunity and we’re willing to take the risk,” Cole explained. “ “Sometimes, that means you are robbing Peter to pay Paul while you’re scaling. That’s the reality of growth in this industry, especially when you don’t have outside investors or a line of credit backstopping every decision,” she continues.
But in order to take that type of calculated risk, Cole thinks it’s hugely important to have “a strong financial understanding of [your] business. My CPA team and I operate in close sync — we’re looking at our profit-and-loss together, staying ahead of the numbers, and making decisions from a place of clarity even when the timing isn’t perfect.”
She added that “strong financials don’t mean you have unlimited runway. They mean you know exactly where you stand and you move accordingly. The goal is never eliminated risk. It’s informed risk.”
Assemble the Correct Legal Team
When expanding to new locations, restaurateurs need to make sure that they’re covered from a legal standpoint. Roger Lee, partner at Stubbs Alderton & Markiles, LLP, a California-based law firm that regularly handles hospitality matters, explains that “the most significant legal challenges for restaurant groups expanding into new locations revolve around real estate landmines, regulatory compliance, and local entanglements. Real estate negotiations often involve a tug-of-war between landlords and tenants regarding permitted use clauses.”
To aid with these matters, Lee recommends that all expanding restaurant groups hire “a corporate/transactional attorney with specific expertise in the hospitality industry. This attorney provides ‘big picture’ guidance and direction on corporate structuring, brand protection (IP), and general risk management.”
Generally speaking, this lawyer can assist with real estate issues involving landlords. For example, Lee says that “landlords prefer narrow definitions (e.g., ‘fast casual Mexican’) to maintain a specific tenant mix, while tenants require broader definitions to allow for menu evolution or future assignability. Furthermore, exclusive use clauses (which protect a tenant from direct competition within a development) are prone to litigation if not drafted with extreme specificity.” These clauses can be particularly tricky; Lee points out that “a failure to define terms like ‘sandwich’ can lead to a competitor (like a burrito shop) opening next door despite an exclusivity agreement.”
Also, “narrowly tailored use provisions can severely constrict a tenant’s ability to exit or pivot. If the permitted use is too specific (e.g., a studio for spinning classes only), it becomes difficult to assign the lease or sublease the space to another operator if the concept fails or outgrows the space.” An attorney can thoroughly review the lease agreement and help moderate disagreements and misunderstandings between the landlord and the restaurant group.
But expanding into a different city or state can open up a broader set of legal questions. “A new location often means a new jurisdiction. Operators must navigate a fragmented landscape of health department permits, liquor licensing regulations, and local zoning ordinances that vary significantly by city and county,” Lee says.
For that reason, Lee recommends a “hub-and-spoke” model of legal representation. The corporate lawyer he advised earlier will serve as the “hub” of the legal operation, and Lee then suggests that “the main corporate lawyer can then manage local specialists focused on commercial real estate, liquor/regulatory counsel, and local labor/employment counsel. Essentially, this means allowing the ‘hub’ attorney to engage with the proper ‘spokes’ attorneys for the new jurisdiction.”
Prioritize Accessibility For Your Target Clientele
According to Goff, one of the most common mistakes made by newly-expanding restaurateurs is “selecting the wrong real estate.” He warns against assuming that you can use the same standards for opening in a second location that you used for your first.
“Many restaurateurs assume that because they perform well in their hometown mall or in ‘B’ or ‘C’ locations in their home markets that they can do the [same] in new markets where they do not have established brand reputations and relationships. We think this approach vastly underestimates the importance of location and building brand awareness as you scale into new markets,” Goff explains.
Cole tells us that her team’s search for new locations always “starts with community and opportunity. We look at where there’s a gap — where people deserve something better than what they have.” Once they identify a neighborhood that would benefit from their project (and where their project would benefit from the neighborhood dynamics), Cole said that she and her colleagues “get into the practical realities: the lease terms, the build-out, the kitchen infrastructure, [and] what it’s actually going to cost us to open versus what projected revenue looks like in Year One.”
For Johan Engman, founder of Rise & Shine Hospitality Group, which operates 19 locations in metro Los Angeles and San Diego, selecting new locations relies on a thorough understanding of each individual area’s needs. He tells us that he looks for factors like “density, walkability, [and] parking.” He goes on to say that the priorities “change a bit depending on the location. For example; Palm Desert’s [needs are different] from Downtown San Diego.”
Rise & Shine plans to soon expand its footprint into Texas, and Engman says that “we've recently started looking outside of California and it's definitely different. There's less focus on walkability.” For these new locations, Engman believes that “being in a location and area that ‘sees’ a lot of people throughout the day” will prove crucial. “For example, a shopping center that is anchored by a Target, Trader Joe’s or Whole Foods tends to work very well for us because there are people coming in and out of that center throughout the day,” Engman explained.
Use the Same Operating Systems
Engman tells us that Rise & Shine “uses the same POS, the same financial reporting systems, the same accounting and labor management [systems] across all the restaurants,” which helps keep the brand consistent and avoid overcomplicating the business as a whole.
Sam Aguilar, brand president of Oak & Stone, a restaurant brand under the Artistry Restaurants umbrella with locations in Florida and Texas, explains that “today, most operating systems are built for multi-location businesses like Oak & Stone. [They] allow the user to self-manage and self-program, and platforms such as 7-Shifts Scheduling, Restaurant 365, and Toast POS offer fully integrated ecosystems.”
Aguilar lists examples of how these platforms can help multi-location restaurant groups stay streamlined: “Users can be set up to view data across multiple locations. Individual locations having visibility on peer performance is a great tool that allows for real time collaboration on best practices between similar sales locations [while also] providing ownership/management with the ability to view side-by-side location performance and make real time adjustments without having to wait for end-of-period reporting.”
Cole summarizes the importance of consistency like so: “We want our locations to be able to communicate through centralized reporting, shared culture, and shared training so that what we learn at one location makes every other location smarter.”
"The foundation is the culture and the values, because those travel even when the systems are still catching up," she added. "If your employees understand why you do things the way you do, they can make good decisions without a manual for every scenario.”