Expansion Education

Perhaps you’re looking to add a second location. Or launch a second concept. Maybe you’re looking to move your business as part of your plan to get bigger. We’ve pulled together some useful information to help in the decision-making process.

Success breeds success. Much depends on your individual circumstances, but expanding makes the most sense when:

1. Your cash flow is good
2. The economy is good
3. There’s a real need or niche for you to fill, foodservice-wise
4. You can identify the right location

Buy or lease? It’s all about the money. Purchasing usually requires a substantial down payment—but in the end, for good or bad, it’s an investment in real estate. Also, you have more control over “your” property, and monthly payments, i.e., the mortgage. Renting gives you a wider range of short-term options, as well as less responsibility for repairs and other expenses. Remember to estimate any remodeling needs, whether you rent or buy. Evaluate properties, crunch numbers and then decide.

Experts say there is no “standard lease”: Everything is negotiable! That said, there are basically four types. With Single Net or Net, you pay utilities and property tax; the landlord covers maintenance, repairs and insurance. Net-Net, a.k.a. Double Net, has you pay the same as Single, plus insurance. Triple Net is generally used for an entire building; you’re responsible for all costs except structural repairs. For multi-tenant buildings, a Full Service (Modified) Gross lease is the norm. The difference between those comes down to defining “gross”: Full Service Leases can include additional rent, or “base rent,” calculated from a formula that sets the amount and kinds of operating expenses paid by the tenant, subject to change. The bottom line: Who pays for what? Can your obligations increase over the term of the lease?

A common mistake: not verifying the space (when renting) or property dimensions (when buying). If you rent, the space for your business is the “usable area.” Yet the cost may be based on “rentable area.” Do your own measuring—and confirm! Also important: Whether this is a new use for an existing space or structure, or a new building, you should double-check relevant zoning laws.

Choose a lawyer with experience in commercial lease negotiations or purchase of commercial property. Check references. You’ll also want someone you can get along with, and who in turn can be diplomatic on your behalf. The best “partner” of all—because that’s how important this is—maybe has business ventures of his own. Your bank? Select for its track record with lending to foodservice businesses, if possible. Have a formal business plan ready for personnel to review.

If you’re thinking of bypassing the banks, or getting a project-specific loan, you have options. One of the newest is crowdfunding sites such as Kickstarter. Required: a solid plan to present to possible investors. And as proposers have learned, you must put considerable time and energy into managing a fundraising campaign, with no guarantee of success.

Some established venues form clubs. For a joining fee, customers receive free beer for a year, for example. This should be a formal pursuit, with paperwork! Formality also applies to bringing friends and family on board. Common sense—and plenty of civil lawsuits—underscore getting any loan agreement in writing.

The number of locations you can truly handle is the correct one. Will you need more managers? How will bookkeeping and cash flow be affected? Also consider work-life balance—and your bottom line—as you forge ahead. Think about logistics, too: Whether locations are close enough to be easy to oversee, or even share a prep kitchen. The trick is to have same-concept venues far enough apart not to cannibalize themselves. Some operators have seen success by opening two or even three restaurants within steps of each other, because the concepts are different. A few companies, like Starbucks, can get away with cookie-cutter stores within blocks of each other in crowded urban areas.

Two lessons:

1. Have a succession of restaurants in a particular building or area failed? It just might not be a great spot.
2. A prime, high-traffic area can help visibility, but turning a profit can be tough because of the costs involved.

Look for organizations offering free or reduced-price advice, such as banks, SCORE (score.org) or your local Chamber of Commerce.