Your restaurant is a neighborhood hotspot with constant lines out the door. Local foodie influencers are spreading the love on social media. And your staff is running the show like a well-oiled machine. Is it time to expand and start at your next location?
It could be. The only way to know is to do your homework. Restaurant expansion takes careful planning and consideration. If you’re just starting on your journey, this guide is for you. Read on to learn key signs that it may be time to expand, plus tips on how to grow your restaurant business.
1. Measuring the Profitability of Your Restaurant
Any restaurant expansion business plan begins with the numbers — those being profit margin. If you’re in it for the long haul, strength must precede growth.
The average profit margin for full-service restaurants tends to fall between 3 and 5%. Your restaurant’s profit margins should match or, ideally, exceed these numbers. If not, then you may want to reduce your restaurant’s operating expenses and increase revenue before you look into expanding.
To calculate your restaurant’s profit margins, first determine what you’re spending on cost of goods sold (COGS) and operating expenses (OPEX) each year. Next, you’ll need your yearly revenue.
Once you have determined all three, you are ready to calculate your restaurant’s profit margin.
The formula to determine profit margin is:
(Revenue- (COGS + OPEX)) / Revenue * 100 = Profit Margin
Or
Profit/ Revenue * 100= Profit Margin
Example: Safe Harbor, an imaginary seafood restaurant, makes about $400,000 a year. The owner spends around $380,000 on COGS and OPEX:
($400,000 – $380,000) / $400,000 * 100= 5% profit margin
At 5%, Safe Harbor’s profit margin is around the current national average for a full-service restaurant. If the restaurant is in a large enough area that can support another restaurant, the business owner may want to consider business expansion.
But numbers aren’t everything, you’ll also want to ask yourself some key questions:
• Why do you want to open another location?
• What has made your restaurant successful?
• How much of your success is due to the actual location of the restaurant?
• Who would run your new location?
• Can the same success be transferred to another location?
Doing a formal SWOT (strengths, weaknesses, opportunities, and threats) analysis can also be helpful for any business considering expansion.
2. Funding Your Restaurant Expansion
If you consider your first location to be successful and another location is warranted, it’s time to move on to the next step — securing funding. Generally, it’s wise to consider the new location as a completely new venture, and not rely on your current location to fund the new one. That means you may want to explore business loans early in the process.
When applying for a business loan, make sure you understand any lender requirements (such as minimum amount of time in business or business credit score). Doing so will expedite the application process and improve your odds of getting approved.
There are a variety of business loans on the market that can help a restaurant expand. Here are some of the more popular options.
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SBA Loans
Opening a restaurant can be a lot easier with a Small Business Administration (SBA) loan. These loans are backed by the government, which reduces risk to the lender and, as a result, come with some of the better rates and terms on the business lending market. The application process can be long and cumbersome, however. Restaurant owners looking for fast money may want to consider alternative loan options.
Term Loans
Term business loans are offered by banks, credit unions, and online lenders and can be short term (up to one year) or long term (up to 20 years). Long-term loans come with lower monthly payments, which could help a new business building its monthly cash flow. Short-term loans will have higher monthly payments but typically come with lower interest rates, which reduces the total cost of the loan.
Lines of Credit
A business line of credit can be a good option for occasional gaps in cash flow. Unlike loans, a line of credit allows you to borrow up to a certain limit and pay interest on only the portion of money you borrow — similar to the way a credit card works. You then repay the funds and can continue to draw on the line. Compared to a standard credit card, business lines of credit generally come with higher credit limits and lower interest rates.
Merchant Cash Advances
A merchant cash advance is a unique financing option in which a company gives you an upfront sum of cash that you repay using a percentage of your debit and credit card sales, plus a fee.
Merchant cash advances can be useful if you need capital immediately to cover cash-flow shortages. And, merchant cash advance companies may work with businesses with bad credit, startups, as well as those with previous financial difficulties. However, interest rates can be as high as 350%, depending on the lender, size of the advance, and how long it takes to repay.
Equipment Loans
Equipment loans can help you buy expensive restaurant equipment, and the item you purchase with funds typically serves as the collateral for the loan, which means you don’t have to put any other restaurant assets on the line. Rates will depend on the value of the equipment and the strength of your business.
3. Looking at What Makes Your Restaurant Successful
If you already have a successful location, chances are you already intrinsically know how to grow a restaurant business. Still, it can be a good idea to look at each of the categories below and consider what you’ve done well, and repeat what you can.
Interior Design
Does your restaurant have a unique design that attracts your customers? What vibe or energy did you purposefully create? If the furniture was unique and sourced from an unusual location, contact the business owner to see if you can order additional staple pieces.
Customer Experience
When are your customers visiting your restaurant? Is dinner your busiest time? Are you primarily getting blue or white-collar workers? Take whatever reason customers are choosing your restaurant over others and expand upon it at your next location to further enhance their dining experience.
Food
If you are opening the same concept in a nearby area, you might want to start off with the same menu as the first location. Over time, you can assess menu item popularity and adjust as necessary. If the potential customers, demographics, and food taste may be different at the new locale, however, you may want to take that into consideration when creating the new menu and pricing.
Branding
Branding is complex and multi-faceted, but if your original restaurant has a unique brand and a clearly defined demographic, that may be one of the secret ingredients to your success. If your next restaurant is a clone in a new location (and not an attempt to capture a new demographic with a different brand), then it’s paramount that your next location meets customer expectations by maintaining the same brand.
4. Finding a Location
The answer to how to grow a restaurant business often comes down to its location, but finding that sweet spot to get the maximum amount of business at a reasonable cost can be difficult.
Restaurants can grow by word of mouth, and so one strategy is to open your next location relatively close to the first one, so you’re not starting at ground zero. Many of your customers will have already eaten at your first location, so word should spread quickly and organically.
However, opening in an entirely new city can also have its benefits, especially if you have a target audience that is untapped in that area. Just keep in mind that it will likely require more marketing, as well as more time traveling between both locations to solve and address problems as they arise.
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5. Writing a Business Plan
Even though you already have one successful restaurant, you will need to write a new business plan for your next restaurant. Some of the information will likely remain the same, such as human resource practices, accounting, and technology. However, there will likely be sections that will need to be tailored to the new location, including:
• Analysis of nearby competition
• Amount of foot traffic
• Peak traveling hours
• Types of customers you expect to get:
◦ Travelers
◦ Workers
◦ Families
◦ Tourists
◦ Locals
6. Applying for Licenses and Permits
Make sure you research zoning laws for your new location and apply early for any licenses or permits your new restaurant will need. If you’re moving to a new location, don’t assume the area will have the same laws and regulations. You’ll want to research state, county, and city regulations, as all of these can vary. Generally, visiting your state’s website can help you find out which permits and licenses you need.
7. Marketing Your New Restaurant
Even if you have a strong brand, don’t assume your new restaurant will do well from word of mouth alone. It’s important to create a marketing plan unique to each location that includes:
• Social media strategy
• Website updates
• Email marketing
• Soft opening event
• Grand opening event
• Media outreach
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8. Hiring Staff and Managers
Since you can’t physically be in two restaurants at the same time, it’s important to hire managers you can trust to stay on top of day-to-day operations. You may want to hire a new manager for your existing location, to free you to manage the new location.
It’s also a good idea to hire new staff and managers a month or two before opening the new location. That way, you can train them at your existing restaurant with existing staff who already know the ropes. Hire only the best because you’ll need a culture of excellence to ensure your new location makes the best impression possible.
9. Purchasing Equipment, Supplies, and Food
If you plan for your new location to mirror your first, consider getting the same equipment so you can easily train your new staff before opening day. However, you may also want to take advantage of newer tools and technology that could increase efficiency in your new location.
Also review your financial statements related to supplies, and don’t forget to consider whether the new location is larger or smaller than the first.
Also, take this time to buy as much shelf-stable ingredients and liquor (if serving) as possible, so you’ll have less to do the closer you get to opening day.
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10. Organizing an Outstanding Grand Opening
To prepare for the grand opening, it can be a good idea to have a soft opening with less than a full house. This gives your staff a practice run for the actual opening and gives you a chance to get some feedback before the restaurant officially opens. For the official big day, invite as many friends, customers, and local business owners (including friendly competition) as you can. Encourage them to leave a review online so that word gets out.
Pros and Cons of Expanding a Restaurant
| Pros of Expanding a Restaurant | Cons of Expanding a Restaurant |
|---|---|
| May see increased profits | Must hire and train a new workforce; second restaurant may cannibalize the first, or vice versa |
| May see an increase in your restaurant’s brand awareness | It may take time for a second location to get a strong revenue stream, which means you may need to have dedicated savings set aside for it |
| May benefit from the economies of scale — meaning the cost to produce an item or food product may go down as you produce more of it | Collateral used to secure the expansion could put the first location at risk |
Is Expanding the Right Choice for You?
Cash flow and profit margins from the first restaurant are the first things you need to pay attention to and analyze. If they are strong, that’s a good sign.
However, you may also want to consider speaking with a CPA before you move forward with any decisions.
Other strong indicators that expansion is the right choice include:
• Your restaurant has repeat customers on a consistent basis
• You routinely have a packed house during peak business hours
• Customers ask if you’re considering expanding
• There is a low restaurant per capita ratio for your area
• Other non-franchise restaurants are able to support multiple locations
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The Takeaway
Restaurant expansion takes careful consideration. Figure out first if it’s the right time to expand and then learn how to grow your restaurant business.
FAQ
How can you promote your restaurant?
There are all kinds of ways to promote your restaurant business. They include creating a unique website, posting on social media, getting a Google business profile, and listing your site on common restaurant apps.
Is expanding your restaurant business always a good idea?
No. Expansion should only be considered if the original restaurant’s profit margin is consistently strong and the new location can support another restaurant.
Is expanding a restaurant the only way to increase revenue?
If your restaurant is consistently maxed out, then some form of expansion is likely necessary. However, revenue is not the same thing as profit. You may be able to increase your restaurant’s profits by decreasing overhead costs and optimizing your menu.
Photo credit: iStock/SouthWorks
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