Considering Expansion? Make Sure the Benefits Outweigh the Costs

Does your restaurant constantly have a line going out the door and down the block? That means you should expand your operation, right? Not necessarily.

Asking the right questions and analyzing your current situation will lead to the best answer. Here are the factors to consider and questions to ask before you add space or a second location.

Assess What You Want

Before putting in the time to do the math and everything else required to make a smart decision about real estate, consider the personal reality of managing a renovation project, move or second location.

“I know many business owners who probably could expand but don’t want to due to the fact that they’re happy with what they have,” says Tim Burke, owner of In a Pickle in Waltham, MA. He recently moved to a larger location after nine years in the same space. “Expanding means hiring new staff, spending a lot more money and juggling a lot more than they’re used to.”

Talk to other owners to get an unvarnished view of what it truly takes to manage a larger restaurant or additional location so you can make your decision fully informed.

Assess the Opportunity

If you have a long wait for every service every day, you may need more space. But if you notice increased demand, so might your rivals. “Be aware of any competition coming into the market,” warns Greg Overbeck, co-owner and marketing director of Chapel Hill Restaurant Group (CHRG). “Someone might recognize that factor before you pour more money in it.”

Here’s an important caveat: “A lot of times when a restaurant opens, there’s a honeymoon phase,” say Overbeck, whose company owns six eateries in the Research Triangle region of North Carolina. During this time, lots of people may come in, but don’t use those early figures as a sign of true demand. “You must get through this phase to be sure it’s consistent business.”

If the demand holds up, then check the finances. “The restaurant needs to calculate if the revenue they believe they’re losing by not being larger can sustain a larger space,” says Burke. “The owner or company needs to ensure that if they do expand, there is a market large enough for their growth. Over-valuating that ‘lost’ revenue could be disastrous.”

Other important calculations:

  • Determine the cost of the added square footage and the additional revenue gained by it
  • Estimate how long it will take for the additional revenue to cover the cost of expansion and increased labor
  • Making sure you can afford the upfront renovation or build-out costs and expenses like new furnishings, service items and kitchen equipment and supplies

And be sure to get help from a financial expert in assessing all these costs. “A good CPA who really knows your books is so important in the restaurant business. We go to this person first each and every time,” Overbeck says.

Expand or Relocate?

If you want to expand, check local zoning rules and other limiting factors. Spanky’s, CHRG’s first eatery, is located in a historic storefront. It’s popular, but “in an old building, you’re limited by certain things,” says Overbeck. “We couldn’t add on.” So Spanky’s stayed as it was. Another CHRG eatery, Squid’s, was also ripe for expansion. “We added as much space as we were allowed to — another 30 feet. We have maxed out by square footage and zoning.”

It’s also important to make sure the kitchen staff and equipment can handle the increased volume. Overbeck recounts the cautionary tale of a restaurant that “added a huge new addition — 150 seats. They overextended financially and the kitchen couldn’t handle it. Their reputation took a huge hit, and in one year they were out of business. You can’t take the addition off and sell it back.”

Limited kitchen capacity frequently prompts the decision to move to larger digs, as does inadequate parking. Mark Klebeck, co-founder and owner of Seattle’s Top Pot Hand-Forged Doughnuts, moved after demand became sustained and parking became a challenge. “People would park blocks away and walk because there was no parking, or they would double-park and risk getting a ticket just to get a doughnut!”

Of course, if you’re really killing it, you may be mulling a second location. “Many restaurateurs say it was much harder to open their second restaurant than it was to open their first, because you can’t split yourself in two,” says Burke. “For a moment of time, you’re asking one restaurant — the current one — to support the bills for two. And if there are delays in the build-out or in the permitting process, it can be a killer. If this takes longer than anticipated, it could mean the failure of both restaurants.” Opening a second location should put money in your pockets, not leave your cupboard bare.

Before you check out expansion opportunities or vacant properties, check in with your CPA to review the numbers. And chat with a trusted commercial real estate broker to understand the costs of a new space. With these two professionals, you can develop a realistic estimate of what it’s going to cost and tie that to the projected sales increase. If the sales cover the cost of the addition or the relocation, give it a go.

Seattle-based Jamie Peha has more than 30 years of experience in the restaurant, beverage and culinary industry, and has worn many hats throughout her successful career. Find Jamie on Google+. Margot Carmichael Lester has been a freelance business writer in Carrboro, NC, for more than 30 years. Find Margot on Google+.

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