If things are going well, you may want to consider an expansion strategy for expanding your restaurant business into new locations, but it can be dangerous.
In 1948, Maurice and Richard McDonald opened up a small burger restaurant in San Bernardino, California. It was the first in what would become the biggest food franchise in the world. It’s proof that even the largest restaurant chain has humble beginnings. So, if things are going well and you decide to expand the sky could be the limit.
Unfortunately, this could also be a dangerous time. While most people worry about the first few years, expanding a business is also perilous. It can affect your financial security, cause problems and harm your reputation.
There are many things to consider from funding, to choosing the right staff, finding a good location and ensuring there’s a steady supply of demand for what you’re offering. It is no easy challenge, so here’s our exhaustive guide to making sure you expansion is a success.
When is the right time for a restaurant expansion?
In life, and in business, timing is everything. Go too early and you might fall flat on your face; go too late and you could miss the market opportunity. Many businesses take the chance to expand before they have really laid the groundwork in place. The result is a failed enterprise which can damage the reputation of their existing restaurant.
First things first, you need to be sure your restaurant business is in a good position for expansion. There aren’t many hard and fast templates to tell you when you’re ready but you can get a few clues by asking yourself a few important questions:
- Have you maxed out your current location?
Look at how things are going at your current location. If business is booming and growing it’s a good indication that you’re ready to expand, but you may also be able to get more out of where you are.
Expanding to a new location is expensive and risky. So, if you can get more out of your current location, it could be a slightly safer and cheaper option. This could put you in a better financial position when the time comes for you to expand as well as giving you a useful blueprint for success.
- Is there an audience from outside? Are people travelling just to get to your business? If so it’s a sign that your reputation has grown and that they would welcome a new outlet closer to where they live.
- Do you have enough time? Opening a second restaurant might be slightly easier than your first, but it is still going to be a major operation and will take you away from your existing work. It’s easy to forget all the details which have been making you successful while your eyes are focused further afield.
- What about the funding? A new restaurant will be expensive with all your costs front loaded in the hope of more revenue down the line. You need to be sure you have all the funding you need in place and that it is compatible with your business model.
- What about your financial planning? This is related to the point above, but when assessing your funding needs you need to get the finances right. Budgets often overrun and, if you don’t have enough fiscal headroom, this new project could put your existing business under threat.
If you can answer all these questions, it’s a good sign you’re ready to take the next step. If not, it’s worth addressing them before you move on.
Securing finance for a restaurant expansion
The first thing you’ll need for any restaurant expansion is capital, and quite a lot of it. In an ideal world, your existing restaurant will be so profitable that you’ve built up enough capital to fund the expansion with your own financial reserves. This is cheaper than securing a business loan and doesn’t involve surrendering any equity by raising investment, but it can have risks.
Firstly, it could reduce your own financial security. The most common reason small businesses fail is because of a cash flow crisis. Entrepreneurs are, by nature, optimistic but you need a financial buffer in case things go wrong. If you don’t have it, a quiet period could quickly put your entire enterprise at risk.
If you have good credit, a good track record and can provide your home or business as collateral, you may be able to secure a business loan from a bank. However, they have become much more conservative since the financial crisis. The bar for securing capital is rising and, even if the fundamentals of your business are in place, banks may still be reluctant to risk their money on a new enterprise. Even if you are accepted, this loan will have an impact on your finances. Repayments are fixed which could be a constant drain on your finances.
Another option comes in the form of a merchant funding. There are many providers out there and, if you do your research, you may be able to find one tailored to the restaurant industry. The idea is simple: first you receive an immediate capital injection which you pay off gradually by agreeing a percentage of your credit and debit card receipts.
It’s a great solution for a restaurant which takes most of its money through card transactions and offers a flexible method of repayment. If business is good, you’ll pay it off more quickly; if it’s bad then you won’t lose as much if your revenue. In short, you pay it back when you get paid by your customers.
The advantage is that it spreads the repayments and lets you realise some of the return on investment before you start paying it back. It’s faster and more accessible than a loan and won’t require you to put your existing business at risk by eating into your savings.
This alternative type of funding for restaurants is perfect for anyone wanting to concentrate on an expansion strategy for this type of industry. Whatever route you go, though, it’s important to consider all options and ensure you have enough capital on hand to finance the expansion.
Choosing your new location
The right location can make your business, the wrong one can break it. Your first restaurant will most likely have been a success because of where it is based, the same must be true of your second. Here are a few things to consider:
- Does the new location have enough customers? Every restaurant appeals to certain people: old, young, professionals or tourists. Make sure there is enough of your target audience in your new location.
- Will it harm your existing restaurant? A common mistake is to set up too close and risk cannibalising your own restaurant. If your existing customers are coming from elsewhere, they may divert to the new one leaving you with roughly the same amount of custom spread over two outlets.
- What about the competition? Look at what’s already there. It may be that there’s already a pretty good restaurant doing everything yours does for less money. If that’s the case, the locals won’t see the need for another.
- What’s the area like? The most obvious areas will be those which are like your existing location. So, if you’re on a spot which caters to 20 somethings, you need an area with a similar demographic.
Finding the right new location isn’t an exact science, but the more you do it, the better you’ll get. You’ll develop an instinct for the kind of location which would be best suited to your new restaurant. Alternatively, you may be able to make slight changes to your second restaurant in order to make it fit the new location.
Preparing a good restaurant business plan
When expanding, you are effectively launching a new business. So, just as you made a business plan for your first restaurant, you need a good one for your second, third and so on. Aside from anything else, your funding partners will need to see a watertight business plan before they even consider advancing money.
The new plan should have most of the same components as the older one including:
- Overview: This describes the overall concept and staffing levels.
- Market analysis: Look at the local area and analyse the likely market.
- Financial information: All the financial information you need to budget.
- Projections:A good plan will need detailed and realistic projections about the future. It can be tempting to be optimistic but they need to be grounded in reality. Your existing restaurant should give you a pretty good steer on what you can expect.
While you may use your first business plan as a template, there may be some important differences to consider. Firstly, the experience of running your business may have taught you lessons about what you might have done differently with your plan. Take these and use them to make a better business plan. Secondly, your new restaurant will be a slightly different proposition. It might be bigger, more expensive, or have a slightly different theme. You’ll have to take account of all these factors to craft an effective plan.
Once you have a location and business plan in place, you’ll need to fit it out with both people and equipment. Because you’ve been there and done that before this should be relatively straightforward.
To make things easier you can try to use the same equipment as before and use the same suppliers. If you’re a loyal customer they might be willing to offer you a better deal. In some cases, you may feel this new location needs its own look which might affect the furniture you buy and the décor.
Staff will be crucial. Any restaurant will only be as good as the people running the business. When the McDonald’s brothers started to franchise their burger restaurant, the biggest problem they encountered was finding people who could match their exacting standards.
When you have multiple outlets each one is an extension of the other. A bad meal in McDonalds would affect your perception of every McDonald’s restaurant in the country. You need to ensure you have enough staff to manage the expected influx of trade and that they can replicate the dining experience which made the first restaurant so successful. One good idea could be to take the best people from your first restaurant and have them take leading positions in the new one.
Hiring the right restaurant team
It cannot be stressed enough that employees are the backbone of any restaurant, and they are the ones who keep it running. Therefore, hiring enough human resources before the launch of the new restaurant. Training any new team is demanding therefore they need to deliver what your established teams are expected of.
Often, a restaurant is known for its exceptional service and the signature dish. Hence, investing in a reliable and efficient staff is a wise step and crucial for restaurant business expansion. Hiring the team that can pull off the legacy of your restaurant brand, and then training them right is extremely important. This is vitally important for a restaurant expansion, a good tip is train the new staff and let them understand your values at one of your trading venues for constancy and quality.
The success of your first restaurant and the brand name will bring customers to your next restaurant. Only excellent food and service are going to help retain customers from coming back. Therefore maintaining consistency and quality across all outlets are a must while running a chain of restaurants. Standardization of recipe is essential and helps to keep the taste and quality of the food. In the case of long-chain restaurants, brand image is integral to the chain’s success. A standard format and menu help to keep the brand image intact when opening a new restaurant.
Marketing your restaurant
If your existing restaurant has a good reputation much of the hard work will have already been done for you. Word of mouth will spread and people will be looking forward to it before you even open. Even so you’ll have to do some work to drum up new customers. Unfortunately, marketing can be a hit and miss business. Businesses waste a huge amount of money on advertisements and marketing which doesn’t attract customers.
There are certain things you can do immediately. Firstly, let your existing customers know about the new restaurant. They can help spread the word. Secondly, educate new customers about what’s coming. You can take advertisements in the press, send brochures or even buy advertising space on the local radio. Whatever option you take, you need to let them know you’re coming and what they can expect.
If there is someone else in the area, you’ll need to show why you’re different and why customers should ditch a restaurant they know for something new.
Day to day running
Last but not least you need to tackle the business of getting up and running. You could start with a soft launch for a week or so in which you handle a few bookings and iron out any problems. This can give you a good idea of the ideal staffing levels, and which dishes are most profitable. Once you’re satisfied everything is working well, you could have a grand launch party. This will get you up and running and give you some of your earliest customers.
In these early days it’s important that everything goes well and you continue to meet all expectations placed upon you. Mistakes here can harm your reputation and make it very difficult to grow your new business.
This, then, is a time of great opportunity, but also considerable risk. Get it right and you’ll open up a new revenue stream taking your enterprise onto a new level. Get it wrong and you can harm the reputation of your entire business. Good look with your restaurant expansion plans!