“Each success only buys an admission ticket to a more difficult problem” is a statement often attributed to former Secretary of State Henry Kissinger.
Any entrepreneur with a successful restaurant venture faces an interesting prospect: Is the next move to open another restaurant that mirrors the successful one in another location? Or is it better to leverage the infrastructure of the existing business to establish a different kind of restaurant in the same town?
Or should a restaurant group be created to include a steakhouse, a Mexican restaurant and a seafood restaurant in the same city? Might the single concept be extended to multiple locations? Or maybe the entrepreneur just wants to focus attention on this first restaurant.
While running a single restaurant can make for a successful enterprise, the financial rewards are usually limited. The owner might carve out a decent living if the restaurant is successful but the chances of becoming wealthy are very slim.
For those ready to expand a restaurant business, the best way to proceed may seem counterintuitive. It turns out that leveraging the infrastructure of the existing restaurant to create a mixed-concept local restaurant group will probably result in only a fraction of the value that could be attained from focusing on a single concept in multiple locations. Leveraging the infrastructure of an already launched business may generate cash flow and acclaim but not wealth, which we believe requires the “multiple effect.”
A single concept that's focused and perfected can result in faster growth than trying to realize multiple new concepts that are so far unproved. If the original concept works, stick with it. Value will increase by a factor greater than the number of units because success has already been shown.
A business has current value and future value. The existing units have a current value and the future value would be the current unit's cash flow plus that of the planned unit. In short, creating a concept that can be applied to multiple units would enable the restaurant entrepreneur to receive value not only for the existing units but also for the ones that could be created in the future.
Restaurant companies that rely on multiple concepts may be bought or sold based on the cash flow generated -- with no value assigned to future units if the new ideas have not been proved successful in multiple markets.
Achieving strong financial results requires tremendous planning and a clear goal. Here are six essential steps to take:
1. Develop a real estate strategy that identifies locations where the concept is a cultural and demographic fit.
2. Prove unit-level operating economics: The first unit should have above-average financial results for there to a second unit to be opened.
3. Create reproducible efficiencies and systems by adopting best practices of the industry and documenting front-of-house and back-of-house procedures.
4. Design a capital structure and secure investment for the first unit with follow-on commitments for two more units if identified financial hurdles are met.
5. Prove geographical diversity when selecting the second and third units.
6. Demonstrate operations efficiency at the units’ diverse locations.
So whether the goal is to create the next In-N-Out Burger chain or just to boost wealth by duplicating a successful deli-cafe in the next town over, put serious time into planning ahead. Remember that while it's possible to arrange for two or more restaurants to look alike and serve the same food, the second and subsequent projects willl need just as much attention as the first -- from the owner and from staff.
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