Adding a Second Location
A single-unit restaurant does $1.8M annual revenue at a 6% net margin ($108K). The owner wants to open a second location in a nearby suburb. Build-out and equipment are estimated at $650K; the landlord requires a personal guarantee. The existing unit's manager is the only person who fully understands the operation, and the owner works 60 hours a week in the business. Projected second-unit revenue is $1.5M at a similar margin. The owner has $120K cash and can borrow against the first restaurant. Fixed costs at the new site (rent, insurance, base labor) run about $28K/month.
1. Assess whether the second location is financially viable as structured, and identify the binding constraint.
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Margin math: at 6% net on $1.5M, projected annual profit is ~$90K, or ~$7.5K/month. Fixed costs of $28K/month mean the unit must cover those plus variable costs before contributing anything - the projected margin leaves almost no cushion for a slow ramp. A few months of underperformance wipes out the year's projected profit.
Capital math: $650K build-out against $120K cash means heavy borrowing plus a personal guarantee. Debt service on the balance competes directly with the thin projected margin. The existing unit throws off only ~$108K/year - it cannot fund a $650K build with cash flow in any reasonable timeframe.
Binding constraint - management, not money: the owner already works 60 hours/week in unit one, and the only person who understands the operation is needed there. Opening unit two splits the one person who can run either. The financials are marginal; the operational constraint is disqualifying as structured.
Conclusion: not viable as structured. The plan assumes a manager who doesn't exist and a margin with no room for the normal ramp.
2. What conditions would you require before proceeding, and what would you do first?
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Conditions to proceed:
- A named, capable GM for unit two - hired and trained before opening, not the existing manager split across two sites. Without this, don't sign the guarantee.
- A realistic ramp and downside case - model months at 60–70% of projected revenue and confirm the owner can carry fixed costs and debt service through it without draining unit one.
- Capital structure that survives the downside - stress-test debt service against the slow-ramp case; the personal guarantee must be a conscious, quantified risk, not a formality.
- Protect unit one - it funds everything; don't let the owner's attention or its manager's time degrade it.
First action: build the downside financial model and start the GM search in parallel. If the numbers don't survive the slow-ramp case, or no credible GM can be found, defer - a profitable single unit is a better outcome than two units where one drags the other down.
Framing: the question isn't "can we afford to open?" but "can we afford the downside and staff it?" Both must be yes.