Purveyor’s Guide to Multi-Unit Ownership
So, you’ve opened at a food hall and are successful. How do you grow? In the past 10 years we’ve offered over 100 early-stage entrepreneurs a lower-risk restaurant debut, but even after a purveyor is successful with us, they sometimes falter on the second location. There is a pattern that boils down to a few simple things, which we are going to go over in this article.
But first, is the concept ready? Going out too early is actually a common cause for failure. We use the following guidelines to help people understand if they are ready:
The original location has at least $800k in annual sales volume
The owner keeps reconciled financial statements
There is a strong operations manager in place other than the owner
There is at least two years of operating history in seasonal markets; one year otherwise
The owner is still meaningfully engaged in the business
The cash flow is 20% of net sales after adding back ownership salaries/perks
A concept should have all of these things. We’ve picked these items intentionally. The first item is related to sales and it signifies that the entrepreneur has found a product that people want to buy, often called “product/market fit.” If the concept struggles to achieve the sales volume in a decent location, something is wrong. A talented chef will sometimes push the wrong concept out. The menu may be unclear, the service may be inadequate, or the product may be inconsistent, but the bottom line is that it’s likely not worth the entrepreneur’s savings to expand from a weak sales figure.
Secondly, the owner keeps reconciled financial statements and uses them to assess the business to make margin at a consistent interval. Reconciliation is the process of matching the books to the bank accounts at the transaction level. Quickbooks (or other accounting software) will do most of this automatically, but it’s the only thing that ensures accurate statements. This is important because an entrepreneur can’t expect to manage its managers to profitability without a consistent form of numeric communication. It is the framework of multi-unit management. No matter what happens, the owner must commit to a quality bookkeeping process before advancing.
Finally, for an owner to step away from the first unit, the owner must now become a recruiter of senior-level managers. This is a new, challenging task for an owner that is crucial to additionally define. Senior level managers should:
Have at least 1-3 years in the system they will be managing
Demonstrate the ability to solve problems on their own
Have a career-oriented mind set
Understand and demonstrate an unprompted interest in selling the product
Show the ability to manage/hire/train their own staff with kindness and patience
When that person is in place, the owner must convert herself into a multi-unit manager gradually. This means remaining committed to operations, routine weekly check ins, routine operational inspections, round-the-clock on-call availability, clear financial reporting and goals. That system needs to become painfully routine over a minimum of 3 months to introduce the proper structure. The manager will want a safe and stable transition to hands-off store management with attentive coaching and safety netting.
One of the hallmarks of cultivating unit-level leaders is that the owner will be required to make an advance financial commitment to the manager that will run each store. This comes in two parts: a slightly better-than-market base pay and an incentivized pay program. The latter is often called profit-share, performance compensation, or synthetic equity. The structures are all relatively similar and focus on numerically-derived participation in the success of the business. Here’s some of our favorite examples:
Owner pays managers a percentage of the increase in annual sales (after the first established year)
Owner pays managers a percentage of cost savings under the annual budget (which is increased for inflation each year). This is typically tied to a list of “controllables” or things that management can actually affect, such as inventory and expenses, but probably not overhead.
We still encourage owners to pay an annual cash bonus to managers in addition to the above, which helps with retention, customer service, store cleanliness, food safety, and other non-numerical factors. This may look like a higher base pay and bonus for the first year and then incentive-based pay after the first anniversary, where the historical numbers allow both parties to calculate the value of the incentive program. The goal of the program is smooth increases in take home compensation to the manager overseeing the business unit. A very common mistake is when an owner promises undefined future compensation once the store is open/successful which almost always results in painful breakups as the manager feels she is owed much more than the owner is willing to part with.
The process of setting up each expansion store is the same as the first, but it goes a little faster with experience. The checklist for each store must always be complete before the next store is committed in order for an expansion to be sustainable over the long term.* If so, the owner focuses most of her effort on location selection, awareness marketing, executing routine checks, and recruiting new unit managers. If an owner gets very good at this and can assemble 6-7 units doing average or better sales volumes, then most owners exit by converting the system to a franchise (sometimes called a “reverse franchise”), where in the store managers form LLCs and pay royalties to the owner. A second similar method is for the owner to increase the incentive program to a financial level where the owner effectively becomes an administrative partner to oversee accounting, payroll, and compliance. Some owners may hire this out to an accounting firm and focus on maintaining relationships.
There are a couple of caveats:
The owner is never completely out of the business. Owners must oversee routine checks to ensure quality. Many business owners aren’t built for rigid routines. The consistent performance of the business will depend on the owner’s ability to give it consistency.
Accounting and compliance must be overseen by a capable party. A lot of owners come from the operations side and realize they hate the accounting side, even if it means they don’t have to work operational schedules. Some find that they actually love the operational side and stay very engaged on that side.
The success of the system almost always comes down to the discipline of ownership.
Here’s a cheat sheet of common failures to avoid:
Don’t overpay for real estate. It needs to be between 5-8% of your historical net sales volume. And it must have the features your customer considers convenient. Don’t rely on your broker to make your real estate decisions. They are compensated by the landlord for getting a deal closed. Get independent advice and pay for it.
Don’t promise future raises. Give raises you can afford. Do this in advance. It’s part of the risk you are taking.
Don’t “figure out an accounting process later.” Your new manager needs structure to avoid panic when left alone.
Don’t deprioritize customer service and cleanliness
Ubereats/Doordash is hideously expensive advertising that offers no long-term leverage to the business owner. It is not a marketing strategy.
* Note that no one has a perfect opening record. There will be unsuccessful stores. See our next article on first leases for food brands. Also, while this model requires the owner to stabilize each store before moving to the next, we recognize that well-funded expansion strategies may elect to move faster. This is geared toward the typical food hall owner/operator looking to build a local career.