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Chain Reaction

Get it going with this advice on opening more locations.

After three generations of his family spent several decades running a number of restaurants, Louis Pappas decided to branch out with his wife, Nancy. In 2003, the couple began opening what is now a seven-unit chain of Louis Pappas Market Cafés. Says Louis, 50, "I've always wanted to pursue this multiunit concept." Here, he and experts offer tips on growing one location into a chain.

1. Know thyself. Colorado Springs, Colorado, strategy consultant Tom DeCotiis, who has advised a number of chain operations, says that before anything else, entrepreneurs must be clear about their motivations for going multiunit. "They may think they have to grow to make money," he says. "That's probably not the best reason." Rather than financial motivation, look for motivations such as the desire to share opportunities with others or to express a personal vision.

2. Know when to grow. If you're drawing a lot of customers from outside your normal market area, consider adding a unit, says Jerome Katz, entrepreneurship professor at St. Louis University. Ask credit card companies for your customers' ZIP codes. Then think about a place where a lot of people who resemble your customers live and shop. Says Katz, "That becomes an area for natural expansion."

3. Go slow. Rather than starting with a nationwide rollout, take baby steps, Katz says. Add a second shift in your first location, and an e-commerce operation if it suits your business, before expanding to another location. Adding a shift lets you try out new managers and get comfortable with handing over some control. E-commerce forces you to develop systems similar to the ones you'll need for a second location. Another option is opening a temporary or seasonal store in a mall kiosk, for example, to give another location a low-cost try.

4. If you don't know how, find someone who does. Despite being a third-generation restaurateur, Pappas took on veteran chain-eatery executive Gordon Yates as partner once he began formulating the multiunit vision. "I realized we weren't going to be able to do it on our own," says Pappas. "We were going to have to find somebody from the corporate multiunit world."

5. Know when to quit. First, if you can't get investors or lenders to finance your expansion, go back to the drawing board. Startups usually benefit from feedback and questioning from family, friends and other seed capital sources, says Katz. Once the entrepreneur has succeeded enough to expand without outside financial assistance, that source of advice may dry up, he warns. That's also why Katz advises entrepreneurs never to use entirely internal funds for expansion. "If you do it alone," he says, "there's too much of a chance you've overlooked something." Second, if your expansion location isn't profitable after a year, you should suspect it's a loser. Two years to black ink is the benchmark for startups, but a second or third location should be profitable within a year or a year and a half.

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This article was originally published in the November 2006 print edition of Entrepreneur with the headline: Chain Reaction.

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