Changing course: Expansion can be the wrong move

CHICAGO (Fortune Small Business) -- When I sold the idea for create-your-own stir-fry restaurant to a group of ten investors, I told them that the big payoff would come with the exit strategy: acquisition by a large restaurant company.

During the next five years, I established five successful Flat Top Grills in the Chicago area. Then, seeking advice on how to make them more valuable, I spoke to some investment bankers, who recommended that I prove the concept in a different market. I started looking for another city in which to expand, and I chose Washington because its demographics were similar to Chicago's.

I opened two Flat Top Grills there - one in a busy office district and another near a university. Both were similar to the locations of my Chicago restaurants. But problems started before the doors opened.

Construction costs at both spots went 60% over budget - to more than $1 million per restaurant - because we didn't do our homework. Building costs were higher in Washington, and I soon saw that the good relationships I enjoyed with Chicago suppliers and contractors had been key to getting things done on schedule and within budget there.

The next issue was staffing. Attracting experienced store managers proved harder than I expected. It was the height of the dot-com bubble, and D.C. had a booming high-tech industry that absorbed the best of the local workforce. I also hadn't considered that Flat Top lacked the name recognition that it had developed in Chicago. While word of mouth and advertising brought us some customers, momentum didn't pick up in the same way that it had with the first five restaurants.

Finally, managing the Washington locations from Chicago was both difficult and expensive. While the restaurants were profitable, the company spent much more than necessary to keep them running. We paid a price not only in plane tickets and hotel rooms but also in the diverted attention of senior management.

Eventually I had to admit that the decision to expand to D.C. was wrong. After many sleepless nights, my management team and I decided to sell both of the Washington restaurants. By that time we had eight Flat Tops in the Midwest - all within a four-hour drive of Chicago.

Following the sale of both D.C. restaurants, we saw 2006 revenues for our remaining locations jump more than 10%. Profits shot up by more than 22%. Still, the company had lost some of its momentum.

I promised Flat Top's investors that I would open two restaurants a year, every year, but given the troubles in D.C., that plan was delayed. We opened one new location in 2006 and finally got back on track last year, when we launched two new stores. This year we added another, bringing our total to 12.

Our 2007 revenues were in excess of $20 million, and I now have financing to open ten more restaurants in the next two years. But this time we'll be growing within the Midwest, where we enjoy the ripple effect of name recognition.

Ultimately, Flat Top is a more valuable company now that we've focused on the Midwest. There's no question that we're well positioned for an acquisition, thanks to our strong regional brand - and we've had lots of interest. We're just waiting for the right partner.