Three common mistakes restaurants make when expanding locations

Expanding a restaurant to multiple locations is a dream for many restaurateurs. Growth brings opportunities for increased revenue, brand recognition, and a wider customer base. However, expansion is also fraught with challenges. Without proper planning, missteps can lead to financial strain, operational inefficiencies, and even legal risks. Here are the three most common mistakes restaurant owners make when expanding –– and how to avoid them.

1.Underestimating liability risks

One of the most critical, yet often ignored, consideration in expansion is liability management. Many restaurant owners initially structure their businesses with a single legal entity, believing it simplifies operations and reduce costs. While this approach might work for single location, it becomes a significant liability risk when applied to multiple locations.

Here’s why

If all locations operate under the legal entity, any legal issues –– such as lawsuits, employee dispute, or lease disagreements –– can endanger the assets of the entire entity. For instance, a lawsuit involving one location could jeopardize the financial security of all other locations. Without proper protections in place, this can quickly escalate into an existential threat for the entire brand.

The solution

Set up separate legal entities for each location. This creates a liability shield that protects other locations from the financial or legal issues of a single restaurant. It also offers more flexibility when it comes to selling individual locations. Share sales, favoured by sellers for their tax advantages, can often be easier to execute when locations are legally distinct. Establishing separate legal entities also makes it simpler to address underperforming locations. Larger restaurant groups often manage a mix of high-performing and underperforming outlets. With separate entities, you can efficiently close or divest an underperforming location without jeopardizing the stability or operations of the rest of the brand. This approach ensures your business remains resilient and focused on its strengths.

2.Mismanaging tax complexities

Expanding to new locations introduces not only operational hurdles but also significant tax challenges that can impact profitability.

Here’s why

A frequent misunderstanding involves the small business deduction. As your taxable income exceeds the small business rate, some restaurant owners assume that creating multiple legal entities allows them to multiply the deduction, but under Canadian tax law, associated corporations must share a single deduction. Failing to account for this can lead to unexpected liabilities and reduced profitability.

Further complications arise when expanding into new provinces or regions. Canada’s tax system varies across jurisdictions, with distinct rules for corporate and sales taxes. For example, provinces like Quebec, B.C., and Manitoba have unique regulations that can catch restaurant owners off guard if they’re unfamiliar with local nuances.

Tax strategy becomes even more critical when considering long-term objectives, such as selling the business or passing it on to a successor. A well-structured business may qualify for the lifetime capital gains exemption, offering substantial tax savings. However, accessing this benefit requires early, proactive planning. Rushed, last-minute adjustments rarely succeed and often result in missed opportunities.

The solution

Speak with a qualified accountant or tax professional. Tax planning and compliance and can be quite technical, and professional advice ensures your business remains optimized for tax efficiency and fully compliant across jurisdictions — while minimizing tax burdens and positioning your business for long term success.   

3.Neglecting operational oversight

Running a single restaurant is challenging enough, but scaling up to multiple locations introduces an entirely new level of complexity from an operation perspective.

Here’s why

Many restaurateurs underestimate how difficult it is to maintain consistency and control across a network of restaurants. Without a strong operational framework, even a thriving business can experience issues with operational management.

A common issue is the lack of centralized systems for financial reporting and operational oversight. When owners rely on traditional, location-specific bookkeeping methods, they often struggle to monitor performance across multiple locations. This can result in delayed decision-making and missed opportunities for improvement. Without a real-time financial data, it can be difficult to identify underperforming locations or address operational inefficiencies before they escalate.

The solution

Investing in a cloud-based accounting and management system can help streamline operations. These systems provide timely, accurate data, allowing owners to make informed decisions without being physically present at every location. Moreover, they can unify processes such as payroll, inventory management, and sales reporting, ensuring consistency and reducing the risk of other errors.

Operational challenges also extend to staff management. With multiple locations, restaurant owners can no longer rely on personal oversight to ensure quality. Building a strong management team and implementing standardized training programs are essential for maintaining brand standards and delivering consistent customer experiences.