Ian Gloer
December 12, 2025
Before you take on any capital (whether it's a loan, a revenue share, or an equity investment) you need to answer one fundamental question: Will this make me money?
Not just revenue. Not just sales growth. Actual profit. Actual return on your investment.
Too many brick-and-mortar founders skip this step. They focus on how much they need to raise, where they'll open, and what the space will look like. But they don't do the hard math on whether the new location will actually generate a return that justifies the capital, the risk, and the years of effort ahead.
Here's how to think through projected ROI before you sign anything.
ROI Is Not Revenue
Let's start with the most common mistake: confusing revenue with return.
If you invest $400,000 to open a new location and it generates $800,000 in annual revenue, that sounds impressive. But revenue is not profit. And profit is not ROI.
ROI measures how much profit you generate relative to how much you invested. It's calculated as:
ROI = (Net Profit / Total Investment) × 100
If that same $400,000 investment generates $800,000 in revenue but only $50,000 in net profit after all expenses, your ROI is 12.5%. That's before you factor in the time, stress, and opportunity cost of opening the location.
A 12.5% return might be acceptable to you. It might not be. But you need to know the number before you commit.
What Counts as Your Total Investment?
Most operators underestimate what they're actually investing when they open a new location. It's not just the buildout cost. It's everything you're putting in to get the business operational and sustainable.
Your total investment includes:
Buildout and construction costs. Tenant improvements, equipment, furniture, signage, all of it.
Soft costs. Permits, legal fees, architect and design fees, insurance deposits. These add up faster than you think.
Pre-opening expenses. Inventory, initial marketing, staff training, rent during construction. You're paying before you generate a dollar of revenue.
Working capital. The cash you need on hand to cover payroll, supplies, and unexpected costs during the first few months while revenue ramps up.
Opportunity cost. What else could you do with that $400,000? If you put it in the S&P 500, you'd average around 10% annual returns with far less effort. Your new location needs to beat that, or it's not worth your time.
We've seen operators budget $300,000 for a buildout and end up investing $500,000 once they account for everything. If your ROI projections are based on the lower number, you're setting yourself up for disappointment.
Project Conservative Revenue
When forecasting revenue for a new location, optimism is your enemy.
It's tempting to look at your best-performing location and assume the new one will hit similar numbers. But new locations almost never perform at peak levels right away. It takes time to build awareness, earn customer trust, and dial in operations.
A more realistic approach is to model three scenarios: conservative, moderate, and optimistic. Then make your decision based on whether the conservative scenario still generates an acceptable return.
For example:
Conservative: The new location does 60% of your best location's revenue in year one, 75% in year two, and 85% in year three.
Moderate: The new location does 75% in year one, 90% in year two, and matches your best location by year three.
Optimistic: The new location matches or exceeds your best location from day one.
If your ROI only works in the optimistic scenario, you're gambling. If it works in the moderate scenario and looks strong in the conservative scenario, you're making a calculated bet.
Account for Realistic Ramp-Up Time
Most brick-and-mortar businesses don't hit full revenue potential immediately. There's a ramp-up period where sales start slow and gradually build as customers discover you, word spreads, and operations smooth out.
For restaurants, the ramp can take six to twelve months. For retail, it can take even longer, especially if you're entering a new market without existing brand recognition.
During that ramp period, you're still paying full rent, full payroll, and full operating costs. But you're not generating full revenue. That gap eats into your ROI.
Factor this into your projections. If you're modeling $60,000 in monthly revenue, assume it takes three to six months to get there. Model what months one, two, and three actually look like (maybe $20,000, then $35,000, then $50,000) and see how that impacts your cash flow and profitability timeline.
Understand Your True Operating Costs
Revenue projections get all the attention, but operating costs kill more expansions than anything else.
Your operating costs at a new location will include:
Rent and occupancy costs. Base rent, CAM charges, property taxes, insurance, utilities.
Labor. Payroll, benefits, payroll taxes. This is often your biggest expense.
Cost of goods sold (COGS). The direct cost of the products you're selling.
Marketing and customer acquisition. You're a new entrant in the market. You'll need to spend money to get people in the door, especially in the first year.
General and administrative (G&A) overhead. When you go from one location to two, your back-office costs don't double, but they do increase. You'll need more support for accounting, HR, management oversight, and supply chain coordination.
Then, add it all up. If your total operating costs are 90% of revenue, you're left with a 10% net margin. That's tight. If an unexpected cost comes in or revenue falls short, there's no buffer.
Calculate Payback Period
One of the simplest and most useful metrics for evaluating an investment is the payback period: how long will it take to earn back your initial investment through net profit?
Payback Period = Total Investment / Annual Net Profit
If you invest $400,000 and the location generates $100,000 in net profit per year, your payback period is four years.
At Homegrown, we generally like to see a payback period of three to four years. If it's longer than that, the risk starts to outweigh the return for most operators. You're tying up capital, taking on stress, and hoping nothing goes wrong for half a decade before you break even on the investment.
If your payback period is six or seven years, ask yourself: Is this really the best use of my time and money? Would I be better off improving my existing location, investing in a different opportunity, or simply keeping the capital for future flexibility?
Stress-Test Your Assumptions
Once you've built your financial model, stress-test it. What happens if things don't go exactly as planned?
Run scenarios like:
What if revenue is 20% lower than projected?
What if buildout costs are 30% higher than estimated?
What if it takes twice as long to reach profitability?
What if a competitor opens nearby six months after you do?
What if your rent increases 5% annually instead of staying flat?
If your ROI falls apart in any of these scenarios, your plan isn't resilient enough. You need more margin for error, either by raising more capital, reducing costs, or rethinking the location entirely.
Factor in Your Cost of Capital
Here's where a lot of operators get tripped up: they calculate ROI based on the business's performance, but they forget to account for what they're paying to access the capital in the first place. Always calculate ROI from your perspective, after accounting for the cost of capital.
Know When the Numbers Don't Work
Sometimes the answer is no. The ROI doesn't justify the investment. The payback period is too long. The margin for error is too thin.
That's not failure. That's discipline.
We've seen operators walk away from deals that looked great on the surface because the financial model didn't hold up under scrutiny. A few years later, they were glad they waited.
If the numbers don't work now, they might work later. Markets change. Your business matures. Better opportunities emerge. But forcing a deal that doesn't pencil out is how good businesses go under.
What This Means for Your Decision
Evaluating projected ROI isn't about being pessimistic. It's about being honest.
You're not just asking, "Can I open this location?" You're asking, "Will this location generate enough profit, fast enough, to justify the capital, the risk, and the years of effort ahead?"
If the answer is yes (if the ROI is strong, the payback period is reasonable, and the numbers hold up under stress) then you're making a smart investment.
If the answer is no, or even "maybe," you owe it to yourself and your business to keep looking.
At Homegrown, we help brick-and-mortar operators evaluate these decisions every day. We know what strong ROI looks like, and we know when the math doesn't add up. If you're working through these projections and want a second set of eyes, reach out. We're happy to help.
Should I Be Growing at All? Part 2
