Marc Adelson
We see hundreds of deals every year at Homegrown, but the truth is, we say no to the majority of them.
Not because the concepts are bad or because the operators lack passion. But because the math doesn't work, and growth would destroy what they've already built.
The most common scenario is that someone comes to us with one or two locations that are barely profitable, or sometimes not profitable at all, and they want money to open a third. They've already signed a lease, are excited about the new space, and can see it all coming together.
And we have to tell them no, and it’s consistently one of the hardest conversations we have, because these are real people who've poured everything into their businesses. But if we funded them, we'd be helping them dig a deeper hole.
Look, we're in the business of funding growth…It’s literally how we make money. We want to fund your expansion. But we want to fund growth that works, not growth that destroys what you've already built.
The Pattern That Kills Businesses
Here's what we see most often: An operator has one location that's doing okay, breaking even or generating a small profit, and understandably, the excitement of early success starts pulling their attention toward growth. They begin exploring a second or third location, eventually finding someone willing to back them, and the buildout begins. But six months after opening, the reality sets in: the new location isn't ramping fast enough to cover its costs, the payments are becoming unmanageable, and their original stores are starting to suffer because their time and energy are now spread too thin. Within 18 months, what started as ambition begins to crumble.
From two locations to three? That's where brick-and-mortar business growth usually falls apart, because it’s the inflection point where you can't mask problems anymore. That said, it can also be the inflection point where everything starts to click if the right prep work has been done.
Most brick-and-mortar owners with one or two locations are actually really good at what they do. They know their business, their customers, and they're profitable. The operators who make it to five locations aren't uniquely talented or better funded – they just approached expansion differently. Before adding locations, they fixed their fundamentals and built the kind of infrastructure that could actually support growth. They chose financing that gave them flexibility instead of locking them into rigid terms, and they grew at a pace their cash flow could sustain.
When we look at why operators get into trouble, it usually comes down to one of three reasons:
1. The buildout costs too much relative to what the location can generate.
If an operator is spending a chunk of cash to build out a space, there needs to be a clear path to getting that money back within three to four years. If they can't see that path, they're gambling, not building.
Here's where it gets tricky. Let's say an operator needs $500,000 for a buildout – we can give them that money, but then they need to factor in the cost of capital, which breaks down to roughly $20,000-$25,000 per month in payments before they've even opened the doors or made their first sale.
So the real question becomes: can that location realistically generate enough revenue to cover that monthly payment, plus rent, plus payroll, plus food costs, plus utilities, and still leave the operator with actual profit?
When operators run those numbers honestly, if the answer is "maybe" or "hopefully," that's a red flag.
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2. Operating expenses are completely out of line.
This is especially common in the food and beverage industry. On paper, a business can look amazing. The food costs might only be 30% of what a business charges, which means it appears to have a 70% gross margin. That sounds incredible.
But when we pull back the curtain, gross margin is just the beginning of the story. That's revenue minus the direct cost of the product being sold. It doesn't include all the other costs of actually running the business.
When operators look at the full P&L, they have to subtract everything else: labor, rent, utilities, insurance, waste, marketing, repairs. All of it. What's left over at the end is the actual profit, often measured as EBITDA. For a healthy business, that number should be somewhere between 10-15% of total revenue.
But we see operators all the time who are at zero or negative. Their gross margins look great, but by the time they pay for everything else, there's nothing left.
3. You’re not balancing infrastructure investment with cash flow.
Growth isn't just about opening more doors. It's about building the systems and team that can support those doors while maintaining healthy margins.
Think about where the business needs to be 5-10 years out. What people will be needed? What systems? Smart operators invest in infrastructure before they expand, but they do it thoughtfully: bringing on a general manager who can run a location without them there every day, and building processes that are replicable across sites. The key is making sure the existing cash flow can actually support that infrastructure before taking on anything new. More on all that in our CEO’s post, “Should I Be Growing at All? Part 1”.
The goal is to maintain that 10-15% EBITDA margin even with infrastructure in place. Once that foundation is in place and an owner is still generating healthy cash flow, then they can expand, because what they generate becomes pure four-wall EBITDA. That way, they’re not rebuilding infrastructure for every new door, but rather leveraging what they’ve already built.
Operators who skip this step, who are "just winging it" and figuring it out as they go, are the ones who end up drowning by location three or four. They're personally covering gaps in every location, working 80-hour weeks, and wondering why nothing is working.
The common thread in all of these scenarios is that entrepreneurs have vision. They can see exactly how their business should grow, but they don't have a financial plan to execute.
The Entrepreneur's Achilles Heel
Here's the thing about entrepreneurs: you’re wired to see opportunity. You spot gaps in the market and are driven to build, which is what makes you successful in the first place.
But that same drive can also be your Achilles heel.
And because you're a doer, you want to move on it now. Waiting three years to make sure location two is solidly profitable before opening location three? That feels like wasting time, and you didn't get where you are by being cautious.
But the difference between wanting a second location and being ready to run two locations profitably isn't about your vision or your drive. It's about whether the numbers actually support that move right now. Your instinct to grow isn't wrong, but the timing might be.
How to “Do Growth” the Right Way
If you’re reading this and thinking about expansion, here’s what we actually want you to do before signing a lease or coming to us for financing:
Get advice by talking to an advisor, a banker, or a financial consultant. Find someone who understands cash flow and can help you think through whether your business can actually support the expansion you're envisioning.
Build a financial plan. Not just a vision of where you want to be, but an actual roadmap for how you'll get there. What will it cost? What will it generate? How will you pay for it? When will you break even?
Don't grow too fast for the sake of growth. Growth at the wrong pace, with the wrong financing, without the right infrastructure in place can destroy businesses that would have been successful if they'd just waited another year.
We want to be financial partners who share your vision and help you create a plan to execute it. Because what we don't want to do is enthusiastically fund something that's going to collapse in 18 months. One plus one equals two – the numbers either work, or they don't.
Your job as an operator is to make sure your revenue expectations match your cost reality. That means understanding what it really costs to build, operate, and staff a new location. It means being honest about what your existing locations actually generate. And it means having the patience to grow from strength, not from hope.
Because we want to fund your growth. We really do. But only when the math supports it.
If you're thinking about expanding and want an honest assessment of whether you're ready, we're here for that conversation. No ego or judgment. Just the numbers and the path forward.
Should I Be Growing at All? Part 2
