CASE STUDY: Hopleaf

Introduction

Michael and Louise s Hopleaf is a Brasserie-style pub in Chicago, Illinois, that was founded in 1992 by Michael Roper, a long-time bar owner and restaurateur who had recently moved to the Chicago area in search of a new business venture. While searching for a desirable location for the business, Roper came upon a building that was used as a liquor store business with a taproom connected. Roper purchased the business for a moderate $77,000; however, until Roper was able to purchase the building itself, Hopleaf functioned solely as a bar without the ability to offer food, as there was no kitchen in the venue. During this time, Ropers business brought in $420,000 annual revenue on beverage sales alone. Once the building was purchased, Roper installed a kitchen and made other necessary renovations, which resulted in annual revenue jumping to $1.5 million and continuing to grow until eventually topping out at $3.2 million.

The Challenge

Originally, when the kitchen was installed, food service was not expected to be a large revenue builder, and the restaurant was only open for dinner. As it turned out, food business was a large part of Hopleaf s growth and success, and it became a part of the overall concept. As business continued to increase each year, the restaurant began to reach full capacity. At this point, the kitchen was too small and there were not enough seats to handle the level of business demand. Currently, Hopleaf is at full capacity every day of the week, and the only way to grow is to add more space, seats, and hours of operation. The biggest challenge is finding the space necessary to provide customers with extraordinary guest service and the desired overall experience at Hopleaf.

Expansion Proposal

In late 2007, Roper was approached by the owners of the struggling restaurant business in the connecting building, who offered him the chance to purchase their building for $2 million. However, none of the commercial buildings in the area had yet approached selling for that amount of money, and these same owners had just sold a larger three-story building across the street for $1,075,000. Roper knew that purchasing this building would require him to take out a large construction loan to renovate the building and create one Hopleaf business, which would cost an additional $1.5 million on top of the building purchase. Also, in order to fund this expansion, Roper would need to find a bank that would be willing to back a large construction loan during a time when the economy was struggling, and most banks were not willing to fund a project of this caliber. A second option would be to take on investors or limited partners to help fund the expansion. However, this would compromise the independence of being the sole proprietor of a business, which meant that business decisions and the way the restaurant was run would include those partners or investors. Ultimately, Roper expects that the addition of the new building would provide a much larger kitchen, an extra 113 restaurant seats, and an additional 20 draft beer lines. Annual revenue is expected to increase from $3.2 million to $5 million, and hopefully top off at $6 million to $7 million, but this is not for certain.

1. Will the return on investment merits purchasing the building for $2 million?

2. Are there any alternatives to providing extraordinary guest service at the current level of business demand without expanding the physical building?

3.What should the restaurants seat turnover be?

4. If the building is purchased, is it more feasible to wait for a bank that is willing to back the construction loan, or should Roper take on investors or limited partners to get the project moving faster?

5. What are examples of different sources of money the owners could use to fund the building?