Personally I think a more direct continuation could have been like:
Big Whoop smashing open let whatever crazy magic inside it seep out
It's the presence of Big Whoop that interferes with LeChuck's spell to transport Guybrush into another dimension
The longer Guybrush and LeChuck stay near the ruins of the chest, the more the Big Whoop magic permeates and the weirder things get (brother, parents, fairground, etc.)
Elaine appears in the Big Whoop dimension and helps him remember that he's not a kid
The two of them try to escape back to reality but Guybrush is tricked by LeChuck
Instead of transporting himself and Elaine out of Big Whoop... he transports LeChuck and himself to where LeChuck wanted to send Guybrush originally... Hell!
In Hell LeChuck is lauded for his behaviour on Earth and immediately given a position of power...
Unfortunately for Guybrush, all LeChuck wants to do is torture Guybrush for eternity
Fortunately for Guybrush there's some sort of technicality with his life and he's not immediately condemned
Stan is also there in Hell... having died after Guybrush nailed him in his coffin
Stan doesn't care, though -- he's unflappable, he's always looking for another scam to run in order to get some power in Hell
Guybrush needs to escape Hell, but when he tries to leave he discovers he can't because he doesn't have a spiritual essence (after LeChuck destroyed it in MI2)
The lack of spiritual essence is why they don't know what to do with him in Hell... a bit of good luck
Much of the game is spent with Guybrush trying to get his spiritual essence back
At some point he meets his own spiritual essence in Hell...
But he has to be careful... once he has his essence back he back be tortured for eternity, but without it he can't escape
Guybrush finds himself incredibly annoying and unpredictable to deal with (like other characters found Guybrush on earth)
Eventually Guybrush does escape and finds himself back on Dinky...
Elaine is waiting outside... they reunite.
The power of Big Whoop is mostly gone... but there's still odd moments here and there
Back in Hell LeChuck is blamed for Guybrush's escape
Stan has spent the game scamming everyone in Hell and is locked up next to LeChuck... forcing LeChuck to spend eternity listening to him
The end