Expert roundup: Is your business ready to expand with a new location?
11 min read
Expansion can be a prospect that’s fraught with both opportunity and risk for many small business owners.
Take Wise Acre Frozen Treats, for example. Its founder and CEO, Jim Picariello, recalls that 18 months after he launched the business.
“… [W]e had 15 employees, a 3,000-square-foot manufacturing facility, and distribution to all of the natural foods stores and many major supermarket chains on the East Coast. Then we landed a contract to distribute on the West Coast, too — but we never got the chance to fill all the orders. By the end of the year, we’d gone bankrupt and I was unemployed.”
Clearly, Wise Acre’s collapse was due to a number of factors, including the near-collapse of the economy. But the too-sudden growth played a part as well.
So if you think it might be time to expand your small business to a new location, take the time to evaluate the situation carefully and follow the advice of the small business expansion experts we’ve gathered below. Their suggestions will help you decide whether it’s time to add a new location.
Clarify your reasons for adding a new location
Why are you thinking about adding a new location? Our experts agree that it’s crucial to get clear on this as soon as possible.
Troy Hazard, entrepreneur and author of the book Future-Proofing Your Business, says it’s important to get clear on this to make sure your ego isn’t driving the decision: “Park your ego. More markets [or] locations on your letterhead is not a sign of good business, a growing business, or of strength. The bottom line is still your most powerful measurement.”
While the decision itself should never be driven by ego, you do have to consider the impact on yourself as the owner, Hazard also points out.
“As the leader you will be the one traveling to open it and get it going so it will mean a lot of time and focus on that venture. It can sometimes [distract from] your focus,” Hazard says. So it’s important to be comfortable with your ability as the owner to manage the added workload.
Once you’re satisfied that personal interests aren’t driving the decision and that you’re ready for the added work of a new location, it’s time to look at the current state of your business and whether it’s ready to support an expansion.
Analyze your customers with market testing
How do you know when your business is healthy and strong enough to support a new location? Your customers can tell you.
Business growth strategist and consultant Kevin Huhn says it all comes down to market testing, and suggests surveying your clients initially to find out where they come from. If they’re traveling from some distance to get to you, it might be smart to consider a new location central to that location.
Basically, you need data. And one of the first types of data you should collect, our experts agree, is customer data, which helps your customers let you know when it’s time to add a location.
Yahaira Núñez agrees. In addition to her work with Excelsior Growth Fund, a nonprofit small business lender and certified Community Development Financial Institution, Yahaira regularly coaches small business owners on everything from financing an expansion to helping them with a business plan.
Ms. Núñez says, “If you make note that a significant number of customers are coming from other places to your place of business, that is when you know that you could support another location. You also need financing, and the right staff, but you should lead with demand.”
Cory Collins, business coach and President/CEO of Ample Opportunity, Inc., also emphasizes the need to look at “simple supply and demand. When a business turns the corner and begins consistently receiving more customer requests than it can accommodate, it could be a sign that expansion is needed, especially when a high percentage of these requests are not coming from a close proximity of the current location.”
Examine your current location’s performance
You also need to examine your existing location or locations carefully. Don’t expand simply to prop up the health of an existing location. As Troy Hazard puts it, “Don’t make one child sick to save another. If expanding into a new market is to prop up the poor performance of the first location/market in the belief that ‘this one will be better’ then you are only going to drag both of them down.”
Fred Schebesta also suggests looking carefully at your first location and asking a critical question: “[W]ill the first business location survive without you there?”
Schebesta says a great way to find out is to test the premise. “Start by pulling away from meetings and general decisions to see what impact there is. With great processes and people in place, the running of the business should not rely too heavily on the owner anymore. That will give you more time to focus on setting up the new location.”
Huhn agrees and observes that in many cases, “expansion is looked upon as the solution to grow the business. But the real goal is scaling. Growing revenues but increasing expenses so profit is net zero; [it] just means you added work for no gain.”
Rather, Huhn suggests the real goal is scalability — “the capability of coping and performing under an increase in workload, like bringing on a new customer. In the example of a professional service business, if it scales well, it will be able to maintain or even increase its level of performance or efficiency by the larger demand without having the same increase in costs.”
Evaluate the strength of your systems and staff
The two key components of your business’s ability to scale in the face of an expansion are your systems and your staff. Both must be capable of supporting an additional location if your expansion plans are to succeed.
“Typically, members of the current staff will need to move over to the new location, whether temporarily or long-term, to get things up and running with a solid foundation, as well as train additional employees.”
Collins suggests starting this process before the new location is opened, with training to take place at your existing location. That way, Collins says, you’ll have a new competent team in place “from day one.” This kind of preparation also applies to your workflow and systems. Collins notes that this is how mega-franchise chains like McDonald’s can so easily open a never-ending succession of new location: “because of their rock solid systems. Staff members at the new location shouldn’t have to ‘reinvent the wheel’ or create new business structure (short of minor adjustments due to market research and demographics as done by management).” Finally, look closely at the management for your new location. While you’ll undoubtedly be spending more time there initially, as the owner, you realize the need to turn over the day-to-day operations to trusted managers.
These elements must be firmly in place before you even consider opening a new location. As Schebesta notes,
“You can’t build these core systems and processes while growing and hope to work it out along the way. You need to have a successful, well-run business already functioning before you can even begin to think about branching out.”
Drill down into the numbers
There’s no getting around the importance of data in making the business-expansion decision. As our experts say: You have to run the numbers.
Kean Graham, entrepreneur and CEO of ad tech firm MonetizeMore, offers a concrete rule of economic thumb to evaluate whether your business’s finances can support expansion. Graham suggests that you “forecast the total expense of the expansion. If you have more than [twice] the forecasted expense in liquid assets, then go ahead and expand.”
Frank Fantozzi, business financial advisor, recommends focusing on three key questions:
“Has the current location reached its financial potential? Is the cost of further growth in the existing location too costly per dollar spend? Also, will financing be needed and can it be obtained and then supported by the organization?”
Be scrupulously honest with this process. Fred Schebesta points out that it’ll take “some time to gain momentum in a new market, so profits from the original business will need to support both the existing and new markets … It’s important to crunch those numbers honestly.”
Finally, while it might seem that data alone should drive business decisions, Kevin Huhn says you need to check in with your intuition as well. “Trust your gut – most of us know what we should do – we just don’t always listen and that is when regret kicks in.”
While expanding your business by adding a new location isn’t a casual undertaking, you can help ensure a better decision by following the advice of our experts in this roundup.
Invest time and effort upfront into researching your customer base and their purchasing behavior. Then examine the financial health of your business — revenue, liquid assets, and projected sales.
And if the time is right, launch your new location confidently with a workforce that’s already trained and ready to go, to help minimize the demands on your time as the business owner.