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What You Need to Know Before You Expand Your Business

(Photo by Royce DeGrie/Getty Images for Holiday Inn)

You’ve built a successful business. Everything is humming along and you are thinking about expanding. There are two kinds of expansion and each has it’s own set of positives and negatives. The biggest negative right off the bat is cash flow.

Expansion Scenario One

The first type of expansion is the expansion of your existing physical plant. A restaurant might add an outdoor patio, or expand the bar area. As you can imagine this is much easier than option two that I’ll cover in a minute. Expansions of this type can often be done with little or no disruption to your current business and customers. Some work can be done after hours.

I worked for a San Diego chain that had a 20×50 foot space in a shopping mall. We acquired the equally sized space next door and planned to double the size of the existing store. We closed the store at 7 PM, ripped out the wall between the two stores, pulled up the carpet, sanded the walls, painted, put down new carpet, brought in new store fixtures, hooked up the computer system, replaced all the ceiling lights, brought in all the new stock, and opened the next day.

That’s an extreme situation but with planning and a lot of warm bodies to do the heavy lifting expansions like that can be done.

Expansion Scenario Two

Number two is fraught with peril. I was also involved with several of these with the same company. Scouting locations, estimating traffic patterns, on the way to work side of the road, or on the way home side of the road. Dealing with inspectors, city planners, sign codes, lease agreements all have to be evaluated against the possible success or failure of the expansion.

Your next problem is money. You opened your first location so you have a frame of reference as to startup costs for fixtures, stock, payroll, etc. The next problem is how to keep the doors of the new location open long enough for it to break-even. While that break-even procedure is under way the first location might have to subsidize part of the new location’s income. If you can get a loan, and you have a sound business plan, each location might be able to stand on its own, without help from the first location.

Other Considerations

Your purchasing power just increased. Buying for two locations you might qualify for volume discounts or more favorable payment terms from your suppliers. Buying for less will give you a stronger profit margin that can help protect you from low priced competitors or economic changes. This savings can also create some extra advertising opportunities. One ad can now talk about two locations.

What’s your competition up to? Owenhouse Ace Hardware had planned to close their downtown store and expand on Huffine Road. But after an outpouring of pleas from the public they decided to retain the downtown location and still open the additional store. In hindsight I’m sure there were wondering if their gamble was going to pay off. Especially since Lowe’s and Home Depot moved into the area within the same time frame. But, it seems to be working quite well.

Some Final Thoughts

One additional idea is to take your lead from the biggest movers and shakers. A bakery chain might acquire a flourmill. A paper supplier might buy a printing shop. Expansion doesn’t always have to be a clone of the original store. Holiday Inn has Holiday Inn Express locations with a few less amenities than their bigger parent hotels. Hilton Hotels has similar versions. The best advice I can give you is to make sure you know the pros and cons of your business. What works in one city might fall flat ten miles down the road. The demographics of your customers, income in the area, competition, and the cost of doing business, can all contribute to either success or failure in any venture. If you, your financial adviser, and CPA think it pencils out, then cross your fingers, throw caution to the wind, and make it happen.

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