Expansion can be one of the best ways to drive growth. It is also inherently high-risk.
Thomas Smale - Founder of FE International said even though the oft-cited cliché that says “nine out of every 10 small businesses fail" is demonstrably false, at least according to the Washington Post, the Bureau of Labor Statistics does show that about 50 percent of small businesses fail within five years.
And while few statistics are available about the number of small businesses that expand beyond one location, it’s probably safe to assume that that figure is significantly less than the 50 percent survival rate through year five.
Regardless of what industry you’re in, the decision to expand your business is not one to take lightly. Cautionary tales abound of small-business owners who have underestimated the resources -- financial and otherwise -- required to open a second location.
Indeed, the failure to consider all of the risks and expenses inherent in expansion could jeopardize not only the success of your new location, but your business as a whole. Here, then, are some of those considerations you should take into account before jumping into this type of growth:
1. Have clear objectives in place.
As with most major undertakings in business, it is essential to have clear objectives in place before expanding into a new location. Ask yourself:
- Is your primary goal of expansion to better satisfy existing customer demand, or to penetrate a new market?
- If your primary goal of expansion is to better satisfy existing demand, have you adequately considered alternative solutions to expansion? For example, if you’re considering opening a second location to hasten the fulfillment of orders for physical products, have you sought discounts from your shipping services on priority services that might help you accomplish the same goal?
- If your primary goal for expansion is branding and prestige, will these intangible benefits outweigh your investment?
Defining your business objectives for expansion early on -- and aggressively exploring less costly alternatives to expansion that could solve the same problem -- will help ensure success.
2. Replicate your prior success.
One of the common mistakes entrepreneurs make when expanding beyond their first location is failing to quantify and replicate the processes that made the business successful in the first place. Thoroughly documenting your business processes makes them easier to replicate and pass on to new employees in a new office location.
3. Figure out your cash flow.
Based on data-driven projections, figure out a realistic time frame for your second location to generate revenue sufficient to fund operations, without further investment. Are there adequate cash reserves to fund the operations of the second location until it becomes self-sufficient?
Presumably, the first location is profitable, if you’re seeking to expand; but is it generating enough revenue to adequately support the second location if the latter doesn’t hit break-even as early as forecasted? If not, is it possible to secure additional financing at a cost that makes sense?
4. Don’t lose focus.
Opening a second location comes with many challenges similar to those of opening a brand-new business. For many entrepreneurs, this can be a welcome and diverting challenge. It’s crucial, however, not to lose sight of the overall well-being of the enterprise.
Without the right systems and people in place, entrepreneurs risk spreading themselves too thin when they expand the business. In fact, it may be premature to increase the perils that come with overexpansion, when you open a second location. So proceed cautiously: Those perils could pose a threat even at this early stage.
5. Keep your culture intact.
One of the more intangible and challenging aspects of opening a second location is keeping your company culture intact. When discussing MailChimp’s expansion to a second office, Jon Smith, VP of Customer Support for MailChimp, offered on his company blog, “The most important thing is that we make sure our employees stay connected to the company’s mission and shared values.”
There are many ways to ensure that the culture of a business remains intact in multiple locations. Often, a founder, partner or trusted long-term employee will opt to relocate and head up the new office. If this is an option, it will almost certainly go a long way toward maintaining a consistent culture.
Using Zoom, or a similar tool, to hold regular video conferences can also foster both collaboration and culture. If possible, consider holding a company retreat at least once a year to bring your team members together face-to-face.
6. Know your market.
One trap many small-business owners fall into when attempting an expansion is the failure to adequately research the new market and make realistic revenue projections.
Opening a second location is too costly in both both time and money to risk undertaking this move based on a gut feeling. Some of the world’s biggest brands, such as Best Buy and Target, have failed spectacularly when attempting to launch in new markets. Don’t follow in their footsteps.
Make sure to conduct thorough research on whether there is sufficient demand for your product or service, and tailor your approach to fit the unique characteristics of the new market.
7. Build your brand.
In some industries, being perceived as a global firm comes with considerable cachet. This is particularly true for professional services such as law firms, accounting firms and financial service providers. For businesses like these, the prestige of becoming a global brand is often a determining factor in their decision to expand.
According to Harrison Barnes, writing for legal recruiting giant BCG, any firm that “seriously competes for work from multinational corporations is considering or has already pursued plans to open a branch office.” Aside from the potential operational and competitive advantages of opening a second location, the added value it can bring to your brand should not be underestimated.
8. Don't forget your compliance due diligence.
Whether your second location is in a new city, state or even a new country, ensure that you can legally provide your product or service and that it abides by the local regulations in the jurisdiction. Additionally, make sure the new location is compliant with any regulations regarding taxation and legal business structure. Registering trademarks and other intellectual property in the country you are considering expanding to is also strongly recommended.