Managing any form of business growth is a better challenge than managing the alternative. However, owners of physical retail stores and restaurants have a unique problem: the question of expanding into new locations. Like all things, it’s when you do something for the first time that you receive your education. So, in hopes of giving you a head start on what should you know before opening a second location, here are the key questions to ask yourself—and answer.
1.Why are you considering expansion?
If you are reading this, you are probably driven to grow. And while it may seem obvious that new physical locations are the only path to growth, there are alternatives (with some exceptions like franchise options). Online stores can be far less capital-intensive. Even restaurants can extend their brand with products sold online. You don’t always need to open a second location to grow. But the compelling answer to the question of “Why?” has to be that the reason for expansion to a second location is superior to other growth alternatives.
2. What about your first location?
Is the first location succeeding as well as you think it is? Since you will likely be living on profits from the first location (see question #3), you need to determine that the first location won’t be destabilized by the second one opening, either by where it’s located or by loss of key personnel. And you need to plan contingencies in case the second location runs over cost. Rule of thumb for construction contingencies? Budget for 25 to 35 percent overruns. If that happens, what then?
3. How are you funding the expansion?
Here’s the worst idea: Funding from your first location. While free cash flow might be helpful, and you will rely on common systems and common success factors from the first location, you should consider the second location as a separate business venture. It’s not uncommon to see businesses fail after opening a second location. While reasons for failure are many, having capital needs for the new venture tied too closely to the original location can suck all the life out of the whole enterprise.
4. Are you sharing systems?
The second (and third and beyond) locations of your business should be utilizing the systems that you perfected in the first location. While you will likely have to be in two places at once all the time (see question #5), each location should have same accounting systems, inventory management, website platforms, HR practices and everything else that you should have built standard process around. Doing things the same way is how you manage growth effectively. Don’t make it harder on yourself by having different ways of doing things.
5. What’s the secret sauce?
What made you successful in the first location? Was it people? If so, is the new staff well-trained? Or can you (or that key manager) be in both places and migrate the culture of service from one location to another? If it’s a key manager, that person might need an ownership interest for the long-term success of the business and each separate location. Is it the location, vibe, store layout or merchandising? Get very granular with this analysis, because you may be looking to try and define that “indefineable” thing that is making you successful.
Even after answering these questions, you’re a long way from having everything you need for a successful expansion. This is the point at which we always recommend you spend a lot of time with your key employees and professional advisors. Growth is great, but smart growth is better.
(Image via H.M.S. Beagle)