If business is booming, the thought of opening up another location to make even more money can be incredibly enticing. But it’s also risky. While a second location could double your profits, it could also steal business from your original store.
How can you tell when the time is right to commit to a new location? Start by making sure you meet all five of the conditions below.
Your First Business Has Been Busy For Some Time
If you’re a service-based business, running at capacity could be a sign that it’s time to open up another location, says Rachel Beider, CEO of PRESS Modern Massage Group, which owns several massage studios in New York.
Red-lining also could be a sign that you should raise your prices. Raise your prices first, and if you are still fully booked then you know for certain that it’s time to grow your business. This was the case for Beider. Her massage studio still had a long waitlist, even after raising prices, and she knew for certain that people were coming from other neighborhoods to get treatment. That meant she could open up a second location safe in the knowledge that it wouldn’t cannibalize her existing book of business.
Note that the flipside of this advice also hold true. You probably aren’t going to make money by opening a second location if you aren’t currently fully booked, accountant and business growth specialist Gloria Murray warns. You don’t want to be just fully booked, however. You also want to make sure that a significant percentage of customers return. “If you’re only retaining 50% of new clients, then you’ve got a leaky bucket,” Murray writes. “Perhaps you need to give your staff additional training to make sure your retention rate remains high?”
Business consultant Lisa Starr recommends you consider the circumstances of your first location’s success. Have you been in business for more than three years? If not, there’s no guarantee that your business is going to prove sustainable in the long term. There may also be other mitigating issues with your first business that means opening another isn’t a smart idea.
One scenario Starr points out is if you only have a couple of years left on the lease at your current location with no guarantee of renewal. “If there is any chance you would have to move the current business, you’d have to time the opening of a new location very carefully, to preserve both cash flow and your own energy and resources.”
You’ve Done Your Research
Don’t rush headfirst into opening a new location without doing your due diligence, says small business productivity expert Stephanie Vozza. This starts by understanding why your existing location is successful and whether you can replicate that success.
One example Vozza gives: whether customers come to see you personally. This can’t happen when you have two stores, in which case you’ll need to train up your team before opening another location. If they come for your products, however, expansion becomes a better proposition.
You can’t rule out that your business’s current success is down to its location, writes Fundera cofounder Jared Hecht. “For example, maybe you’re right next to a few popular long-time hangouts or right off the busiest intersection. These factors could contribute more than you know.”
Researching your ideal second location is key, says Hect. He recommends surveying other business owners and their customers to get to know them better. Understand who shops in the area, what is already being bought and sold, and what is missing. You’ll also want to find out where your current customers are coming from at the moment. You might find out that your new store is going to steal customers from your old one rather than acquire new customers of its own.
Don’t stop at research, however. You should also test your theory. No two markets are the same, says Rieva Lesonsky, CEO GrowBiz Media and SmallBizDaily. That’s why it’s a good idea to test out a second location before fully committing to it. Opening a popup store or a kiosk at a local mall are great ways to see whether there is a tenable market.
Your Business Can Run Without You
It’s not enough for your first location to be successful. It also needs to be able to run without you, says Vend’s Francesca Nicasio. That means getting the right people in place first, before you even think about finding a second location.
You’ll need to spend some time analyzing your existing processes, says Kyle Zagrodzky, president of OsteoStrong Franchising. “Many times, the secret sauce includes all those small tasks and personal touches the owner contributes that employees may not even know how to replicate.”
Zagrodzky recommends that business owners ask themselves whether their businesses would still function if they went on vacation for a month. If you know the business would fall apart within a week, then there is a lot more work to be done before you can open another location.
You’ll need a manager you can trust to run your existing location while you focus all your attention building up business in your new market, says Vouch Insurance cofounder and CEO Sam Hodges. That person is often already working for the company. By promoting from within, you’ll guarantee that your new manager understands your business almost as well as you do — and that standards won’t drop when you turn your back.
You’ve Found the Perfect the Location
The physical location of your new business can determine the success of your expansion. So, it’s important to find the perfect space.
But what constitutes a good location is different for every business, writes the team at SinglePlatform. For some, being too close to the original store could cannibalize sales. But it could work for stores where competition is low and popularity is high.
Content marketer Caron Beesley notes the importance of finding a location that is on-brand. “The state, city or even street address where you choose to open your second business is incredibly important to your brand. Choose the wrong spot and you may find that the people in your new market don’t want what you have to offer, or they may be interested but at a different price point.”
You’ll also want to make sure your new store is accessible by car and public transport, that it is in the right zoning area, and that there is room to grow.
As part of finding a new location, you’ll need to double-check that you are legally allowed to provide your product or service and that it is compliant with local laws, FE International founder Thomas Smale points out. This will be important if you are moving across state lines. You’ll need to make sure that the physical location itself is also compliant with local regulations.
Your Finances Are In Order
Take a second look at your business plan if you’re considering expansion, says Joseph Camberato, president at National Business Capital & Services. You’ll want to update your financial projections based on the additional costs and revenue that comes with a second location.
Getting to grips with your cash flow is essential, writes Reconciled CEO Michael Ly. “Having a handle on your cash flow can help you to generate the right levels of revenue out of the new business, and be there as a backup in case unexpected issues arise.”
It can take a while to break even at a new location. So, make sure your existing location is generating enough revenue to cover the new business, should it take longer than expected to get in the black.
It might be best to meet with your accountant or financial advisor to calculate the exact investment expansion would require, suggests management and legal strategist Nic Cober, Esquire. “With my expansion, I negotiated some build-out funds with the landlord, but in actuality, I needed more money for cash flow once the location was operable. By the time I fully appreciated the need, it was too late.”
All is not lost if you don’t have the money on hand, Karina Fabian writes at Business.com. Angel investors, peer funding or small business loans could all provide funding. If you are taking on outside investment, make sure you have enough to cover worst-case scenarios.
If you don’t meet all five of these conditions, then there is a good chance you aren’t ready to open a second location. That’s no bad thing, however. Building a business isn’t a sprint. it’s a marathon. Take the time to make your first location spectacularly successful before moving onto another location.