Businesses can expand their operations many ways, including opening a new location. Replicating a business’s success in a second location, however, often requires as much research, planning, and preparation as starting up the original business, especially in regard to funding and financing the expansion.
Can you fund the expansion from your existing business’s retained earnings or ongoing cash flow? If not, you’ll need to seek external financing, probably via a bank loan or line of credit. Keep in mind that a banker will want to see detailed financial statements for your existing business and cash flow projections for both it and the new location to help determine your ability to repay the loan.
Before expanding, consider these potential costs:
- Mortgage or rent: This is the most obvious cost, and also usually the largest. If you’re leasing the property, project your monthly cash flow to make sure it will be sufficient to pay the rent. The landlord may also require the first and last months’ rent and a deposit; so factor this into those initial cash flow projections. If you’re purchasing the property, talk to your bank about a commercial mortgage. Keep in mind that mortgages on commercial property are usually shorter term than home mortgages, typically 10 to 15 years, which may result in a higher monthly payment than you are anticipating.
- Additional inventory: Project your initial inventory costs based on the size of your new location in comparison to your existing one. Also think about your inventory management strategy: Can you implement “just-in-time” inventory management techniques, in which you keep just enough inventory on hand to meet immediate customer demands? Doing so will lower your inventory carrying costs but may also reduce your flexibility and ability to meet customer demand for hot items.
- Store fixtures: Again, base your cost projections on whether the new location is smaller or larger than your current one, as well as the layout and look you have planned for it.
- New employees: Salaries and wages for employees at the new location will be an ongoing expense, so factor these into your long-term financial projections. Don’t forget to include the cost of benefits, such as health insurance, paid time off, and other perks, which can account for up to one-third of an employee’s total compensation.
- Marketing and advertising: Depending on how far away the second location is from your current one, you may need to expand your marketing and advertising reach. For example, if you advertise heavily in community newspapers, you might want to buy ads in the papers that serve communities around the new location.
- Loss of business at original location: Business owners often fail to consider this cost. Experts caution against opening a new location if it will siphon away 20 percent or more of your existing customer base. Much of this will depend on how far apart the locations are. Starbucks has become ubiquitous in many cities, with locations practically across the street from each other; but most small businesses need to spread their stores at least several miles apart.
Don Sadler is a freelance writer and editor specializing in business and finance.