How do you know if your small business is ready to expand to another location?
I am considering expanding my salon to a second location. Revenue has increased lately, and our operations have been running smoothly. I also have a great team and I want to give them the space and opportunity to grow themselves. What decisions need to be made before I can take the leap?
The keys on expanding a busines are based on 3 things: Relationship Management - in your kind of business I would think that is important; Roadmap to Revenue - will there be a good path towards making the next location Successful in the right timeframe; Customer Satisfaction- can we be sure that New Customer at the next location are References and Happy.
Hi Lexi, there are 2basic reasons why one may want to expand - (1) seek greener/alternate pastures or (2) render faster response to a profitable local clientele. Which of these apply in your case? Do you have a good number of customers coming in from your 'new' location? In that case it makes total sense. In case you want to expand for #1 reason, remember that it will not really be expansion but 'exploration' initially - almost like starting a new business. You may want to find the main reason for your expansion plans and plan before you decide. Hope this helps.
I've read some excellent ppoints of view in the answers. What I think about your case is:
- the increase of the revenue is not enough to decide to open a second location. It could give you conditions to take same actions, and an option to grow is to check if there is available area nearby or contiguous to your current business. Growth in your current location could be the best choice;
- your business is very talent dependent. But your should have some processes, i.e., the way to do things, that must be replicated to every site in order to guarantee the excellence of your services.
- What information do you have about the other location ? I suggest you to make a business plan, think about all you need to tale this step, use your experience in manage your current business to plan the other one.
Best of luck.
In my opinion it is all about cash flow. If you have achieved a meaningful percentage of revenue in net profits (each industry benchmarks are different) - which typically means your existing location is operating efficiently and you will have enough cash to weather the demands of another location, not just start up costs but also sustainable operating losses. Scaling a business is an incredible job and wealth creator. But it can also sink an existing good business.
Document your success model briefly first.
Review your model to clearly determine what elements will contribute to success independent to location and what elements that are closely depending and affected by location.
You can further improve your core competencies in your current salon and transfer or can be transferred or serviceable by way of back office model to next salon at exceptionally low costs.
Ensure that your success model is twined all the strengths of your first salon and careful designed checklist & strategies to cover those location driven factors.
When you are ready for the above, you can start looking of franchisees or JV model with your employees or expand by own investment. Please note that you may consider buying over another salon as your second salon expansion - this speed up setup process and normally come with existing customers.
Lexi, I’d like to answer you question in two parts:
Your small business is ready to expand to another location when two criteria are met: A) You’ve maximized your current location, and B) The “system” that runs your business has been proven out and is ready to be replicated.
Just because your operations have been running smoothly and revenue has increased does not necessarily mean the best business decision for growth is to open a second shop in a new market. It may be that you’d be better off having a larger facility in the market that you are already doing well in. On the other hand, perhaps you’ve grown as big as your current market can support and opening up a new location is the only viable way to grow. This is going to take some deep examination on your part.
Next, you say your "operations have been running smoothly”, which is an excellent place to be, but have the processes been formalized and can any competent person step into your role? One great way to know for sure is to take a few weeks off and see how things run in your absence. Have you taken time away from your business lately? Opening a second location will probably take a vast majority of your time and you need to be certain your current location will not suffer for it.
There are lots of questions you need to consider but perhaps the first three questions I would start by asking as these form critical go no go decision factors are as follows.
1) Have you got the leadership in your original salon if you are out the business?
Many people taking this step find that their first operation struggles once they are focused on the new venture. This normally occurs because of a lack of skill in the day to day running of the operation (replacing the elements you do). The other factor is that you are heavily invested in your business, and even the best most motivated staff do not have your commitment and as a result do not got to the lengths you will. Finally as a decision maker for your organisation you take key decisions affecting the running as a matter of course, they will seek reassurance and clarification so prepare to be frustrated.
2) Have you any information on footfall for the new salon.
This is always the key as you are possibly aware its all about location, location, location! this is key as will dictate how hard you need to work to get the new venture off the ground.
3) Do you have the finances that include contingencies to ensure you get the new salon the way it should be and cover the running costs for a period until demand ensures that revenues cover costs. As a rule, I would suggest you take your best guess on time to break even and double it. If you can afford this then you likely have the resource requirements.
Obviously if you want to explore any of these in more detail then please give me a shout.
Hi Lexi ,
In my opinion your gut feeling is most probably the best indicator for the decision . Being the eventual risk and reward bearer your sixth sense is the most powerful tool of forecasting your business has at the moment.
However, to safeguard yourself the most important evaluations you have to make beforehand are:
1. Location for the new set up - Preferably it should compliment the existing set up because there may be opportunities to cross sell products and services and cross refer customers .
2. Additional and marginal costs - Preferably it should be a rental space initially and once it is up and running on its own an owned premises may be planned. Other costs should also be evaluated in detail.
3. Skilled Staff - As you said that you have a good team but that team could be sufficient only for the existing set up and leveraging their services to another place may affect your existing client base . So think of the training and development of more staff and the related costs involved.
4. Potential of revenue - This is the most important factor you have to consider studying in detail the target market of the area . The extent and sustainability of revenues for this area should be estimated beforehand. Both in terms of short term revenue expectation and long term revenue expectation.
5. Set Targets- It will be prudent to set some targets for your team and yourself so as soon as you start operations you have indicators of what was expected and what is being translated into financial return actually. This will give you a very quick feedback on the measures to be taken to meet your expectations.
6.Branding- This is also an important matter to be finalized before you practically take a decision . It is generally seen that there are extreme sentiments towards different brands in a single city for example brands famous in posh areas are not very much supported by remote areas. Similarly there are competitive forces between different cities which can harm the brand. So you have to be careful in taking a decision in this area.
7. Competition- You need to evaluate your competition in the new area also separately . Because at times it happens that you did not have major competition in the place where you were successful . Based on that you took a decision and moved to another place but eventually you found out that some local cultural or community entrepreneur is very strong in that area which restricts your ability to grow. So you have to be careful in this area also. Visit and study the market in detail where you want to expand.
These are the major items which I feel you should evaluate before moving but I would still weight your gut feel as the most convincing element in the decision.
Together you and your team can always make things work in your favor. It is just a matter of energy and hard work.
Wish you all the best.
As you mention your Revenue has increased lately , only you should know wether you are moving to another segment market or you are at the same market -within the same circle - you need to sudy that well before moving , plan & study your move well .
A fine array of answers. Yes, before you invest any money you have to be absolutely certain your services are needed. Good market research is not cheap but is part of your business plan.