Business Lifecycle

Opening a second location for your business

Expanding a small business to a second location can be a financially savvy move. But it’s essential that you have a clear understanding of the costs and logistics, so you don’t risk the success your business has already achieved.

Published: September 24, 2013
Updated: February 15, 2017

Opening a second location is a big decision for any business owner. In many ways, it's like starting over again. That's why it's important to carefully analyze whether you and your business are ready to take the next step.

Start by considering whether you need to do a lot of hands-on management at your current locale. For example, can your business get by for two- or three-day stretches without you? If your staff is calling you in a panic or operations deteriorate when you're not on site, you may not be ready to expand. However, if your existing location runs smoothly on its own, it may be time to start planning for the financial and logistical realities of expanding to a second store.

Here are four important things to consider that apply mostly to retailers, but may apply to non-retailers as well:

1. Research the new location

Start by studying the consumer traffic and competition in the second location to determine if your new business can generate the sales you need to be successful. Spend time in the area to observe business activity at different times of the day and days of the week.

2. Know your near-term costs

Make sure you're in a good financial position to invest in a new location – and don't forget to include startup expenses. Start by making a list of everything you'll need to get the business up and running. Then, do your best to make realistic cost estimates for each one. Make sure to account for:

  • Leasing vs. buying

  • Improvements to your new space

  • New furniture, equipment, displays, window coverings, and signage

  • Professional fees, such as your attorney or contractor

  • Initial inventory stock

  • Licenses and permits

3. Prepare for your financial future

After estimating your startup costs, create profit and loss projections, and project future cash flow for six months, one year, and three years. Assume that it will take time to achieve your desired profitability at the new location. Make sure you're prepared by estimating what you'll need to cover operational and overhead expenses at both locations during the ramp-up phase. If possible, give yourself some breathing room by adding a 10% contingency cushion to your budget.

Finally, consider how you want to fund the new location. Do you have enough positive cash reserves to cover startup costs and smooth out dips in cash flow? Or would a business loan be a better way to finance the new location and equipment?

It may be wise to arrange for a loan that you can comfortably repay over time, and keep your cash reserves for unexpected costs.

4. Put the right people in the right places

Next, consider how you want to staff and manage your second location. Evaluate the pros and cons of transferring employees versus hiring more workers. One benefit of transferring people is that they already know the company and your processes, which means less of a learning curve. This could be a big plus at your second location where so many other things will be new and unsettled.

The same considerations also apply to management. Absentee or part-time management is a major cause of unprofitability, so it's crucial to identify where you and your existing managers are needed most. You may decide it's best to send existing managers to your new location, requiring you to backfill at your current location. Or you may decide it's best to hire managers who are local to the area and understand the customers, the competitive landscape, and the local officials.

Careful planning isn't just about setting yourself up for success – it's a matter of protecting your current business. By opening a new location, you can expand on what's already working and transform a smaller operation into an even bigger success.

Visit Business Real Estate Financing to get information on financing options designed specifically for small business owners and commercial real estate investors.

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