How to Figure Out the Right Time to Open a Second Location
Opening a second location for your business can be a great way to drive growth and expand your footprint, but it’s also a risky bet. Let’s explore the pros and cons of opening a second location and what you should consider before you make the leap.
First, there’s the risks. Adding a new physical location brings not only additional fixed costs of rent, insurance, and utilities, but also potential challenges with management, company culture, and business focus. Unfortunately, too many businesses underestimate the resources required to open a second location.
Not only do businesses need the financial resources to expand, but they also need to have the right business processes in place to facilitate expansion. Without the right combination of financial and strategic resources, a second location can sink a growing business.
That’s the glass-half-empty view. The glass half full view is one of opportunity. A second location can give you access to new customers and new markets, access to talented new employees, and can be a great way to grow your business if you do it the right way.
How to know if you should open a second location
There’s no perfect formula to help you figure out if a second location is right for you, but there are a few important achievements that you’ve accomplished that will indicate that opening a second location is right for your business.
- Cash and Profits: Your first location is consistently profitable and generates enough cash to support not only itself but fund an expansion to a second location.
- Documentation: You’ve documented your business processes thoroughly so you have a template for the second location to follow.
- Management: You have solid management in place and your first location doesn’t need you for day-to-day operations. You’ll be focusing on expansion, so you won’t have time to run the first location.
- Demand: You know there’s enough customer demand to support two (or more) locations. That demand may be for more of what you already sell, or to attract a different market. For example, you may already run a fine-dining restaurant and plan to expand to offer a more casual dining experience. Or, you may run a bike shop that caters to road bikers and you plan to create a second location that caters to mountain biking.
5 steps you should take to open a second location
If you think you’re ready to open a second location, finding that new location is often considered the top priority. While finding the physical space is certainly important, preparing your business to expand is even more important. Here’s how you can get your business ready for expansion.
1. Define your objectives
Of course, expanding to a second location is all about business growth. But, taking the time to write down the reasons why you’re doing it and sharing those reasons with your team will ensure that everyone’s on the same page and working towards the same goal. Your objective may be to satisfy customer demand and you plan on offering the same products at your new location. In that case, your objective will be to grow sales at the second location without cannibalizing sales from your first location.
Or, you may be expanding into a new market in which case you need to make sure your team knows exactly who the new target market is for your new location (mountain bikers vs. road bikers, for example).
2. Document business processes
There are two primary reasons to document your business processes. First, this documentation will create a roadmap for your new location. There’s no reason to reinvent the wheel, so you should duplicate what’s worked at your first location. Second, as a business owner, you won’t be able to be in two locations at once and you’ll need solid processes in place to ensure that your first location can run without you while you focus on your second location. Documentation and established processes will ensure that your first location can run smoothly without you.
3. Build a strong management team
Documenting your processes isn’t enough. You’ll also need a strong team of managers to run things while you are at your new location. You need to have people you trust who have good experience running your business. They’ll need to make decisions without you, so good training is important. Plus, you’ll need to hire new managers at your new location. Figuring out how you’re going to hire and train this new group of managers will be critical to your success.
4. Create a cash flow forecast
Opening a new location will inevitably suck up a lot of cash. Take the time to develop a financial forecast that accounts for the fact that your new location probably won’t contribute to the bottom line right away. Before you start the expansion process, you’ll need to have enough cash on hand to get the new location started and fund it until it starts generating its own cash. Of course, you may be taking on additional loans or investments to fund your expansion, so that should be factored into your cash flow forecast as well.
5. Define your company culture
No doubt, part of what’s made your first location successful is your company culture. As you look to expand, you’ll want to figure out how you can replicate that same culture at the new location which will have different managers and employees from your first location. A good way to do this is to document your current culture. Document your expectations, core values, your mission, and management style.
Use this document as part of your training process with new employees so everyone’s on the same page about your culture.
5 questions to answer before opening a new location
Opening a new location is also about answering key questions about your business operations. You’ll need to evaluate your options and make decisions that are right for your business and your specific situation. Here are some key questions you’ll need to have answers to before you move forward with your second location.
1. How will management work?
Just like having two children is somehow more than twice the work of just one, two locations can stretch you to your limits. To help with this, you’ll need to think about how your management structure will work. With multiple locations, will you have a separate administrative office where central functions like payroll and HR are performed? Or will each location be managed independently?
What kinds of managers will run each location and what decision-making power will they have? Will you need to travel back and forth between locations to manage them? Having a plan will make the process of getting up and running that much easier.
2. What will you choose for a legal structure?
As you expand, you’ll want to figure out how you want to structure your business from a legal perspective. Will each location be an independent business entity? Will you franchise? Or, will you keep all locations in a single business unit? Every situation is different, so it’s worth discussing your options with an accountant and potentially an attorney.
3. Have you protected your intellectual property?
Especially if your second location is a franchise, but even if it’s a wholly-owned business, you’ll want to make sure that your intellectual property is protected. You’ll want to ensure that your brand, business processes, and any other proprietary information are protected so that others can’t easily duplicate your business and create look-alike locations.
4. Will your second location cannibalize sales from your original location?
Especially if your new location is selling the same products as your existing location, you’ll want to verify that customers who currently shop at your first location won’t just start shopping at the new location because its location is more convenient for them. If you end up with two storefronts and the same total sales, you’re likely going to be in trouble.
To avoid this, try and determine where your existing customers are coming from. If they’re all relatively close by and your new location is far enough away to attract entirely new customers, then you’re more likely to succeed.
5. Will some employees be willing to work from the new location?
Hiring entirely new staff to get a new location up and running adds a lot of additional stress to an already challenging expansion. You’ll have to train everyone on your business processes, company culture, and sales techniques. It’s much easier if you can get some of your existing employees to start working at the new location so that they can train new hires. Your old location will also need to hire new employees. However, those employees will also be trained by seasoned veterans of your business.
Successfully opening a second location takes planning
Opening a second location for your business is certainly not without risk. But, with the proper planning and preparation, it will be much easier and more likely to succeed. Spending time to answer the key questions and developing the research and documentation that you need will go a long way to making your business expansion a success.