Master These 5 Essential Business Expansion Tips
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Common types of business expansions5 business expansion best practicesIs expansion the right move?
You’re running your small business, and things are going well. Sales are coming in, and you’re starting to see some profits. But at a certain point, you’ll face a decision: Should you stay the same size? Or should you grow?
Deciding whether to embark on a business expansion is one of the most important decisions an owner can make for their bottom line. Expanding might mean opening a second location, introducing a new product line, adding capacity, even acquiring a business. It’s what business owners must do then their operation runs out of capacity to keep up with demand.
And it’s the pathway to financial success at a much larger scale.
But what does it actually take to plan a business expansion? And how can a business owner determine if they’re ready? In this article, I’ll explain how to determine if the time is right for a business expansion, and how to expand smartly to grow your business at a sustainable pace.
Common types of business expansions
But first, what does a business expansion look like? There are a few common ways what businesses pursue growth:
Location expansion: Think about a popular restaurant opening a second spot on the other side of town. Or a small manufacturer investing in an expansion of its warehouse. In both cases, a business is building out capacity to introduce its products and services to new markets.
Market penetration: Growing by seeking to expand a business’s share of the total available market. This could mean investing in marketing campaigns to reach new customers, or offering introductory pricing like discounts for first-time users.
Product/service development: Creating new or improved products and services within a business’s niche. This usually entails listening to your existing customers and figuring out what additional products or services they might purchase from you.
Diversification: Launching new products or services aimed at completely new markets in response to a market opportunity. One recent example was beer and spirits makers producing hand sanitizer in the early months of the COVID-19 pandemic.
New sales channels: Establishing new ways to reach customers, like a retailer building out an e-commerce platform, or a small food producer that sells online getting their items onto grocery store shelves.
Strategic partnerships: Leveraging strategic partnerships with other businesses to tap into each other’s customer bases, like a local house cleaning business partnering with a residential real estate company.
Licensing: Most common in cases involving businesses with unique technology or intellectual property, licensing agreements allow a business to use another business’s assets (like its technology or patents).
Mergers and acquisitions: In the case of a small business, a merger or acquisition most likely means it’s being purchased. But there may be some cases where a small business can grow by purchasing another company’s assets and customer base.
Businesses often grow through a combination of these strategies. For instance, a toy manufacturer might create a new product, and offer it at a discount initially in order to gain market penetration.
5 business expansion best practices
Now that we understand what a business expansion might look like, we’re ready to dig into how to do it correctly. Even though achieving growth can feel like a leap of faith, it should be approached just as strategically as writing a business plan or doing any other type of business planning. Here are six best practices for planning an expansion:
1. Ensure alignment between the plan and the business
If you’ve been running a business for a while (and even if you’re just starting out) it’s likely that you’ve thought about your mission. Besides the obvious one — making a profit — what is the objective, or purpose, of your business?
When thinking about an expansion, it’s important to return to that mission. Does the expansion you have in mind support that mission? Or does it risk pulling the business in a different direction? If it’s the latter, expanding could create unexpected challenges outside of your expertise.
In the early stages, it’s worth thinking about the expansion almost like a mini-business within the business. Outline the expansion’s specific goals, and how they fit the bigger picture of the business.
Seek objective feedback, and play devil’s advocate by stepping back and challenging the plan. What are the weak points in the plan? Discovering a potentially fatal flaw early on is OK, because it will save you a lot of time and money. But if the plan seems like it holds up, you can start integrating it into your overall business plan and budget.
2. Set clear, measurable goals
Once the expansion idea clearly supports the business’s core mission, the next step is to pin down exactly what “success” for this expansion will look like. Simply aiming to “increase sales” or “grow the business” isn’t specific enough to build a focused plan or track real progress. Without clear targets, efforts can become scattered, and it’s hard to tell if the expansion is truly hitting the mark.
This is where setting clear and measurable goals becomes essential. A good way to approach this is using the SMART framework, ensuring each goal is:
- Specific: Is the goal well-defined? What exactly needs to be accomplished?
- Measurable: How will progress and success be tracked? What numbers will tell the story?
- Achievable: Is the goal realistic given the available resources, time, and market conditions?
- Relevant: Does this goal directly contribute to the success of the expansion and align with overall business objectives?
- Time-bound: Is there a clear deadline or timeframe for achieving the goal?
For example, instead of a general aim, a SMART goal for an expansion might be something like: “Launch the new downtown retail location and achieve $75,000 in sales with a 15% net profit margin from that store within the first 12 months of operation.” Or, “Introduce the new software module and acquire 500 paying subscribers for it within six months of launch, achieving an average customer satisfaction score of 8/10.” Setting goals with as much detail as possible helps focus resources and makes it easier to measure outcomes against the initial plan.
3. Conduct thorough market research
Anyone starting a business needs to take time for market research, to ensure there’s a customer base for their idea.
Business expansion should be thought of the same way.
I mentioned earlier that planning is similar to running a mini-business within the business. In the case of market research, planning requires a fresh set of eyes:
Who are the target customers for this expansion? If the plan involves a new product, who is the ideal person that will buy it, and why? If it’s about expanding to a new location or targeting a new customer segment, what are the specific needs, preferences, and buying habits of those potential customers? It’s also important to determine if there’s actually enough demand for what your expansion offers, and whether the customers will be similar to current customers or require a different marketing approach.
What’s the competition? Who else is already operating in this area or serving this target market? What are their strengths and weaknesses? How will your expansion differentiate itself and offer unique value? If the expansion involves moving into a new geographic area, understanding these nuances will be key.
Taking the time to conduct market research before investing in an expansion helps validate (or invalidate) the motivation to expand before a business owner sinks extensive resources in it.
4. Develop a detailed operations plan
Based on the market research and goal setting work, the next step is to map out exactly how the business is going to make this expansion happen. This means developing a detailed strategy and operations plan.
If your expansion proposal is to open a second location, what are the staffing, inventory, and daily management plans for the new spot? If it’s introducing a new product, what are the development, production, and support processes?
All aspects of the expansion need to be covered. Are new permits or licenses needed? Are there different employment laws or industry-specific regulations to consider, especially if expanding outside of the current market?
All of these factors can affect the feasibility of an expansion. You may need to invest in a facility expansion (or acquire a second location), upgrade existing IT or inventory management systems, hire new employees or shift existing workers’ job duties. Taking time to create an operations plan that’s distinct from the current business’s operation will help ensure all your bases are covered.
5. Create financial projections
With a clearer picture of the operational requirements for the expansion, the last (and arguably most important) step is to project how the expansion will impact the entire business’s bottom line. This requires forecasting expenses, projected revenues and cash flows from the expansion.
Start by listing out all the costs associated with making the expansion happen. What are the upfront investments required for things covered in the operations plan like a new lease or facility build-out, purchasing equipment, initial inventory orders, and marketing costs? Then, what new recurring monthly operating expenses will be tied to the expansion, whether it’s new payroll, increased rent or utilities, regular marketing spend, or other costs?
Once expanses have been projected out, create a revenue forecast that estimates how much the new venture can realistically generate. Revenue forecasts are based on assumptions about future demand for a product or service, so make sure you understand where your projections are coming from — it could be from your market research, your financial performance in previous years, or a combination of the two. When you have a revenue forecast and an expense forecast, you can project how long it will take for the expansion to become profitable.
That last point is important, and it’s why you should also create a cash flow forecast for your entire business — the proposed expansion and your current operations. That’s because expansions typically require a significant amount of cash to be spent before they start bringing substantial cash in. So the cash flow forecast ensures that you’ll be able to meet current needs like paying employees and bills while you’re waiting for the expansion to start making money. If your forecasts show that the expansion will take two years to become profitable, but your cash flow will reach a dangerously low level within one year, that can tip you off that you may need to apply for a business loan or reconsider the expansion altogether.
Is expansion the right move?
Business expansion offers compelling growth opportunities, from extra revenue and larger market share to enhanced brand recognition and operational efficiencies.
But it also carries financial risks, and, when done without proper planning, it can put a massive financial strain on an otherwise successful business.
There isn’t a true right time or correct strategy for every business considering an expansion. But understanding what type of expansion is right for your business, and bringing a business planning mindset to the process, can turn one of the most pivotal stages for a small business into a stepping stone for sustainable growth and long-term success.
Elon Glucklich
Elon is a marketing specialist at Palo Alto Software who works with small business owners, consultants and advisors. He's also a freelance business journalist with over a decade of reporting experience. He has Master of Business Administration from the University of Oregon.
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