Bigger is a mantra many small business owners repeat. For retail based businesses, this means adding more locations. However, this is not always the best expansion strategy. In fact, if done incorrectly, it can kill a business. This happens because when a company starts a second location, the owner moves their attention to growing that new entity. Because they are no longer totally focused on the original location, that part of the business can falter. As the most profitable part of the enterprise, this can endanger the entire company.
For many owners, a single location is a perfectly profitable business. They can either work to expand the size of that location or make it more profitable.
Only add a second location when:
• The company has been profitable at one location for several years. Positive cash flow to finance company expansion is critical. There needs to be enough profit from the first location to support the second location until that unit reaches profitability. This typically takes at least one year.
• Demand does not support growing the single location bigger. Getting larger at one location is always the first way to increase profits. Alternately, the small business owner can focus on increasing gross margin or reducing expenses there.
• Processes have been carefully documented so they are repeatable at other locations. A winning operating formula is required to train employees in the same procedures at other locations. This is the key behind some of the most successful location businesses like McDonalds and Starbucks.
• Managers that can be trusted when the owner isn't there. Remember, even entrepreneurs have not perfected being in two places at once! The founder can no longer personally oversee all locations simultaneously. As the business gets larger, they also can't be the "in person" face of the business.
• It's about scale, not ego. Expand because economies of scale will lead to higher profitability, not to feed an ego. Running two or three locations are exponentially more difficult. The second location is always the most difficult to add.
• Implement a unified communication solution. Customers see all locations ultimately as one so employees must be able to easily communication across all business units.
Barry Moltz gets small businesses unstuck. He is a speaker, author and small business consultant. He can be found at www.barrymoltz.com.