Business As We See It: Winter 2017
8 Questions to Ask Before Opening a Second Location
Business is going so well that you’re thinking about adding another location. Before you plan the ribbon-cutting ceremony, be sure you’ve done all you can to ensure the success of both your existing and new locations. Ask yourself some key questions to get a better sense of whether a new location will actually help grow your business:
1. What’s driving your interest in another location? It’s important to articulate specifically how the new location will help your business move toward its long-term goals. Expanding simply because the time seems right isn’t a compelling enough reason to take on the risk.
2. How solidly is your current location performing? As management, you’ll find that your time and attention will be diverted while you get the second location up and running. Yet, you’ll need to maintain the revenue your first location is generating — especially until the second one is earning enough to support itself. The upshot? Your original operation needs to be able to operate well with minimal management guidance.
3. Can you expand in other ways that are less costly and risky? You might be able to boost sales by adding inventory or extending hours at your current location. Another option is to revamp your website or mobile app to encourage more online sales. The investment required for any of these steps would likely be a fraction of the amount required to open another physical location.
4. How strong is the location you’re considering? Just as you did with your first location, you want to make sure the surrounding market is strong enough to support your business. Whether it’s an urban center or a suburban industrial complex, the setting should complement your business. You’ll want to consider proximity to your competitors. In some cases, such as a cluster of restaurants in a small downtown, proximity can help. The area becomes known as a destination for those seeking a night out. But too many competitors could mean that all businesses will be fighting for the same small group of customers.
5. How might expansion affect business at both locations? Opening a second location prompts a consideration that didn’t exist with your first: how the two locations will interact. Placing the two operations near each other can make it easier to manage both, but it also can lead to one operation cannibalizing the other. Ideally, the two locations will have strong, independent markets.
6. What are the financial issues? You’ll also need to consider the economic aspects. Look at how you’re going to fund the expansion. Ideally, the first location will generate enough revenue so that it can both sustain itself and help fund the second. But it’s not uncommon for construction costs and timelines to exceed initial projections. You’ll want to include some extra dollars in your budget for delays or surprises. If you have to starve your first location of capital to fund the second, you’ll risk the success of both.
7. What are the tax implications? It’s important to take into account the tax ramifications as well. Property taxes will affect your bottom line. For instance, you may be able to cut your tax bill by locating in an Enterprise Zone. Of course, the location still needs to make sense for your business. The key is to include the tax impact when assessing locations.
8. Can you duplicate the success of your current location? If your first location is doing well, it’s likely because you’ve put in place the people and processes that keep the business running smoothly. It’s also because you’ve developed a culture that resonates with your customers. You need to do the same at subsequent locations.
Opening another location is a significant step. Your financial professional can help you address these questions to minimize risk and boost the likelihood of success.
This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.
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