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4 Things to Consider Before Expanding Your Business

Andy Ali, president of Sunsations International, has big retail dreams. The Santa Monica, CA-based sunglasses, luggage and travel accessories retailer wants to open 30 more stores. But for now, he’s content with two locations. The motivation to expand was simple: “I wanted to keep growing the company—I really believe in what I’m doing,” he says. “I happen to love the retail business.”

Although the desire to grow is straightforward for Ali and many other retailers, the actual decision to open a second location is more complicated. In retail, love is not all you need.

Here, then, are four critical factors to consider before expanding your retail empire:

1. I Got to Be Me

Some retail operations thrive as much because of their owners as their merchandise and business plan. “Often small store owners don’t realize that they, themselves, are the business and the reason for success,” says Todd Nathanson, a broker with illi Commercial Real Estate in Encino, CA. “They possess product knowledge and a passion for the business that can’t be duplicated by employees.”

This can make success at a second location difficult, since you can’t be in two places at once. A little customer research and honest assessments from service providers such as bankers, accountants and attorneys can help you determine if your business can be successfully duplicated, even if you cannot be.

2. Money. Money. Money!

“Not having enough capital is still probably the number one reason for business failure,” Nathanson says. Meeting with your CPA and banker is essential to evaluate factors like:

  • How much space do you need and what will that cost in rent?
  • What fixtures, supplies and physical improvements are required to outfit the space, and what will that cost?
  • How much additional staff and inventory are necessary for operating the second location and what are the associated costs?
  • What will be the total fixed cost burden?
  • Does additional order size yield any economies of scale or savings from vendors and suppliers, such as volume discounts or preferable terms?
  • How much funding do you need to cover several months of operating without income (just to be on the safe side) and where will it come from?

Ali and his partners saved most of the profit from the first store while taking small salaries. This enabled them to fund the cost of build-out at the new location. “Plan for at least 6 months downtime to get the business up and running,” he explains. “It takes a while for the business to take off.” 

3. I Want You to Want Me

If the financials check out, investigate demand. Survey customers to find out where else they shop and what might keep them from coming to your first location more often. After running a busy operation at their Bellaire, MI, store and warehouse, the owners of Traverse Bay Farms saw there was enough demand for a store closer to customers in Traverse City, the largest metro area in the region. “A second location allowed our customers to purchase our products on a more regular basis since our new Elk Rapids location is only a short drive,” says Andy LaPointe, managing partner and director of marketing. “The increased traffic to our stores has increased our cross-sell ratio and online sales, too.”

The expansion positively impacted some other important aspects of the business. “The addition of the second location also increased inventory turn,” he says. The company collaborated with its accountant to set up inventory tracking for each location. “This helped us reduce overall production costs. And since we sell our own product line, the increased volume also helped gross margin.”

4. Where Is the Love?

In the end, location makes or breaks the expansion. Obviously, you want to be where there are plenty of new customers and not too many of your existing ones—you don’t want to cannibalize your original location. But there are other factors to consider. Assess whether the resident employment pool meets your business and budgetary needs. What are current wages of skilled employees at comparable retailers? Can you afford them?

Speaking of comparables, it pays to know the property market, and that’s where a commercial real estate broker with direct expertise in retail can really help. And before you squawk that you can’t afford that—you can. “The tenant rep broker’s fee is typically not paid for by the store owner,” Nathanson says. “It’s customarily paid directly or indirectly by the landlord.”

Ali worked with a broker who was instrumental in securing a second location. “It helps to have a broker who knows the market rents to make sure you get the best deal,” he says. Brokers can often find better locations than you because premium space rarely makes it to public market. Brokers-only deals are common, especially in highly competitive markets.

Opening a second location requires a lot of advance work before the final decision is even made, which may require more time than you can afford to take away from running the store you already have. That’s where your CPA, banker and broker really come in handy, doing a lot of the legwork.

“Retail tenant rep brokers spend a tremendous amount of their time researching demographics and competitors, driving trade areas and talking to property owners and the brokers who represent landlords,” Nathanson explains. “This allows store owners more time to focus their time on income producing sales at current retail locations.”

Margot Carmichael Lester is a freelance business journalist and consultant in Carrboro, NC. She grew up in a family-owned gourmet grocery and understands the special challenges of running a small business. Follow her on Google+.