How do you know if your small business is ready to expand to another location? What issues should you analyze before making the leap?
Before you consider an expansion, consider assessing the health of your business to try to determine whether it's developmentally ready for growth.
Several key characteristics that often matter:
- Your management team and operational systems ideally are clearly defined and function well. The days of you being a “one man band” have hopefully given way to a staff of managers and trained team members.
- Profits ideally have increased and flourished, with more than just enough revenue to cover expenses. Consistent months, quarters and years of sustained profit may help.
- Products and services should ideally have been tested and found effective, with your brand gaining credibility and recognition.
If any of those elements are absent, talks of expansion may be premature. Even if those factors are present, a plan to implement such a dramatic change often works best when it’s plotted out methodically and with precision. Otherwise, the expansion could be fatal to your business.
[pullquote showtweet="false" alignment="center"]If your research confirms that expansion is right for you, you consider consulting with an intellectual property attorney to ensure all your brands, taglines, patents and copyrights are in place. [/pullquote]
My former business, a day spa and salon in Washington, DC, failed because I expanded for the wrong reasons and didn't seek professional counsel prior to the move. From the inception, I always envisioned my business as a franchise. After six years in business, the spa was profitable, though not wildly so. With regard to management, I was still primarily responsible for the day-to-day operations. I had a strong brand and my team was stable. One day, I heard a day spa in a town center in Maryland had recently closed and the space was available. I made the critical mistake of negotiating my own lease. In short, within two years of opening, not only did my new location go under, my flagship location did as well.
To try to avoid this outcome, here are five legal and business issues to consider before expanding to a second location.
How will the new location be managed?
Training and management succession are often key. Most people can’t split time between the two locations without training and support. This was one of my biggest mistakes. When the opportunity for a space came about, I didn't fully appreciate what my absence from the first location would mean. Putting all your energy and resources into a new location may come at a cost for the existing location.
What type of legal relationship will the entities have?
Whether your existing entity is an LLC, C corp or S corp, consider consulting with an attorney and an accountant to determine what the new entity's relationship will be and why.
- Will it be a separate entity?
- Will it be a wholly owned subsidiary of the first company?
- What are the tax implications?
- Is your goal to franchise your operations or to have owner-operated locations?
These are all important issues to consider at the beginning of your expansion.
How much capital do you need?
Consider sitting down with a financial advisor and accountant to do a comprehensive analysis of the financial investment required for the expansion. Lending institutions and investors may be more likely to assist your efforts once you have a proven track record of profitability. With my expansion, I negotiated some build-out funds with the landlord, but in actuality, I needed more money for cash flow once the location was operable. By the time I fully appreciated the need, it was too late.
Do you have a seasoned real estate broker or attorney who understands all the leasing issues?
As I mentioned, a fatal flaw in my expansion effort was that I negotiated my own lease, and I didn't specialize in real estate. The bottom line was that I didn't understand all the expenses, so when I opened, I was paying double what I had anticipated. Having a strong real estate broker with knowledge of this market would have saved me a lot of headaches and heartaches.
Have you trademarked your brand?
If your research confirms that expansion is right for you, you consider consulting with an intellectual property attorney to ensure all your brands, taglines, patents and copyrights are in place. These are important assets that may add value to your bottom line. For more information on patents and trademarks, visit the U.S. Patent and Trademark Office's website. For information on copyrights, visit the Copyright Office's website.
The ideal goal is to balance management, profitability and brand strength before considering an expansion. A proper accounting and assessment of all those factors may take your business to new heights. Without adequate planning, however, your dream of expansion may quickly become a nightmare.
Read more articles about expansion.
A version of this article was originally published on August 18, 2015.
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