Business Expansion: Be Aware of These Red Flags

If you're ready for business expansion, make sure you're prepared for success by taking these four scenarios into consideration.
Journalist, freelance writer
April 11, 2016

Most business owners want their business to get bigger and bigger. But just because it feels like the right time to expand, that doesn't mean you should. Sometimes, a business owner is ready to grow before the business is. So if you're thinking about business expansion, you may want to make sure you don't see any of these red flags waving in the wind before you actually go for it.

You Haven't Budgeted for Your Startup Costs

If you have a brick-and-mortar store and you're opening up a second location, keep in mind that your next establishment is a little like a startup business—even if you feel you're a battle-hardened, established entrepreneur at this point. Customers may still need to find your second location, and you may need to do more marketing than ever before. Depending on the nature of your business, you may have to spend a lot of upfront money on inventory or supplies. You may have to hire a staff and train them before you make any money off your second location.

If he could have a do over on his second location, Aalap Shah says that he would have banked three months' worth of expenses "for inventory, fixtures and other odds and ends." Shah had a toy store he opened in Chicago in 2004. It did very well, and in 2009, he decided to open a second location in a posh mall about 12 miles away. There were several mistakes that Shah says he made, including thinking that because he had done plenty of marketing on his first store, he could skimp on promoting his second.

"Huge mistake," Shah says. "The traffic in the store, even though it was in a better location, was lower."

Shah sold his two toy stores in 2010. He did rebound, however, and in 2011, he co-founded SoMe Connect, an agency that helps businesses grow through social media.

... I'd start asking [myself] questions about what will happen when the unknown unknowns come up? Who will be involved in the fix? What risks can be insured?

—Greg Chambers, president, Chambers Pivot Industries

You're Expanding Into New Territory You May Not Understand

You can obviously expand without adding a second location. Perhaps your business is providing a new service to bring in an additional revenue stream. While that's a good thing, you may have a tough time if you're working on something that isn't yet a core strength of your business.

Sabrina Parsons is the CEO of Palo Alto Software, which sells the business-planning software LivePlan. Parsons says that she has a customer who has a doggie daycare and used high-end doggie treats, food and shampoos for his clients when they brought their dogs to him.

"Clients started asking to buy the products, and this business owner decided to expand and add a retail shop to his doggie-boarding business," Parsons says. Smart idea. But Parsons says the owner jumped into the expansion without fully understanding the cash implications of a retail shop.

"He struggled to be able to have enough cash to buy sufficient inventory, and in order to not run out of cash, he ordered too few of every item," Parsons says. "He started to deal with out-of-stock issues where his customers would want to buy an item, and couldn’t, and started to get used to the idea that the items were never in stock. His business stalled."

According to Parsons it all worked out in the end, but if you're expanding into uncharted waters (uncharted for you, anyway), learn how to sail before you go out in your boat.

You're Basing Your Expansion on Your Gut and Not Market Research

Expansion isn't always adding a new location or adding a new service—maybe you want to expand into a bigger office because business is booming. That's what happened in Max Soni's case.

Soni, a co-founder of Qumana, a marketing company that now has some high profile-clients like BBC America and Phone.com, says that he started the business in 2010, under a different name, when he was in college. At first, he was working out of a home office. But as he began hiring employees he took it to the next level with a central office with a hefty rent of $2,500 a month in Long Island, New York.

"We saw great success from having this office—and even had some walk-in foot traffic," says Soni. (His company would later merge with another company.)

Business was flourishing, and so it seemed logical, Soni says, that if their offices were positioned in an even better place, the business would grow even more. "We thought that being in proximity to all of the great businesses in NYC would naturally result in more clients," Soni says. He ended up moving out of the Long Island office for an office in downtown New York City where rent was $12,000 a month.

"To put it lightly, our assumption was incorrect," he says. Soni ended up subleasing to another company, which helped offset the cost of the lease tremendously. Still, the expansion was an error. "We overestimated the value of proximity to businesses," Soni says. "What we should have done is have a game plan on how this proximity to so many businesses would be harnessed through a marketing strategy." 

You Have No Game Plan for Your Expansion If It Doesn't Go Well

That may be the biggest red flag of all. You need to plan for the unknown unknowns, says Greg Chambers, president of sales and marketing consultancy Chambers Pivot Industries in Omaha, Nebraska. True, you can't know what you can't know, but Chambers says you can make some educated guesses as to what might go wrong in an expansion.

"Lawyers are great for this," Chambers says. "They can dredge up remarkable stories of things gone wrong. And then I'd start asking [myself] questions about what will happen when the unknown unknowns come up? Who will be involved in the fix? What risks can be insured?" And look at it this way: If you don't have a backup plan, what's the first thing you'll say after you're picking up the pieces of your shattered expansion dreams? I should have had a backup plan.

Read more articles on business expansion.

Photos: iStock
Journalist, freelance writer