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OPERATIONS

When to Open a Second Location
 

If you build it, will they come? Here are the criteria you should meet if you're considering opening a second location.

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After several steady years of operation and a progressively growing customer base, your first retail store is a hit, and you think you're ready to open up another one.

But don't rush in too quickly; not every second location is guaranteed the same success as the first. In fact, an existing location's current profitability has absolutely no bearing on the success of a second store. On the other hand, companies with fairly small revenues—even unprofitable companies—have still managed to successfully expand.

So with that in mind, if your first location doesn't need to be über-successful, when is the right time for a business to consider another location? While there's no perfect time, there are a number of key variables that will ultimately decide whether or not the new venture will succeed.

1. Your existing location is running smoothly.

While the existing store doesn't need items flying off shelves it certainly helps.

"You want to have the operation fairly well-running, because companies trying to expand, especially when it's out of normal range—in other words, if you're opening up in another city—is one of the three or four main causes of a company going under," says Randy Moon, consultant and co-owner at RMoon Consulting, based in Dallas. "So it is a big decision."

The reason for ensuring a healthy first location before considering another is an issue of security. Opening a second location is much more involved than simply "expanding" the first store.

"You really have to look at the second location as a first location," says Mark Loos, consultant at Consulting Services Methodology in Laguna Hills, California. "It's got to be able to stand on its own. A lot of people don't look at what it takes to actually find the employees to support the location, the right insurance provisions, what kind of zoning they're going into, there are still a lot of things that are unknowns."

Loos recommends using the template from the first business to write a completely new business plan for your second location, but carefully checking each item to see if there could be any potential crossover—maybe you can use the same insurance company for both locations—to save more money. Otherwise, keep the books between the two locations separate or else you risk cannibalizing your existing business.

Dig Deeper: The Perils of Expansion


2. You have sufficient cash flow.

"Every small businessman is best off to use his own cash flow and to stay away from other people's money as much as possible," says entrepreneur and business consultant Adam Hartung, based out of Chicago. "There's a lot of places to go get other people's money. People go to banks, they go to [angel investors] like me, but when you do that, what's really hard for most owner-operators to realize is the rate of return that other people want."

Investors will typically ask for a 40 percent rate of return, but even if you manage to pay them back in full, they still own 40 percent of your company. Most banks, on the other hand, will only ask for 10 percent return on a loan.

"Obviously if you can get a loan [from a bank], and if something goes wrong, you file for bankruptcy," Moon says. "But you give up ownership and you're going to have the bank breathing down your throat."

"If you leverage to a bank, they're going to be looking at your accounts receivable, what you have in the way of debt collections, all the things tied to specific financial statements that are audit-able," says Loos. "So you have less room to play in that respect."

Loos recommends avoiding the banks "especially in today's times of over-conservative evaluations of loans," and instead recommends finding an angel investor, or someone who cares less about guidelines and payback and more about growing the business.

"Angels tend to put more skin in the game because they have more risk, but they also get a higher payout, Loos says. "But they also complement your risk strategy because as you move into a new location, you really don't know whether or not that location's going to achieve what it needs to achieve."

Dig Deeper: How To Raise Start-up Capital in 2011


3. There's a current market trend.

"Let's say you have a business, and let's say you love tuning pianos. You're passionate about it, you love it, you're really good at it, but there's no big trend to it," says Hartung. "Opening up your second piano tuning shop just because you love it isn't going to matter because there's no trend driving people in the direction you're trying to go."

Whether or not you're passionate about your business, it's important to be realistic about the chances of a second store actually succeeding. The way to discover whether or not your business will prosper is to observe the market, research your competitors, and analyze the mood.

"If the market is headed in a particular way and what you're doing is fulfilling a market need, then you need to move quickly so that you can be able to establish your position," says Hartung. "When the trend is going in the right direction, you want to take advantage of that trend."

To figure out what the competitors in your market are doing—Are they investing in new trends or search terms?—check out Quantcast, Compete, or Spyfu. These services provide access to real numbers about important market data, including the number of monthly visitors for most websites, search terms that generate the most traffic, and advertising spending numbers.

Dig Deeper: The Geeks Are Graying


4. You have a reliable person to run the second location.

Since opening a second location is actually more like starting up an entirely new business, Loos believes it's important that the owner is present during the early stages of the second location to help it launch.

"It's more beneficial for [the owner] to be at the new location because you want to start to identify what the challenges are early on, and if he can spot those, then he can take action to correct those," Loos says. "Having the new owner there really instills a sense that there's some importance for the success of that second location, and I think the new employees there also feel that as well."

Of course, Loos notes, "it depends whether or not you need to have local knowledge." If the business would benefit from someone who knows the area, the owner might consider handing off managing duties to a hire from within the new region.

"Great success happens when you adapt to the local market," Hartung says. "Depending on what you're doing, moving a few blocks away could have a local variation, moving the next town over could have a local variation."

If the second location is far from or inherently different than the existing store, then it's beneficial to gain as much local "tribal" knowledge as possible. However, if there's no radical change in demographics between locations, it's wise to let the owner guide the second shop's maiden voyage.

"Nobody's going to care about that new business like you," Moon says. "You're not going to be making money [at the second location] for the first six or seven months, and to entrust anybody to have the desire and drive that you have to make it successful, I think, is much riskier."

Dig Deeper: 5 Steps To Picking Your 2IC


5. There's a region with unfulfilled demand for your product.

If you decide to open in an already-competitive region right off the bat, you have one of two choices: Hold your turf and try to drive the competition out of business, or move one or two towns over, get your old customers to come visit, and attract new local customers.

"You want to fish where the fish are—that's trends—but if you walk up to the pier and there's 700 guys shoulder-to-shoulder throwing a line out there, you'd may wonder if that's really where you want to go out to throw your line," Hartung says. "Or maybe you should try to find some fish somewhere else."

As head of development for the restaurant business of Pepsi Co., Hartung led the initiative for Pizza Hut's Home Delivery service. He was tempted to take the battle to Domino's Pizza, go into their areas and beat them at their own home delivery game, but he thought better of it.

"We opened 600 stores and they were all wildly profitable, and part of the reason was I just wouldn't open anything where [Domino's founder] Tom Monahan already had stores," Hartung says. "If Tom Monahan had already opened 15 or 20 Domino's, we could not compete. The guys that ran Pizza Hut couldn't believe this, and I'd say, 'Yeah, you can't.'"

Unless your company plans to be a radical "game changer," it's best to avoid opening a second location in areas of heavy competition. Instead, do some research, find a region that fits your geographic and demographic criteria, and find somewhere with few competitors so you have room to grow.

"It's wise to avoid competition, especially in the infancy, until you've grown to a number of locations and you're starting to grow economies of scale," says Loos.

Dig Deeper: 10 Tips On How To Research Your Competition

Last updated: Aug 31, 2011




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