13 Business Expansion Risks When Opening a Second Location

Steven Imke June 6, 2021

Many business owners who operate out of a brick-and-mortar facility dream of a business reach that spans several locations. Once they see some success in a single location, the itch to expand to additional locations seems like a logical way to grow their business. However, many businesses that choose the business expansion route by opening a second location or branch office may be jeopardizing the success they already achieved because they underestimate everything that is required to expand to additional locations.

Oftentimes, people assume that because they have had success with one location, they can just duplicate everything they did at the first location and have success at the new location. If you thought opening your first location was a challenge, wait until you try to open your second. It is hard enough to manage all the affairs of a single location when you are 100% dedicated to its success. Dealing with customers, employees, inventory, payroll, etc. takes up a lot of your time and energy. Opening a second location not only doubles your effort but comes with new challenges. In fact, opening a second location is like starting an entirely new business with the additional burdens of managing the operations of the first location. Without proper planning, not only is it very possible for your second location to fail, but your first location may suffer as well.

For many businesses, expansion can be one of the best ways to drive growth but don’t be fooled, it is also inherently risky for the enterprise. Any decision to open a second location must be based on verifiable business factors and not merely based on your desire to duplicate the success of your first location. Therefore, you must ask yourself a series of very hard questions.

Can the Business Be Duplicated?

One of the first questions that you have to ask yourself is if the business can be duplicated. When you started your first location, you were hands-on. When you open a new location, your time will be split so you have to ask yourself if the first location can run smoothly without you being there since a great deal of your attention will be focused on opening the second location. Moreover, many businesses are based on the reputation of the owner. If some of your customers insist on working with the owner to give you their business, you may not have a business that can be easily duplicated.

What Are the Alternatives to Opening A Second Location?

If duplicating your business is a challenge, have you considered how you can achieve your business expansion goals in other ways before taking the big leap to open a new location? For example, are you able to grow your business by building an eCommerce website, eliminating the need for considerable funding and the risk associated with opening a physical store? This doesn’t mean you can’t open a second physical store or branch office, but there may be other steps you can take in the meantime that aren’t as scary or risky and can better prepare you for what’s to come.

Who Will Staff the Second Location?

Is there an adequate supply of qualified potential employees to staff the new location? Many technology businesses are located in specific parts of the country so that they can recruit top talent from local colleges and universities. In my case, my documentation and training company opened a branch office in Athens GA adjacent to the campus of the University of Georgia and another in Research Triangle Park near the North Carolina State University at Raleigh, so we could recruit Instruction Design talent from these top schools.

As I write this post, local restaurants are once again able to operate at 100% capacity after being forced to close their doors completely or operate at significantly reduced capacity for over a year. Many servers and cooks have gone on to other professions creating huge staffing headwinds for the remaining restaurants to resume full capacity operations, let alone staffing a new restaurant.

Who Will Manage the Second Location?

Once you have addressed the question of hiring qualified talent for a second location, you need to ask yourself who will manage it? Business expansion will put a lot of stress on your business and will often require you to split your time between your two locations. This is why it is so important to have a strong management team and reliable employees who can help support you at both business locations and not require constant oversight.

Some businesses have several founders, partners or a trusted long-term employee that have the skills to either stay and manage the operations of the first location or will opt to relocate and run the new location. If you have this kind of option, it will go a long way toward maintaining a consistent culture between the two locations. However, if your presence is critical to the successful operation of the first location, you cannot expect it to operate very well without you.

I learned the lesson of having the right management in place for a new location the hard way with our Athens GA office. Since neither my two other partners nor I were willing to relocate to Athens for an extended period of time, we decided to hire a Ph.D. graduate from the University of Georgia to run our Athens office. With minimal exposure to our business culture and processes, the office started doing things we would never have supported or authorized. While my partners and I made frequent trips to the branch, we were bleeding all kinds of money. Finally, we had no other choice but to cut our losses and close the office. Based on this lesson when it came to opening future locations, one of our top staff members, Ray Carrado, was nominated and dubbed our “Hand Grenade”. Every time we opened a new location, we had him pack his bags and move to that city for about three to six months to make sure the office was run in our image.

I had a client who owned a coffee shop. He had a passion for coffee that really showed and he knew all the elements to create a truly superior cup of coffee, from the sourcing and growing conditions of the beans to how various roasting techniques affected the final product. He could often be found talking coffee and educating his patrons on coffee excellence.

His energy and love of coffee were obvious and key to his shop’s success. His biggest obstacle to any business expansion plans was finding someone with the knowledge and level of enthusiasm necessary to operate additional locations.

Does your industry require a manager with a high degree of knowledge and passion for the product or service to differentiate your locations from those of your competitors, like my coffee shop client? If so, how can you locate, grow and empower your next manager?

Do You Have The Time For Business Expansion?

Opening additional locations are going to take a lot of work and a lot of your time. So, consider if your current lifestyle allows you to put in those much-needed extra hours. If you’ve got way too much on your plate at the moment, it might be better to wait until you can give more of yourself and your time to the project. You shouldn’t rush into opening a second location.

Do You Have Documented Standard Operating Procedures?

One of the most common mistakes business owners make when expanding beyond their first location is failing to document all their day-to-day processes that made the first location successful. Business expansion by opening additional locations requires that you thoroughly document your business processes so you can pass them on to the new employees in a new office location.

One of the most important factors we discovered when expanding to a new location is ensuring that each location has consistent operational systems in place. Before you even consider business expansion, start by making sure your first location is well-organized and has a well-documented system for communication, hiring and training, customer service, and financial management.

By streamlining and thoroughly documenting your business in the first location, it will be much easier for your staff to maintain a level of consistency at the first location and provide you with the blueprint for replicating your successes at additional locations. Since you can’t be in two places at the same time, you need to be sure you have a standard operating procedures (SOP) manual that contains all the processes and systems your business needs to run smoothly. Creating an SOP document will help the manager of your second location run your business like you would and make sure everything goes smoothly when you’re not around. Plus, having an SOP document is helpful for new hires to know how things are done as well.

How Will You Create a Consistent Culture?

Your company culture has an immense impact on your day-to-day operations and when you start up a new location, you will have to build it from scratch. So, you must ask yourself, how will we make sure employees stay connected to the company’s mission and shared values? You must try to understand the dynamics of your culture and what makes it work and then figure out how to create consistency between locations. As the business owner and founder, you will also want to be there physically in the early days or have a senior employee present for at least the first three to six months to get things off on the right foot.

How Will You Preserve Your Brand?

In some industries, being perceived as a business with multiple locations comes with considerable cachet. Aside from the potential operational and competitive advantages of opening additional locations, the added value it can bring to your brand should not be underestimated. This is particularly true for professional services such as law and accounting firms, and financial service providers. For businesses like these, the prestige of becoming a global brand is often a determining factor in their decision to expand. However, failure to meet customer expectations at a second location can bring bad reviews and hurt not only the prospects of the second location but the first one too. The quality of service at either location should be equally top-notch, and that’s something that can only be achieved with the right team and a well-thought-out SOP document in place.

Have You Conducted Proper Market Research?

Make sure to conduct thorough research on whether there is sufficient demand for your product or service at the new location, and tailor your approach to fit the unique characteristics of the new market. Ask yourself what were the keys to the success of your first location? Can these factors be transplanted to a new location? Are there complimentary shops or anchor tenants nearby that can help to generate and sustain the traffic of potential customers?

That reminds me of the fact that you will often see car dealers and food courts grouped in a mall so they can leverage traffic. Have you ever noticed that most successful liquor stores are located in a strip mall right next to supermarkets? This is because supermarkets are anchor tenants and the liquor store takes advantage of their traffic. But as we discussed in Location, Location, Location? Wait, Maybe Not that studied foot traffic in Seattle’s Pike Place Market based on which side of the street the business was located, you have to observe the human traffic patterns to make informed location decisions. As the Seattle example demonstrated, you cannot infer the potential success of a location by its address alone.

Have you done your market research and identified a location with great foot traffic, easy access to public transportation or parking lots, and a solid supply of potential customers? Before expanding to a new location, do your due diligence to confirm there is enough demand in that area for a new location. You may be very busy at your current location, but that doesn’t necessarily mean the expansion office will be as well.

Also confirm that your advertising mediums are available, and at a cost that is within your budget. For example, your current location may have great success from newspaper advertisements. However, that may be because your current location benefits from two newspapers, keeping advertising costs competitive. At your new location, there may only be one newspaper where they can charge much more for similar ads since they are the only game in town.

Make sure that the demand for your business is consistent and not just a temporary spike. As we discussed in How Responding to Popular Fads will Destroy a Business, don’t fall prey to the “the circus comes to town” fallacy. The fallacy got its name from the days when a traveling circus came to a town for a few days. People from nearby towns flooded in to watch the circus, and local businesses saw significant upticks in business. Some business owners who didn’t associate the increased customer traffic to the circus took steps to handle the new level of business. They often bought new equipment or began expanding their operations. Later, when the circus tour was done and had left town, business levels returned to normal. However, the businesses that expanded to handle the circus surge, not recognizing that it would be short-lived, now had additional expenses due to their ill-advised expansion. Many soon collapsed when demand returned to normal and their profits turned negative.

Distance Between Locations

You don’t want your second location to cannibalize sales from your first store. This is especially true in retail. Subway restaurant learned this lesson the hard way. Subway was one of the fastest-growing franchise restaurants on the planet. However, in their zeal to stave off competition, they encouraged franchisees to open thousands of new shops close enough to cannibalize sales from other existing locations.

So, before you settle on a location, you will need to ask if the new location will take some clients from my first location, making the overall enterprise less profitable? When considering expanding your business to a second location, it is crucial to remember the importance of avoiding cannibalization. While it may be tempting to open in a geographical area close to your existing location for operational and logistical reasons, doing so could hurt your original business, diverting customers of the first location to the second.

Do You Have A Financial Plan For Business Expansion?

Assuming that you can staff a second location and that you have an SOP document they can follow, you must try to determine the cost of opening the additional location. You must develop a realistic financial plan for the second location to make sure that the location will generate the kind of revenue required to sustain its operations. More locations mean more headaches and overhead, which can translate into less profit for the enterprise, not more. Your financial plan must include accurate projections and not optimistic projections of expected cash flows. Keep in mind that revenues at the first location will often suffer when you are not minding the store, so be sure that your revenue projections for the second location are conservative and that you have a plan if expenses are greater than projected. Some business expansion experts recommend that you should have enough discretionary income from the first location to cover 100% of the fixed expenses of the second one.

Always plan on spending two to three times what your initial projection is. That way, if you need it, it is there. It is easy to lose track of what you’re spending when you’re using tens of thousands of dollars across various contractors and businesses to ramp up your second location.

How Will You Finance Your Second Location?

Just because your first business is profitable doesn’t mean you’re financially ready to open a second location. You’ll need to take a hard look into your books and determine if you have the revenue, profits, cash flow, and financing to not only sustain your business expansion but also keep your current business financially stable.

Sources of funding for business expansion may include loans, outside investors, your own contributed capital as well as any applicable trade credit. Remember, it is in your best interest to never rely on your existing location for any funding; instead, consider the new location a separate business venture.

How Do You Know If It Is Time for A Business Expansion?

Deciding when to open additional locations is one of the most critical strategic questions that you will ever face as a business, after starting a business in the first place. Opening a second location too soon and you risk overextending your resources. Wait too long and you could lose momentum and competitive advantages.

How do you know when it’s time? Some questions to ask:

• Do you have more business than you can handle based on physical constraints?
• Are you turning away customers because you just do not have the capacity to service them?
• Do you have a local customer base as well as customers traveling long distances to get to your location?
• Do you have multiple customers asking you to open a new location or to provide more services?

If you answer yes to all of these questions, it’s clear that you have demand for your products and or services and a loyal customer base. However, customer demand is not enough of a reason to open a second business location. You have to answer the hard questions to determine if the time is right for you.

Do you have plans for business expansion and if so, are you ready to open a second location?

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