Eric Goldschein is an editor and writer at Fundera, a marketplace for small business financial solutions such as small business loans. He covers entrepreneurship, small business trends, finance, and marketing.
How to plan for a second location
Follow these steps to ensure this expansion serves your growing business well
You did it: In the age of e-commerce and same-day deliveries, your first brick-and-mortar store exceeded expectations and now you’re thinking of opening a second location.
The odds, by some measures, are on your side: Recent research finds that brick-and-mortar stores are still popular, especially among younger shoppers who prefer a live shopping experience. One study found that 72% of millennial shoppers said they preferred to make purchases in a store.
Although you can never predict if a physical store will be successful, there are steps you can take to ensure that this kind of expansion turns out well for your growing business.
Assess your first location’s success
How has your first location done? This seemingly simple question is the most important when considering whether to open a new location.
If you’re thinking about expanding, business is good. But how good? What do your balance sheet, income statement and other crucial financial documents look like? Are you set up for long-term success, or are you currently experiencing a boom time that may cool off in the coming months? Reviewing these statements with your accountant is of crucial importance.
Other considerations to make if you’re deciding on a second location include:
- How long have you been in business? Businesses that have been in operation become much more likely to qualify for elite financing options (which are discussed below).
- To what do you owe your success? Does your location — excellent foot traffic, a lack of similar options in the area — play a big role? If so, you’ll need to replicate this situation when scouting your next spot.
- Why a new location? Would you be better served investing in e-commerce? Or do you think that your brand is strong enough to thrive in a new market entirely?
The profits and success of your first location will support the second in the beginning, so make sure that your success is sustainable and repeatable before moving ahead.
Create a new business plan
It may be tempting to treat opening a second location exactly like your first location’s opening. However, you’ll have to balance your existing expenses and resources against the needs of your new location.
With that in mind, it’s important to take a two-pronged approach when writing a new business plan for your second location:
- Keep what’s central and replicable: Certain core tenets of your business plan, such as your market analysis, marketing strategy and unique business processes, should carry over to your new plan and will apply to your new location.
- Address what’s unique about a second location: Your plan for your second location should assess financing options that weren’t previously available, delegate authority to employees to oversee one or both locations in your absence, plan for carrying over processes and culture to your new location and so on. You’ll also have to plan for the cash flow of Location No. 1 to help support the operations of Location No. 2 until everything is up to speed.
Securing financing is critical to expanding your business. Opening a second location is going to cost you and tying up your profits and working capital while doing so is a recipe for disaster. After all, you’ll need your emergency funds ready for the potential challenges mapped out in your business plan.
Therefore, it might be a good idea to consider outside financing, so you don’t sacrifice flexibility while expanding. You also, quite simply, may not have the cash available to make such expensive investments in your expansion.
Your best options include:
The Small Business Administration’s (SBA) loan program makes long-term, low-cost loans available to qualified small businesses. Some SBA loans are best used for real estate investments, while others are better for acquiring working capital and covering costs like buying inventory. The SBA loan process is arduous, and you’ll need to meet a number of qualifications.
Community bank loans
Small business loan approval rates at community banks are three times the rates of big banks. So even if a big bank turns you down, smaller community banks might offer you an affordable loan or line of credit.
A newer class of online lenders has emerged, offering quicker underwriting periods and less stringent requirements. However, repayment terms tend to be shorter and the interest rates higher.
Get (and stay) legally compliant
You can have everything up and running, but if you don’t keep your business compliant with state and federal laws, none of it will matter. Staying on top of things will require a lot of paperwork and monitoring of company records.
You should discuss this with your legal counsel. You’ll need to go over filing requirements, maintaining licenses and permits, possibly changing your business structure and other considerations.
You can never plan too much when it comes to opening a second location. As you know from your first time around, the tough part is the execution — and the more detailed your plan, the easier it will be for you to clear obstacles after you open your doors. Start with the above steps, but never stop thinking about how you can think ahead.