Last year Murray Gordon, president of MAGA Ltd., a Deerfield-based long-term-care insurance agency, noticed a spike in the number of inquiries from consumers in the Phoenix area. He and his staff could handle the new business from their office in Illinois, but Gordon decided that the growing Phoenix area, with its burgeoning retiree population, deserved closer attention. He opened a Phoenix office about 13 months ago and hired a family friend to run it.
Business in Phoenix is now humming, but it didn’t happen overnight. The Phoenix office manager was new to long-term-care insurance. For about six months, either Gordon or his son and business partner, Brian Gordon, made trips to Phoenix to train their new manager.
“Expansion isn’t as easy as you would think it is,” said Murray Gordon, who plans to open a San Diego office soon. “It’s costly and time consuming. I wouldn’t have done it if I didn’t have someone I could rely on to start up the Phoenix office. Our reputation is at stake. And you know what they say about bad news traveling faster than good news.”
Many entrepreneurs who have opened offices and stores across town or across the country echo Gordon’s sentiments. The challenges–from finding employees you can trust to haggling with building inspectors–are reminiscent of those you face when you start a new company. But when you’re facing these challenges from 50 miles or 1,000 miles away, they can be maddening.
Before you consult leasing agents about a second store or office, make sure you’re really ready to expand. If, like MAGA, you have proof that there is a waiting market in a new location, you have a leg up. If you don’t have that assurance, do some homework. Before opening a second retail store or a restaurant, consider the new neighborhood’s dynamics. If there are direct competitors in the same area, will the local market support your business as well? How far will people be willing to travel to partake of your merchandise or services?
Some variables are tough to predict, such as how the neighborhood’s socio-economics might change in the next decade, and your competitors’ expansion plans. “The small-business owner isn’t aware of the grand plans of a Walgreens, a CVS or other major corporations with deep pockets. They can carve up a territory of the country and start saturating the market,” said Harold P. Welsch, professor of management and Coleman Chair in Entrepreneurship at Chicago’s DePaul University.
For many service or consulting firms, the decision to open a second facility is almost forced upon them when they land important customers out of state and company executives wind up spending more time on the road than at home.
SupplyCore, a Rockford-based company that provides procurement and distribution services, primarily to the federal government, has offices in Charleston, S.C., Atlanta, Santa Fe Springs, Calif., and San Diego. Said SupplyCore’s president, Peter Provenzano, “Sometimes the volume of business reaches a point where it’s no longer feasible for us to service it from here, or the customer’s demands are evolving to where they want additional services levels. They want someone onsite to service their account.”
SupplyCore’s San Diego facility, for instance, was established specifically to serve the Mexican market. “We did market research for nearly a year on the Mexican marketplace and their need for U.S. materials,” said Provenzano. “We wanted to show our customers that we’re making a commitment by putting someone down there permanently to work with them. That goes a long way with customers.”
Leveraging relationships
Even your most loyal customers can stray. To expand your customer base in a new area, consider leveraging your local customer relationships. MAGA asked its contacts and business partners in the retirement housing community, as well as financial planners and bankers in Illinois, for referrals to their counterparts in Arizona. “Even though we’re successful in Chicago, and even though we have networks built up in Phoenix, it’s still like starting a new business,” said Gordon.
Both Provenzano and Gordon stress the importance of regular communication with their out-of-state offices. “Make sure they know that you’re there to answer questions, that they have a support system,” said Gordon.
Avoid the temptation to micro-manage both locations. Establish processes and rules that your employees can follow for handling money and working with customers so that employees at your new site have some degree of autonomy.
For some businesses, the employee-management hassles that come with expansion can be particularly trying. According to William Gartner, professor of clinical entrepreneurship at University of Southern California’s Marshall School of Business in Los Angeles, dry cleaners are a classic example because the income from cleaning a garment is small, while the cost of replacing a garment that has been stolen or damaged can be prohibitive. “That’s why it’s difficult to expand a dry cleaner from one unit to another, and why oftentimes expansions are through the family,” he said.
The risks are similar with many cash-based businesses because they’re vulnerable to employee theft. “Entrepreneurs think everyone will care about the business like they do, but that’s not the case. People are there for other reasons,” said Gartner.
There are many ways to finance your expansion, but the cleanest method is to wait until the cash flow from your existing facility is sufficient to cover the cost of establishing a new location. “If you can finance internally, it says you have good margins and you’re managing your cash well. If you can’t finance internally, the first thing to look at is why the business can’t grow via self-generated cash. There might be a fundamental problem with the business,” noted Gartner.
Overlooked sources of capital
You may be able to accelerate your expansion plans by tapping outside investors, but in exchange you give up a portion of your equity and control. Said DePaul’s Welsch, “That’s not a good state to be in if you’re a dyed-in-the-wool entrepreneur who likes to make his own decisions and values autonomy.”
One external source of capital that many entrepreneurs overlook is their key suppliers. Gartner suggests asking suppliers to extend better terms on payment–say 120 days instead of 30 days, on a temporary basis.
Talk to customers also, especially if you’re opening a business unit to be closer to a large customer in order to serve them better. Said Gartner, “If you’re a printer and you want to set up a second plant, you might tell your customers, `I need to know you’re committed to me. I’d like a purchase order from you guaranteeing a certain amount of business.'” Also, consider asking them to pay faster, or pay 50 percent upfront for the first two months to help your cash flow.
Allow plenty of time to get your new site fully functional. Dealing with zoning regulations and building permits can be time consuming unless you have someone else managing these tasks for you. If there is a compelling reason to open your new store during a particular season, start the process extra early.
Whether a business will thrive in a second location depends on many factors, but with enough business smarts, you can trump many major roadblocks. Said Gartner, “The genius of those entrepreneurs who can expand their business is that they have the skill to manage through other people. A lot of entrepreneurs just aren’t there yet.”
