Opening a Second Shop? Plan Ahead

Expanding a business to an additional location takes thoughtful preparation to avoid the worst-case scenario: No business at all

By Karen E. Klein

Q: I have been running a car-service center for seven months, and sales are so good I'm planning for expansion. What factors should I consider in deciding whether to open a second branch? I have a $44,000 loan that will be paid down to $10,000 next March. Assuming that I decide to push ahead, should I wait until then? -- R.Z., Manila, Philippines


Congratulations on your early success and your ambitious plans for the future! Thinking about and planning for a second location is a great idea. But make sure that you don't push ahead too quickly. Your first location is still new and untested, so it needs your full attention for quite some time.

Also, you'll find a huge difference between running one location and running two, and it'll be easy to get personally and financially overextended if you expand prematurely. And if that happens, you'll be on a dangerously short road to losing not just the second location but the first one, too.

Definitely wait until your initial loan is paid down or retired before moving forward, says John Rooney, a business consultant and an adjunct faculty member at Pepperdine University in Malibu, Calif. Then, engage in some meticulous planning. The most important thing you can do for the new location is draft a very conservative monthly cash-flow projection, including sales forecasts (which may not be the same as those at the first store) and cash payments.

"Don't forget about your loan payments," Rooney says. "Also, put in all your capital expenditures and all the things you'll have to purchase to get a new store up and running. And be generous -- it always costs more than you expect."


  Remember that you'll have negative cash flow for several months, so make sure that a new loan you take will provide enough capital to cover your operating expenses and a cushion of three to four months' worth of expenses to cover your fixed costs during the startup phase.

Also key to preparation will be ensuring that you have a trusted manager at the first location who's experienced enough to handle things there when your focus shifts eventually to location two. If you don't have such a person on staff, begin your search and training process immediately -- and don't even think about the new site until that person is in place.

When you decide you're ready to move forward with the second service center, be cautious and stick to your proven model. It will be tempting to try the "bigger and better" route at the new location, but remember that bigger and better also means more expensive. The manageable scale that you're now working with has proven successful, so stay with it.


  Reduce your startup costs by getting on a delayed-payment schedule for your loan and/or rent for the first few months, Rooney suggests, and lease equipment rather than buying it. But don't scrimp on good information and communications systems to link the two locations. You'll need real-time access to customer information, cash flow, and other data from both sites.

Choose your next location wisely. "A bad location can be the kiss of death for an automotive business, so scout a site that is convenient and highly visible. It should have good traffic flow and be in an area with sufficient commercial and residential density," Rooney says. "Once you've got a location picked out, get a list of all the households within three or five miles and send out some invitational promotions, so you can get your customer base built up quickly."

You could try offering an introductory service at a special rate, throw in freebies (in your case, maybe a free tire rotation with an oil change), even hire people to go door-to-door to offer a coupon packet that can be used at the new place. And make a dramatic entrance. Plan a large grand opening and invite all your customers from the current location.


  If you don't maintain a customer database already, start one immediately, and send out reminders to existing customers about return service. You may find that this practice alone will increase your business by up to 15%.

Bask in your early success for now, and concentrate on sustaining the good results there while you start planning for the future. Here's the good news: Replicating your business model becomes easier the more you do it, experts say, so even if launching service center No. 2 is a tough battle, it will all be downhill from there.

Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BW Online, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues

Edited by Rod Kurtz

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