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Business Trends: Blueprint for success
Having a good business plan is the first step toward a successful expansion
By Joanne Friedrick
September 01, 2010
If one is good, are two better? That's just one of the questions that business owners think about when the talk turns to expansion. Two seafood stores or restaurants or distribution outlets may conjure thoughts of twice the profits, but it could also spell double the headaches with staffing, overhead, loans and so on.
Knowing when to expand relies on having a sound business plan, says Tom Egelhoff, a consultant who is also CEO of Small Town Marketing in Bozeman, Mont.
"Make sure it works on paper," says Egelhoff, before embarking on the ex-
If the idea is to add a second location, the business plan should center around that site, he says, and explore factors such as demographics and income of homeowners in the area or types of businesses nearby to gauge what the competition might be. Online sources such as www.melissadata.com, he points out, can help business owners sort through demographics by ZIP code, city or area code.
"You have to choose a location based on what is best for your business, not your finances," says Egelhoff. Even if the rent or mortgage is higher in the best spot, it will likely pay dividends that a second-tier spot would not, he adds.
Other means of expansion can come from adding profit centers to your core business, such as a seafood counter in your restaurant or a take-out restaurant in a store. It still requires a business plan, he says, but it can be a less-involved expansion process than
adding another whole site.
Whatever works on paper also needs to work in the world of banking and lending, says Egelhoff, who notes the higher failure rates on loans have put lenders in a more cautious position, especially with restaurants.
"The best way to finance is to do it internally," he says. If a business has a solid track record of profitability for the past five years, he says, that foundation can serve as the collateral to start another site.
Other points in the laundry list of items that should be considered in every expansion plan, says Egelhoff, include healthcare costs. Will an expansion put your business in a category where offering health insurance is required? Management is another concern: Do you have people you can move up into new management roles, or will you continue to run things yourself? Your vendors also need to be considered. Can your current suppliers support your business as it expands, or will you need to supplement with new providers? The expansion could put a business in the position of getting better deals from suppliers because purchases are larger or more frequent.
Greg Boyce, who with his wife, Dana, owns Corbett Fish House and Hawthorne Fish House in Portland, Ore., knows firsthand the ups and downs of expansion. The Boyces opened their first location in October 2002, and their second site, about seven miles away, followed in June 2006.
Both restaurants serve fish and chips based on the Friday night fish fry that is a tradition in Greg's native Green Bay, Wis. The formula was successful from the start, he says, with Friday and Saturday nights often too busy to handle the crowd of diners.
"We had requests from fans of our food, asking us to open closer to them, so we knew the demand was there," he says.
At that point, they decided to expand, having created a niche in the seafood category by serving perch and walleye coated in a gluten-free brown rice flour batter.
"We had this huge audience," says Boyce, adding the restaurant even drew customers from as far away as Seattle. "It seemed like a natural thing to open a second restaurant."
They created a business plan for the second restaurant, just as they had done for the first one and scouted more than 50 locations. None of the final choices was perfect, he says, but the location on Hawthorne Boulevard presented a good combination of price, size, set-up and location. Fortunately, he says, the necessary kitchen equipment was in place, such as a hood vent for frying, so it took less than three months to open the second restaurant versus six months for the first one.
The management issue was dealt with by moving experienced employees between the two locations. Each site has a manager and kitchen manager, he says, but Boyce and his wife also spend time at the sites: Greg is typically at the original fish house, while Dana works at the Hawthorne location.
Opening a second location did provide some savings when buying seafood and supplies, says Boyce, but it was less than 5 percent.
For financing the new restaurant, the Boyces explored Small Business Administration loans, "but their criteria was stringent and the paperwork was daunting." In the end, they went a route probably not approved by Harvard Business School and "mortgaged everything we had, so we only had the two restaurants." They also relied on networking to help them secure their second mortgage. A VP at the local Wells Fargo Bank is a regular customer, explains Boyce, "and he pulled some strings to get the money just in time."
As the Boyces consider adding a third location down the road, they are cultivating a relationship with a local bank that specializes in small business loans.
Having the financing in place is one of the lessons Boyce learned from his expansion process, along with learning never to settle on location. "We once in a while look at a third place," he says, "but it doesn't happen too often. And if we do expand, we'll be very selective."
Getting to the breakeven point with an expansion can mean looking for more exposure than is needed to draw customers to the first site, says Egelhoff. For new restaurants or retail stores, a grand-opening event with specials and sampling, advertising via Facebook and Twitter and offering coupons online should all be part of the first 90-day strategy in the business plan, he says.
But most important is delivering the goods, no matter what th e expansion is. "You have to make sure to meet the expectations of your customers," says Egelhoff.
Contributing Editor Joanne Friedrick lives in Portland, Maine