This is a guest post by Craig Keolanui of SmBizSuccessTeam. To read more from Craig, visit his blog.
The slowly expanding economy has many business owners wondering about their next step. For some businesses that next step might be hiring another employee or leasing some extra space next door, but for others that might mean adding an additional location. Another way to expand is to license your original business model/concept to others or even consider going the route of franchising.
Many business owners view expansion as additional sales and minimized potential costs. For example, hiring additional employees or leasing adjoining office spaces are low risk moves that can be easily reversed.
1. Opening up an additional location offers great rewards, but higher risk.
If you are looking to open up a new location, you will bear many start-up costs that you might not have realized opening the original location.
Phones, internet, rent, equipment and payroll can’t be shared between locations. However, marketing, supplies and other costs non-specific to location can be. Payroll can be a big expense for location expansion, so be prepared. How will the new location be managed? How many people will you need to staff to start with?
Expansions do not necessarily mean double the sales. Your current location will, more than likely, lose 10-20% of your customers to your new location. Of course, the new location will take time to grow to the volume of your current location. So planning ahead with a realistic time table is paramount to your success.
2. Licensing is probably the easiest way to expand your business idea or concept without cost or responsibility.
What’s the catch? Licensing is tricky because you are not providing the support, once the license agreement is complete. You can offer a certain level of support, but there are regulations that prohibit too much assistance, as that would be taking on the role of a franchiser. Licenses are essentially selling your business model or idea to someone who is willing to assume the risk of expansion by using your formula and trade secrets.
A few pros and cons:
- Licenses sell for a smaller price tag than franchises
- Some offer a level of support, come with small royalties – your call
- Licensers take no responsibility for operations or profits, once the trial period is over
- It is difficult to control geographical licenses, or adherence to branding standards
- If you have ideas that are “local” in nature, licenses can be a boon to expand your business idea without assuming any risk.
3. Franchising is a great thing to consider, especially if marketing, branding and consistency have been achieved.
If you have a secret formula that requires more details and marketing support to achieve success, franchising can be the right path. Like licensing, franchising allows you to expand your idea or business without cost, but the key is making sure you select operators who will maintain the quality of the concept. As a franchiser, you would need to consider the following:
- What upfront fee and royalties to charge (Generally between 2-10% of sales. Source: Startuplawyer.com)
- Costs for standard marketing supplies
- Franchise marketing plan with branding standards
- How much support will be provided
All forms of expansion require smart planning with accurate budgeting. If you’re going to need a loan or investors, you’ll need a sound business plan with vision that projects revenues, expenses, the break-even point and beyond.