Guide to Business Expansion in 2020
The ultimate goal of every choice you make as a business owner is to expand your small business. Every dollar you spend on marketing, every new hire you add to your team, every new customer you bring in goes toward creating a bigger and bigger business capable of dominating your market. So how can you go about building a plan for expansion in a way that will make sense for your business and your goals? You can start by formulating an answer for these questions.
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Is my company ready for aggressive expansion?
The first step in any expansion plan is to recognize whether your company is ripe for that expansion. There are a few key signs that you're probably ready to take the next step.
Your finances have stagnated.
When you sit down to perform an annual financial review for your company, are you seeing that your cash flow has remained steady for a few years in a row? Are your efforts at increasing revenue only marginally successful, if at all? To be clear, your company may very well be generating enough profit to keep afloat, but no further.
Your customers want more than you're able to provide.
This can mean a number of different things. Perhaps your customers are loyal to you for a certain product, but are also looking to buy a very similar product (or one that goes hand in hand with yours). If they've got an option to purchase both products in tandem at a new business, that may be a better option for the consumer.
Your customer base may also just simply grow too large to handle as your company is currently constructed. Are you dedicating an inordinate amount of time to customer service requests, answering customers' calls, or sorting out efficient ways of acquiring more inventory in order to meet demand? That may be a sign that you need to expand.
Your finances are in great shape.
Your business credit report is immaculate. You've got a bunch of revenue coming in from diversified sources. You make your business loan payments on time and in full. Your employees are thrilled with their compensation. If all of the above are true, your finances may have you in a position where you can expand with minimal growing pains due largely to your savvy financial planning. Your potential lenders will see you as a safe bet and will be willing to loan you the capital you need to make expansion go well.
Your industry is trending upwards.
If your company is doing well in an industry seeing universal lift-off, you may find that it'd be wise to expand in a way that takes advantage of the rising tide.
You're out of space.
If your storage facility can no longer host the inventory needed to satisfy your customers. If your storefront or commercial space is literally not big enough to hold the customers looking to buy. If your restaurant is packed to capacity every night of the week. Those are signs you simply need a large physical space to operate from. New real estate is often the most visibly obvious way to recognize that a company has grown.
What can expansion look like?
There are a few different ways to expand a business. It's incumbent upon you, as your company's leader and strategist, to determine which business growth model will best fit your company.
Horizontal Expansion
Horizontal expansion means finding ways to make your business reach new customers. That could mean customers further away, customers who may not have been exposed to your company, or customers who may have previously had no idea that your product was something they might need.
New locations
Many small business are local businesses. You might run a fitness center or a restaurant. Those are business whose products and service depend entirely upon customers being physically present. So in order to expand such a business, you'll need new locations. You could either move to a larger facility, offering additional clients an opportunity to be a customer, or you can create an additional location. Consider purchasing real estate in a nearby town or neighborhood.
If you're running a successful business with your current customers, it stands to reason that those who were previously only potential customers will bring success to a new location as well. By opening a second location, you've now got twice the opportunity to bring in revenue and expand your market share.
Acquisitions
Buying another business is a great growth strategy. While there can be some growing pains with taking over an already-established business, there are also long-term benefits. For one, acquiring a similar company to yours can allow you to control tangentially-related but not quite overlapping parts of your market.
Say, for example, you run a hotel. Your hotel is pretty large. You can offer low prices because you've got lots of rooms just off a major highway and you cater to travelers looking for somewhere quick and efficient to catch a few hours of sleep before they get back on the road. Most of your customers aren't seeking you out. You provide a reasonably-priced, convenient service. Imagine if just up the road is a small destination hotel. There's only a fraction of the number of rooms, but it's in a quiet, scenic area and is known for beautiful views, great food, and a wonderful atmosphere.
By purchasing the second hotel, you're doing several things at once. You're showing customers your hospitality know-how, because they can see that you're able to cater to multiple types of customers. But you're also seizing another chunk of the market. Now travelers looking for a base for their vacation can look to you, just like travelers looking to get off the road for a few hours.
You can also look to acquire your competitors. If a competitor is clinging to potential customers, it may be wise for your business expansion plans to involve buying out that competitor. In addition to taking over their customer base, you've now removed another fish from your pond, so to speak.
New markets
Since its 2002 inception in Columbus, Ohio, Jeni's Splendid Ice Creams has been a prime example of how a small business can use new markets to fuel expansion. The company started as a booth in Columbus's North Market. After showing that their pricey, but high-quality ice creams were a hit with customers, they expanded to a full scoop shop. Then two. Today, the company operates out of ten shops in Columbus alone, with at least one shop in cities from Los Angeles to Austin.
But the company also has utilized new markets masterfully. You can buy Jeni's cookbooks. You can buy pints of their products in grocery stores, and even take a seminar with the founder to learn to make ice cream yourself. All their new market expansion makes perfect sense given their company's goals.
Consider your product or service. What other products or service come hand in hand and how can you insert your company into those markets in a way that'll drive growth?
Internal Expansion
In addition to expanding your reach to new customers through new locations and markets, you can also consider how you can work with your existing locations to grow your customer base.
Expand your products or services
This is a strategy used by companies from local pizzerias to tech giants like Google. If your company's services are particularly specialized, it might behoove you to consider how you can offer new products (or innovate your current products) in a way that'll grow your customer base.
Perhaps the most obvious example of this expansion strategy is Apple. Apple has never been satisfied to be one thing. They weren't content with just producing computers. They created a ubiquitous cell phone. They created the device millions used to listen to music, the marketplace where users bought that music, and the headphones that delivered the sound. They created a device that streams TV and film programming, and are now creating TV and film programming. iPads are used at the counters of coffee shops. It'd be nearly impossible to go through a day without interacting with an Apple product in some way.
Most of us aren't going to found a company like Apple. But even a pizzeria can think the way Apple thinks. What cuisines or foods are your customers looking for but may not have access to? If your pizzeria exists in a town without a good restaurant for, say, chicken wings, can you use your skills and know-how to provide the best chicken wings in town? Now you're attracting customers looking for two of America's most beloved foods.
How can you use your skills and equipment to offer more and better services and products to your existing customers? And how can that innovation bring in new customers?
Deepen market penetration
No matter how loyal your customers, you're probably leaving some on the table. So one way to expand is to consider who those potential customers are and how you can go about bringing them into the fold.
Perform an objective analysis of whois coming to your company and who isn't. And once you've got a firm idea of who your current customers are, ask yourself what you can do to target the people who aren't coming to you. The answers can be deceptively simple or incredibly complex.
If you run a brewery, but choose not to hang TV screens in the drinking area, you're effectively telling sports fans that they should go elsewhere to watch the game. If your pizzeria's music selection is loud and modern, younger people may be pleased. But many older customers may want to go elsewhere.
And remember that deepening market penetration can also go hand in hand with new locations or acquisitions. If your restaurant or fitness center is in a part of your city known for being populated by young professionals, a second location in the suburbs can bring your company to larger families.
Marketing also plays a huge part in this side of expansion. What does your current marketing plan look like? Who's it targeting? If you're only doing digital marketing using certain social media platforms, you may be missing out on reaching potential customers using different platforms. If you're doing print advertising in a weekly magazine in your city, who reads that magazine? Can you find a different host or a second publication?
Which type of expansion is best?
The bottom line is that there's not one specific answer for which type of expansion is right for any given business. You need to evaluate your business's strengths and weaknesses in order to decide what's best. Your goal may be to expand aggressively using an entirely new marketing strategy designed to target a potential customer base you've never reached before. Your goal may be to move your in-person goods into an e-commerce based business model.
Evaluating your company each year will give you the most up-to-date idea of where your company stands, and you can use that evaluation to decide where you can expand, and how.
How can I pay for expansion?
No matter which form your expansion takes, it will almost certainly cost money. Marketing campaigns, real estate, acquisitions, new product development, and a bigger staff all require a sizable investment in order to produce the sort of results you're looking for. Luckily, there are financing options available for these specific instances.
Equipment Loans
If you're looking to start offering a new product or products, you may find that you'll need to finance a piece of equipment. If you run a fitness center and are thinking about opening a new facility just for weightlifters, you'll need to buy racks and bars, dumbbells and benches. The expenses add up.
Luckily, there's a type of loan designed specifically for buying physical equipment. In an equipment loan, the lender holds the equipment as collateral, which creates a favorable backup plan. If a borrower defaults on an equipment loan, the lender simply repossesses the equipment and sells it, minimizing loss. And because their potential loss is minimal, equipment loans often come with favorable terms and interest rates. The biggest downside to an equipment loan is that there's little to no flexibility when it comes to the way you can use the capital.
Acquisition Loans
A business acquisition loan exists purely to finance the purchase of another company. They're a lot like an equipment loan, except that instead of buying a new pizza oven, you buy the pizzeria. If you choose to look toward an acquisition loan, it's smart to really consider if your existing cash flow can support the short-term bump in costs that'd come with a loan big enough to buy another company.
SBA Loans
The United States Small Business Administration (SBA) offers plentiful resources for business owners looking to expand their companies. Most commonly, that assistance will come through an SBA loan. These coveted loans, frequently used to fuel expansion, are backed by the US government, meaning that lenders face a greatly reduced risk in lending to small businesses. While they can be difficult to acquire, the SBA's guarantee means that SBA loans are low-interest and favorable for entrepreneurs. So if you qualify, they can be a great way to hire more staff, develop new products, acquire another company, or launch a new marketing campaign.
What's the next step?
No matter how you plan to grow, you need to have a plan in place. Look back at your most recent business plan and determine where and how you've met or not met your own expectations. Are your revenues above pace? Below? Do you have as many employees as you'd planned to have, or are you still too small to grow the way you'd thought?
And once you've evaluated yourself that way, revise your business plan. Draw yourself a roadmap to the sort of expansion you're dreaming of. Remember, your potential lenders will also be evaluating this business plan, so be sure that it uses objective research and industry experience to show how a loan will fuel expansion, which will fuel income. You want your business plan to show investors and lenders that money spent on your company will be returned with interest in full and on time.
You'll want your business plan to show not only how your team is coordinating to meet the demand you're currently fulfilling, but also to show how you plan to adapt to the expanded business you'll become with this new funding. How is your business planning to use a second location or a new product? How will you ensure that customers are getting the same high quality product they're used to when you're no longer overseeing every single outgoing package?
With smart answers to these questions, you'll put your company in great shape not only to acquire new funding, but also to move forward as a viable, growing business.