Navigating the Risks and Rewards of Expanding to a New Location

Watching your small business thrive is an incredible feeling. If things continue moving in the right direction, you might start asking yourself a very important question: Should my business expand to a new location? The answer depends on your company’s unique goals and financial situation, among other factors.

Let this guide help you grow your small business to a new location.

Benefits of opening a new location

Let’s start with the potential rewards of adding another location to your roster. Doing so could result in the following wins.

More revenue for your business

The goal is to open another location that attracts new and existing customers, and ultimately does well. That could generate more revenue for your business, and you could use that extra income to:

• Invest further in your business
• Hire new employees
• Pay down debt
• Expand your employee benefits
• Increase your business’s charitable donations
• Build up your business’s cash reserves

Any additional revenue from another location can also give your business more clout in your industry, especially if it leads to increased market share.

Stronger brand recognition

Increased visibility can be a powerful marketing tool. Occupying another location is an opportunity for consumers to see your business and interact with your brand more often. Expansion also implies that your business is strong, which could help build customer trust.

A new storefront or office can give you a stronger presence in the community as well. This is especially true if you’re participating in local community events, partnering with other small businesses in the area and positioning yourself as a business leader who cares about the neighborhood.

Better diversification

If all your revenue is coming from one location, you could suffer greater losses if you run into challenges there. That can include everything from a slowdown in sales to a spike in your rent to a natural disaster that impacts your area. Adding another location to the mix can help spread out your risk if it provides an extra revenue stream. If you experience issues with one location, you’ll have another to help pick up the slack. In other words, all your eggs aren’t in one basket.

Case in point: 43% of small businesses that are affected by a natural disaster never reopen, according to the Federal Emergency Management Agency (FEMA). What’s more, 29% go out of business within two years.

Access to more talent

Expanding to a new location will likely require you to bring on more staff. That might include retail workers, managers, customer service representatives, consultants, specialists and more. Widening your talent pool can give you more people to brainstorm ideas with. It can also translate to a more diverse set of perspectives and voices, which could influence your decision-making for the better as the business continues to grow.

Risks of opening a new location

Expanding to a new location comes with some built-in risk. Every small business is different, but below are some potential drawbacks to consider before making a decision.

Upfront costs

Depending on your business and location, opening another site could be costly. You may have to financially plan for upfront expenses like:

• Signing a new lease and providing a security deposit
• Securing all necessary permits and licenses
• Covering renovation costs
• Buying more inventory and equipment
• Recruiting and onboarding new employees

While you may not be able to avoid the cost of getting a new location up and running, you can look at it as an investment in your business — and cutting corners could lead to unnecessary challenges in the future. For example, trying to do it all yourself, instead of delegating tasks to other people, could result in a failed launch.

Increased operating expenses

Beyond those initial expenses, a new location will also require ongoing operating costs to be successful. That may include:

• Rent
• Utilities
• Employee wages
• Inventory
• Insurance
• Marketing campaigns
• Unexpected costs, such as equipment repair and replacement

You’ll want to budget for these recurring expenses before expanding to another location.

Additional risk

No business is foolproof, and being successful in one location doesn’t guarantee that your business will do well in another. Expanding your footprint to a new space comes with some level of risk, but if you’ve already taken the leap to become a small business owner, you may have a higher risk tolerance than most people.

Weigh the potential pros and cons of opening a new location, then ask yourself how you’d cope if things didn’t work out as intended. Would you be able to bounce back if a new location underperformed? That might be an impossible question to answer, but understanding the risks could influence how you proceed.

More responsibility

As an entrepreneur, it’s easy to get burned out, even if you only have one location. Putting another location on the books will also put more on your plate as a business owner. You’ll be tasked with:

• Managing that new location, or trusting someone else to do the heavy lifting for you
• Keeping up with a larger employee base
• Complying with regulations related to employment and labor laws, workplace safety, and data protection
• Staying current with your tax responsibilities

What to consider before opening a second location

You wouldn’t be thinking about expansion if your business weren’t doing well. Having said that, the Small Business Administration (SBA) suggests the following action items before making the transition:

• Do market research for your new location and update your marketing plan. Do you have what your target customer needs? And how will you stand out from the competition?
• Review your finances and estimate the new location’s upfront costs and regular operating expenses. Will you need to acquire more funding?
• Work out the logistics of getting all the required licenses and permits. Be sure to check at the federal, state and local levels to ensure you have everything you need. This is especially important if you plan on expanding into a new state, which may require you to file for foreign qualification.

Signs you might be ready to expand

Every business and industry is different, but if you can answer yes to the following questions, your business may be ready for a new location:

• Are you starting to have a hard time keeping up with customer demand? To put it another way, is business going so well that it feels like a lot to handle?
• Do you have a strong customer base?
• Do you think your business would do well in another market?
• Are you financially able to expand right now? If not, do you have a plan in mind for funding?
• Do you have a strong team of employees?
• Do you have the bandwidth to open and manage another location?
• If you have any business partners, are they on board with expanding?

The bottom line

Only you can decide if expanding to a new location is right for your business. It could be the thing that allows your business to scale and grow to new heights — but it isn’t without risk. You’ll want to take a close look at the potential rewards and downsides before making a decision.