Every business owner faces the decision of whether or not to expand their operations to meet prospects for growth within their market. This article discusses considerations that business owners should make before deciding to raise money, hire staff, and pursue new sales.
Advantages of Expanding
Gaining market share through expansion is pointless unless profits also increase. The benefits of spending money to grow your small business include:
- Developing a new product line.
- A proportionate savings in costs gained by an increased level of production.
- Increased capacity to attract qualified staff who can further improve the organization.
- Expanding geographically to take advantage of opportunities in other markets.
- Access to a wider variety of financing (at a lower cost) from banks and financial institutions.
- Eventually becoming a public company so that shares in the business can be bought and sold on a stock exchange, giving ownership an opportunity to sell shares and recoup their investment.
Many successful brands started out as home businesses. The founders of Spanx, Craigslist, and Under Armour all famously started and grew their businesses from home.
A home business that's forecasting growth may choose to move into a commercial office space, especially if new staff are being hired, or the business requires regular face-to-face meetings with clients, press, and tradespeople.
Increased Sales vs. Costs of Expansion
Expansion may be necessary to increase sales, but increased sales may not materialize unless it's apparent to the customer that a business is large enough to handle the large sales volumes. The ideal situation is to have new sales secured before expansion.
Make a forecast for the costs of expansion, including all leases, moving fees, increased utilities, additional staffing, and as many other estimates as possible. Next, do a breakeven analysis to determine whether expansion is likely to provide the expected return on investment.
If you're relocating, take into account that you will lose some of your existing customers, and that you may need to incur additional advertising costs to drive business to your new location.
Unless your business has sufficient retained earnings to cover the costs of an expansion, outside capital will be necessary to make your dreams of growth possible. If your business is on solid financial ground, and has a track record of loan repayment, it will be much easier to secure debt financing for your venture. Businesses tend to put up collateral in the form of assets and accounts receivable, and approximately 6.6 million small business loans (totaling $242 billion) were reported in 2017, with 93% of those loans being issued for less than $100,000.
If your business is incorporated, or you intend to incorporate as a part of your expansion, then you can raise capital through equity financing. Equity financing involves selling shares in a business to outside angel investors.
Angel investors do not normally involve themselves in the management of the business but do expect a significant rate of return (>25%) on their investment. As of 2017, U.S. angel investment was approximately $24 billion, and contributed to the growth of more than 64,000 startups.
Obtaining Qualified Staff
One of the greatest challenges of growing or maintaining a business is finding and keeping qualified staff.
The problem is particularly acute with skilled trades, information technology, and occupations that require specialized training and experience. If you're unable to hire and keep experienced staff to help your business grow, you will need to train new employees as they're hired. Contractors or part-time employees may fill temporary gaps, but more than half of the small business owners surveyed in a 2019 study reported few (or zero) qualified candidates for the job openings they posted.
In some jurisdictions, you may be required to provide health insurance or other benefits if your business staff exceeds a certain number. In the U.S., the Affordable Care Act mandates that larger businesses (those with more than 50 full-time equivalent employees) offer health benefits to their workers.
If your company is a sole proprietorship, you should consider changing the legal structure of your business to a corporation before hiring payroll employees, as a way to reduce owner liability.
Growing a business demands more complicated management. Growth is characterized by serving more clients and supervising more staff, and business leaders must select and delegate tasks effectively within their team.
As a business owner hoping to scale, operating additional locations is a challenging adjustment, given that your presence is so directly associated with the brand. Customers that are used to your personal attention may be reluctant to form relationships with unfamiliar employees or partners.
Scaling a Business the Smart Way
Running a business requires long hours, and fatigue can take a toll on your relationships, health, and management style. Take into account the additional stress you'll be placing on yourself before committing to any plan. Following a rigorous forecasting methodology will help you determine the smart way to expand your business in spite of the financial risks.