You’ve started your own business and made it valuable. Congratulations! But there’s always the next step for your business. In this post, we’ll go over factors to consider when you should expand your business.
There’s no exact answer because every business has its own set of unique factors. Still, there are some downsides to expanding too soon or too late.
If you expand too soon: Watch out for the landmines. You might not be able to raise enough financing for the expansion. The cost of debt or equity may be very high.
If you wait too long to expand: An opportunity may be gone. Your competitors may develop first. They’ll have a first-mover advantage to dominate a market or create a better product. Then, that exact type of expansion may not be feasible.
Update your business plan before you expand. Do enough market research to get an indication of if your product or service works in a new market. Be sure to study the current and future competitive landscape.
Don’t forget about regulatory or licensing requirements when expanding. If you’re opening up a new location, research the required business licenses, legal forms or other elements that you may need. Be sure to check with your tax professional to make sure your expansion is done in a tax-efficient way, too.
Pros: One of the advantages of expanding is growing revenues and reducing costs through economies of scale. As the company reaches higher levels of sales and cash flow, its valuation goes up.
With more revenue and potentially more profits, your business can get more financing with better terms. Expect interest rates to be lower on small business loans. Lenders may not require guarantees and collateral from the owners. Companies financed by venture capital will likely be able to get new funding rounds to keep them going.
Cons: Expanding your business may take a long time to pay off. That means burning cash and reducing profits. Overexpansion can lead to cash flow problems and failure.
Expanding your small business will also lead to more complexity. For example, running one local coffee shop has a different set of problems than running a coffee shop with multiple locations, a direct-to-consumer web business and a wholesale bean business.
Be prepared for your role to adjust as the business owner or hire people to handle the new challenges.
Expanding your business can be done in different ways. It includes:
You can start small steps to expand your business. If you’re the coffee shop in the example below, you could start by selling at new farmer’s markets in different cities. Selling in new locations could give you initial data on how successful your products are in the new market. Staffing up and buying space at a farmer’s market still costs money, but it’s dramatically less than opening up a new retail location in a new market.
There are many ways small businesses can easily expand without breaking the bank, especially with digital marketing. Digital marketing also gives you lots of useful data that can inform your future expansion plans.
You can also use social media channels to help expand your business. Look for some well-priced social media influencers. They don’t have to be movie stars. Marketing like this can create new leads and sales.
Mergers and acquisitions are a fast track to growth. You can shave years off of creating products and entering new markets. And gain expertise.
The combined companies will have synergies for higher profits. Of course, this also carries a lot of risk, and you’ll need access to capital to buy other companies.