NFIB

Should You Take the Risks Necessary to Grow Your Business?
04/ 11/ 2002

At one time or another, almost all entrepreneurs have dreams of greatly expanding their businesses. It's easy to get caught up in visions of multiple outlets and regional or even nationwide franchising. But such expansion is not for everyone, because it often demands sacrifices of various types. In today's Workshop, Jeffrey Moses discusses the pros and cons of expansion.

When businesses achieve a certain level of success, owners are faced with the decision of expanding or continuing to operate as usual. What are some signs that the decision is looming for your business?

1. A business maintains steady profitability without increased advertising.

2. A large number of sales are to repeat customers, or sales actually increase based on word-of-mouth.

3. A significant percentage of sales comes from an area of the city or region that is at some distance from the central location.

4. The store's location is not large enough to accommodate enough customers to maintain profitability or to house enough inventory to supply customer demand.

Many of the these factors existed when Bob and Linda White considered moving their Seaside, Fla.-based bookstore, Sundog Books, into a larger space. The store had operated profitably for years in a relatively small space, but the customer base was expanding so rapidly that additional space was desperately needed.

"We really didn't have room for enough people to be in the store at the same time," Bob said. "If more than three or four customers were there, everyone was crowded. We also needed more employees, but didn't have room for them either."

To solve this problem, Bob and Linda leased a larger space nearby. They already had quite a selection of books -- which had contributed to the space problem in their original site -- so they didn't have to purchase much additional inventory. But their new larger space did mean increased lease costs, utility costs and added salaries for the new employees they brought on board.

The Whites were able to make the transition quickly and successfully by holding onto their existing customer base and making the shopping experience much more comfortable for everyone involved. Despite the slowing economy, sales have increased steadily. So solving their problem of a lack of space was worth the added expenses that moving brought.

The decision to add a new location is almost always difficult for a small business. But the owners of Wattsound Audio-Video in Panama City, Fla., knew it was time to add a new location when its service trucks were continually being called to a growing beach community about 35 to 40 minutes to the west of the city. This new area was ideal for Wattsound's business. Numerous new upscale residential homes were being built, with many new owners eager for the latest in audio-video home equipment.

To operate the new store location, owner Tom Watts lured a trusted and highly experienced associate, Mitch Bowen, away from his 13-year post with UPS. Watts and Bowen formed an "S" corporation with Bowen becoming part owner of the new location, rather than operating as a store manager. Bowen worked at the Panama City location for a few months while a suitable space was found, and they moved into the new location in July 1996.

"We knew that the area was booming," Bowen says, "so we wanted to secure a great location to take advantage of the many new homes being built. By forming a partnership and operating as a second location rather than as an entirely new store, we maintained the ability to sell many of the high-end brands that Wattsound had offered at the Panama City location since 1983.

"The financial risk was considerable, of course. Opening a second location entailed a new lease, quite a bit of new inventory, employees, vehicles, insurance and many other costs. But to date it's been worth it."

There are numerous pros and cons to consider when thinking about expanding or maintaining the status quo. Unfortunately, there is no easy answer to the question, "Should we continue on at our present level, making money and living comfortably? Or should we take the risk and put in the extra effort required to grow our company?"

The answers usually depend on the capacity for risk and extra work of the business owners themselves. Risk is always associated with growth, but by examining the pros and cons and consulting with business advisers, complete knowledge of all that growth may entail can be understood and fully considered.

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