In This Chapter

There comes a point in the life of any business owner when he or she faces a choice: should I expand?

For some, the answer is almost automatic—“Yes.” For these entrepreneurs, growing the business is as much of a calling as launching the business.

There are as many reasons to embark on an expansion of your business as there are to start a business in the first place. For a sole proprietor who has spent a year or so playing “chief cook and bottle washer,” there often comes a moment of truth that brings the answer to the question of expansion into clarity: you want your business to grow, and you realize that there is only so much you can do on your own.

To bring your business to the next level, you may decide that your situation justifies bringing on additional employees or even adding a partner. For other situations, expansion may take such forms as opening new facilities or storefront operations, licensing your intellectual property (IP), or franchising.

Just as you did when you were starting your business in the first place, you need to have a strategy and develop a business plan for expansion. There is always an element of risk when it comes to expanding your business, and you must have a plan in place to address those risks.

This chapter helps you decide whether it’s time to expand your business and how to proceed if you conclude that doing so is the right course of action.

At some point, you’ll at least consider the question of expanding your business. It may be because you are looking to increase your market share, move into new geographic regions, or increase your revenue and profits. The expansion plan you eventually develop may be as simple as hiring employees so that you alone are not doing the work or as complex as opening up offices internationally. Certainly the more complex the plan, the more risks you are likely to face—and the more carefully you will need to plan for your expansion efforts.

Address the following questions when creating a plan for expanding your business:

There is no proven, hard-and-fast rule about when you should (or shouldn’t) expand your business. One fairly reliable rule of thumb, however, is that if you notice that your competitors are expanding, you should at least consider the possibility of expansion yourself. Of course, the mere fact that your competition is doing something doesn’t necessarily mean that imitating them makes good strategic sense for your business. Many terrible expansion initiatives have begun as misguided, emotionally driven efforts to keep up with the competition.

The only principle that definitely makes sense for all entrepreneurs who must evaluate the question “Should I expand?” is this one: stick to the facts! In keeping with this principle, you should do a fair amount of research first—and before you commit to any expansion plan, bounce it off your advisory board.

The authors know of a training company that decided to expand into a number of different areas simply because their competitors were expanding. Had they done their homework, they would have learned that the market for their programs was actually on the decline. Expanding at that time by opening new facilities and investing in new employees simply wasn’t a good use of their time or money.

The owners ended up paying significant money for extensive leases they couldn’t get out of. A better move would have been for them to look at expanding their product line in a smaller number of content areas—areas that were more promising for their company, given its history and past successes. If the owners were committed to embarking on a whole range of totally new training programs, they could have minimized the risks of doing so by creating small-scale pilot programs and then evaluating what had worked well (and what hadn’t) before making all the investments associated with a full-scale program (such as office space, marketing materials, and employees).

Consider carefully whether you can afford the expansion you have in mind and what other projects you could be undertaking with the resources the expansion will consume. Do you have the financial means to carry out your plan? Do you have the time to invest in expansion? What about the political capital necessary to get managers, key employees, and customers to go along with the inevitable changes that accompany expansion? Last but certainly not least, consider that expanding your business is going to take a significant amount of your own time. You’ll need to be able to invest in the process from all of these perspectives—not just the financial perspective—in order for your expansion campaign to be a successful one.

You may be able to finance your expansion by using current cash flow or your own savings. Many entrepreneurs prefer this route for the same basic reason they prefer using their own money during the start-up phase: autonomy.

If you need to take out a loan in order to expand your business, consider loans through your local bank or the Small Business Administration. We discussed options for securing loans and financing for your business in Chapter 4.

You might also choose to take on a business partner who can help finance the expansion of your business. We’ll talk more about the specific issue of finding the right partner for overseas ventures a little later on in this chapter.

Depending on your goals, you may choose to expand in your own region or nationally. For example, if you have a bakery business in Boston, you may choose to open up new locations in New Hampshire, Connecticut, and New York; if you do management consulting on the East Coast, maybe you have decided to take on a partner on the West Coast to cover that area of the country.

Franchising is an option for expanding your business. Franchising enables others to operate an extension of your business using your logo, trademarks, and way of doing business. For example, Subway sandwich shops are franchised, and franchisees are taught how to operate Subway shops and are provided support by the home office of Subway.

Franchising doesn’t work for every business. If you run a very complex business, franchising may not be possible. The simpler your business model, the more successful you may be with a franchise.

Keep in mind that you don’t want your expanded business to compete with your original location. For instance, if you decide to franchise your retail clothing establishment, you would likely want to have franchises nationally (to help you expand your brand) but not in your immediate area (no sense competing with yourself!).

If you decide to go the franchise route, it is important to have a plan in place for how you will do the following:

One company we know of attempted to leverage the excellent IP it had developed over a period of about a decade by launching a full-scale consulting franchise operation that targeted every major city in the United States. The goal, according to the CEO, was to “show his competition a thing or two.” (One of this company’s major competitors had a national network of franchises.) Little planning or consultation with senior business advisors preceded this effort. Unfortunately, this particular CEO was completely out of his depth when it came to navigating the maze of regulatory obstacles presented in each state, and he was equally unfamiliar with the challenging task of managing a network of franchisees. No one on staff had experience in either of these areas, either. The effort sputtered, morale plunged, and the parent company’s relationship with its franchisees quickly soured. The CEO eventually sold his interest in the company. He had lost more than a year of hard work, a substantial amount of money, and the good will of senior employees—many of whom had worked for him for over a decade.

The CEO might have saved himself, his employees, and his network of franchisees a great deal of trauma and stress if he had opted instead to create, and troubleshoot, a plan based on licensing his company’s IP. This would have been a far less complex, and far less risky, way to expand his business. It would have allowed him to create relationships with more new partners, avoid the legal and organizational pitfalls of establishing a franchisee network, and disengage more quickly (and gracefully) when expectations on either side were going unmet.

One great example of licensing as an expansion strategy can be found in the Ken Blanchard Companies, which license their Situational Leadership IP to other training companies and individuals, allowing them to train using the materials under Blanchard International. This has enabled the Ken Blanchard Companies to increase their revenue and profits through a network of partners (not franchisees) who pay for the privilege of using their materials but don’t pay an up-front franchisee fee. If you have developed IP, such as training or software programs, you might consider licensing that IP to increase your profits and expand your business. Of course, you must have a plan in place that includes a contractual agreement with licensing terms and protection of your IP. For both franchising and licensing of your IP, see an attorney for assistance in creating the appropriate contracts and legal agreements to ensure you are protected.

Your decision to expand either regionally or nationally will be based on a number of factors, such as:

Competition: Where is the competition located? Are there areas that are not served and where opportunities exist? Or are there needs that are not being met by competitors?

Target audience: Where does your target audience exist that would benefit from you expanding your operations? Will expanding open up new markets for you so that you can increase your profits? For example, if you focus on consulting for pharmaceutical companies and are not based in Massachusetts, you may choose to expand operations in the Massachusetts area since many pharmaceutical companies are located there.

Capacity to expand: Do you have the resources and time necessary to expand effectively and successfully—especially if you choose to expand outside of your region? Will you be able to invest time in traveling to the other locations?

You want to spend significant time researching possible locations and really weighing your options.

We can’t emphasize enough the importance of doing your homework prior to committing to a new business location. Follow these best practices when choosing a location for your business:

There are usually major tax implications to consider when evaluating any plan to expand your business. For example, if you open up new storefront locations in different states, you’ll need to pay taxes in those states, including sales tax. If you have a storefront in a particular state, you’ll need to see what zoning and licensing requirements there are for your particular type of business.

If you license your brand or IP, and something happens that is attributable to your product, you could be held liable even if you are simply licensing.

Bottom line: Don’t expand operations without first getting advice from your attorney and your accountant.

If you are thinking of expanding your business internationally, you’ll need to consider a variety of issues besides what we discussed earlier in this chapter. First off, hire an attorney who specializes in international business development and expansion. There is really no excuse for not getting good legal representation right from the start in this situation.

You’ll also need an experienced partner and/or consultant in the country you are considering operating in, so you will need a plan for securing a relationship with someone you can trust. In many situations, a local partner with an equity stake in the business is required by law. Check with countries as to ownership requirements of businesses. For example, in Kuwait, the majority of a business must be owned by a Kuwaiti citizen.

Get information for any country where you are considering expanding operations. What regulations exist? What are the tax laws for doing business in that country? Can you get money out of the country easily? For example, does the country have a free zone—an area specifically designated to encourage business development—where you may be able to own 100 percent of the business and/or be taxed at significantly reduced rates? Can you easily export product to that country?

Draw on the variety of resources available to you, including consultants from SCORE, government websites, and certainly an attorney and accountant well-versed in international law in the country you are considering for expansion. Check out the U.S. Department of Commerce site’s grants, contracting, and trade opportunities (www.commerce.gov/about-commerce/grants-contracting-trade-opportunities) page for a variety of resources for doing business overseas.

Don’t jump into expanding internationally without a strong business and strategic plan in place.

Finding the right partner will be the most difficult part, especially for global operations. Unless you know someone personally or have a personal recommendation, you really need to do your due diligence in securing the right partner for your business.

You might ask vendors, resellers, suppliers, and your attorney or accountant for recommendations for partners. Your best bet is going to be to find a partner through someone you know and trust.

Consider also the possibility of partnering with another small business overseas. For example, if you are a technical services firm, you might find another small business that complements your services or extends your services overseas.

In order to reduce your risk, you might choose to work with a potential partner on a few projects prior to formalizing an agreement. For instance, you may initially enter into an agreement to refer business to each other prior to entering into formal partnership agreements.

Are your products or services culture-centric? For example, if your business sells memorabilia and historical products from the American Civil and Revolutionary Wars, there’s not going to be a lot of international demand for them. On the other hand, if your business sells specialized hiking and adventure trips, you may find that your business expands well in areas, such as Europe, where there are well-established hiking trails.

You will more than likely need to make changes to your product or service offerings to accommodate overseas expectations and norms. Especially with products, think clearly about why you believe your product will sell in a global marketplace. Is there no similar product available in that country—or is your product superior?

You’ll also need to consider pricing. Your pricing will need to be adjusted for overseas markets; some countries will require a much lower pricing model. If you have many costs associated with either development or delivery of your product, you may not be able to price competitively enough in certain overseas markets.

Think carefully about what changes you’ll need to make in your business model when planning for global expansion, and get advice from a business ally with direct overseas experience before committing yourself. Do not make the mistake of assuming you can simply transplant your existing business model without making any changes. The question is whether the changes are minor enough for you to expand overseas … or major enough for you to conclude that it simply doesn’t make sense for you to expand globally.

Last but not least, don’t forget that growing as a person is at least as important as growing your business!