Rules for Business Expansion

Rules to Follow Before Expanding

Once your business has started, you will face the challenge of making it grow. In this session, you will learn about some basic rules to follow before expanding.

Before even thinking about growing your business, you must first have a stable platform from which to take off. You must work out the bugs in your initial operation, including making it profitable.

Your readiness to expand will improve if you can gain experience in all aspects of your start-up unit. Whether you have started an Internet business or opened a restaurant, become personally involved in all the functions of your business. Then you can detect weaknesses that can be remedied early on, where changes can be made rapidly and at less exposure to loss.

Another reason to become personally involved in every aspect of your business is that later on after expansion plans are implemented, you will be depending on others to whom you must delegate responsibilities. Because you will have had personal experience in running things yourself, no one will be able to mislead you.

Remember that after you expand, you will no longer be the person at the cash register. You must have systems in place to prevent employee theft and shrinkage (shoplifting). Your competitors have probably already figured out the loss-prevention systems that work best for your particular business. So, check out and implement systems already being used in your industry. (If you’re going to open a convenience store, go to work for 7-Eleven beforehand to learn its systems that work!)

Try to avoid giving your personal guarantee on leases or creditor obligations. As much as possible, separate your business liabilities from your personal assets. While banks will most likely require your personal guarantee on business loans, exposure of your personal assets can be mitigated by drawing the line against this practice whenever possible.

For example, a potential landlord for your second store may ask you to personally guarantee the lease. Your exposure in a five-year lease of $3,000 per month would be $180,000. This amount could far exceed the initial capitalization of your business. Yet, because of the desire and enthusiasm to add more stores, it will be tempting to incur such potentially overwhelming liabilities.

Instead, by practicing discipline in limiting your liability, you might insist on negotiating a one-year lease with options for additional periods of time. Your liability, in this case, would be reduced to $36,000.

Starting With a Pilot Operation

There are some understandable reasons why many entrepreneurs overlook the importance of having a successful pilot operation in place before expanding.

Entrepreneurs by definition are self-confident: The problem is that too often we are overconfident either in ourselves or our product or service. This overconfidence can propel us into expansion programs without carefully working out the wrinkles, including getting to the point of having a proven and profitable pilot plant (model) from which to expand.

One reason for overconfidence is that many wealthy entrepreneurs have enjoyed success in an unrelated field: A wealthy tycoon who had a successful career, for example, might start a new business in a field that he or she doesn’t know or understand and might meet with failure because he or she assumed his/her expertise would transfer.

Another enemy is haste: Entrepreneurs who start multi-unit businesses will experience some deficiencies in their first unit. Many will lose money at the beginning. This is the time to work out the bugs and produce a positive income statement. If you can’t, this may be time to abandon the idea. But, if you are starting a restaurant chain and in haste open six of them with problems, your losses could become overwhelming.

Problems in an Expanded Business Not Present In A Start-up

There will be controls needed in your expanded business that have not been present in your start-up mode. It will take careful preparation to break the do-it-yourself mode. For example, your business will need accounting and cash flow controls that measure the performance of individual units within your overall operation. These reports will be required on a frequent basis. In many businesses, weekly income statements are used to prevent small problems from growing into bigger ones that may become unmanageable. Your accountant can help you set up unit financial reporting.

The importance of an advisory board
Expanding your business means you will be taking on more risk. Yet your dilemma will be that once you have made it and are ready for growth, you will become exposed to new dimensions of risk. And the only way to avoid risk is not to make mistakes. This is where a board of advisors becomes an important participant in your growth program. Entice the best brains you know, both in your business and outside it, to become your board of advisors. Your advisory board, a body of collective wisdom, will become your cost-free insurance policy against making mistakes.

Delegation of responsibility and authority
Your expanding business will require delegation of responsibility and authority. New skills in recruitment, evaluation and training will be needed. The greatest leap of expansion for most businesses is growing from the first unit to the second one. Once you have made the big step from one to two, you are now a chain! From then on, it can become a continually improving cookie-cutter operation.

Sometimes it is difficult for the beginning entrepreneur to delegate authority. There are many ways to do so without relinquishing certain functions that you will want to keep for yourself. For example, you should be the only person signing checks and deciding on capital allocations, yet you might want to delegate the training of employees to your managers.

But without giving up these functions, you can still motivate key employees in two ways: recognition and reward. Recognition means much more than bestowing an impressive title. The most important recognition is to let it be clear that your key people are in positions of authority as well as responsibility. While delegating authority will mean that your managers will be making some mistakes, their mistakes will be limited to their spheres of responsibility. Also, frequent financial reporting will minimize the adverse financial impact of their mistakes.

Delegation of authority can be accomplished by:

Financial motivation of key employees
Creation of profit centers

Monetary incentive plans
Good managers are motivated by monetary incentive plans that are tied to their individual success: The incentive compensation of your management team should be, therefore, compartmentalized for each manager, so that a manager’s bonus is based solely on what he or she has accomplished and not diluted by how other parts of the business are doing. For example, if you develop a chain of stores, each store manager’s incentive compensation should be based only on the profit of his or her store.

If you are uncertain as to how to set up such a profit sharing plan, you might get ideas from your most successful competitors, who have already gone through the trial-and-error process of refining such systems.