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Is That a Stretch?

Know when to expand outside your geographical area.

Jeremy Wunsch never planned to expand beyond Minneapolis. "I started in my basement and thought that was where the company would stay," says the founder and CEO of LuciData, which sells data products and services to aid forensic investigations and protect intellectual property. But when Wunsch, 34, got serious inquiries from prospects in Denver, he changed his mind about geographic expansion. "I was losing business because I didn't have a local presence," says Wunsch, who opened a Denver office in 2004. Today, with eight employees and $1.8 million in annual sales, the 4-year-old firm is looking at East Coast and California markets.

Most entrepreneurs whose companies grow significantly are forced to reach out to new geographic markets, says Fred Kiesner, professor of entrepreneurship at Loyola Marymount University in Los Angeles. To do it right, consider these tips.

1. Make sure it's what you want. Adding new geographic markets can greatly increase the hours you need to work--especially if you'll have to travel--and reduce how much control you have over the business, as you must delegate authority to others, Kiesner notes. For some, growth may not be worth that. "It all depends on what you're after in life," he says. You may be able to make the move work for lifestyle and business. Wunsch, for example, chose Denver partly because he could work in an occasional ski trip while he was there on business.

2. Pick the right time. Wunsch added geographic scope when he was faced with a choice between doing so and turning down business. Kiesner says another indicator is when you've maxed out the potential of your current geographic markets but you haven't overloaded your capacity. "[Geographic expansion is] for when you can handle more and you know there's a bigger world out there," he says.

3. Have the people in place. Adding new geographic markets usually means adding people, including management positions. Before expanding, identify suitable new hires or existing employees who have the potential to move up. In Denver, Wunsch started by hiring two sales reps, then immediately had to scramble to hire a technical employee to meet his new clients' needs. "Now we know [that] those need to be simultaneous hires," he says.

4. Grow slowly at first. Kiesner says that too-rapid growth causes many failures. Often an entrepreneur lacks the personal bandwidth to oversee the expanded enterprise. "If you're good managing one store and go to five stores, you'll have 20 percent to give to each," he notes. He recommends that if you have one office, add two to start with, then a handful more, rather than rolling out a large number right off the bat. Wunsch is growing slowly as well, adding a single new market last year: Des Moines, Iowa.

5. Manage costs carefully. Expanding can add costs even faster than it adds sales. Wunsch says that in the future, he'll add 50 percent to any estimate of the cost of opening in a new market. Overruns can come from unexpected places, he warns. Wunsch planned to start with an inexpensive office suite in Denver but had to opt for costlier space when suite operators couldn't accommodate his security needs. For future expansions, he'll budget for more and costlier pre-launch marketing to make sure sales reps and tech workers have enough leads and jobs to keep them productive from Day One. And he'll also consider using contract employees, at least at first, to keep costs low and flexibility high.

For more tips on expanding your business to new geographic regions, visit Exploring New Markets.

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This article was originally published in the May 2007 print edition of Entrepreneur with the headline: Is That a Stretch?.

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