Growing Up

This story appears in the July 1996 issue of Entrepreneur. Subscribe »

Any entrepreneur who's been in business a few years knows the feeling. You've reached a certain plateau-you've expanded the business as much as you can without adding on to your building or opening another location. Sales are up, profits are tidy and customers are hinting they might like to see you do more. You are decidedly antsy; you may even be downright bored. You want to grow, but the question is how?

There are many options. You could franchise, get into licensing, acquire another company, form a limited partnership, spin off your original business, start a different company or, if you own a retail store, open a second location. If your company is really ready to take the next step, one of these options is probably ideal.

But however you decide to do it, growing your business for the right reasons is key. Ego shouldn't be a major factor in your decision; neither should boredom. According to Donald Reimer, president of The Small Business Strategy Group in Southfield, Michigan, growing for the sake of growth is perhaps the worst mistake an entrepreneur can make.

"Sometimes the [true] entrepreneur feels he or she should take advantage of every opportunity that presents itself, but that could be devastating to a company," says Reimer. Some other misguided reasons to expand: Your main competitor is growing, your friends urge you to, or you want to make more money-fast.

What are some of the right reasons to grow your business? "The decision to grow should be based on whether the market is there to support the growth," says Charlotte Taylor, president of Venture Concepts, a Washington, DC, company that specializes in growth issues of small and midsized businesses. Are you going after a flourishing market or tapping into a new, promising niche? Then chances are growth is a good idea.

Many experts recommend hiring an unbiased third party to help you assess the business before deciding to grow. Awareness of your company's strengths and weaknesses is essential to planning healthy growth, but as much as you'd like to think you can be objective about your company's growth, you can't possibly be. "Smaller companies often don't have a board of directors or advisors to bounce things off," says Reimer. In these cases, Reimer strongly recommends hiring an outside consultant to guide you through the process. You need someone with a fresh perspective to critique your strategy.

Sound Like a Plan

Ideally, the decision to expand doesn't come about spontaneously; it's been part of a company's business plan from the outset. "A good growth strategy is in focus with what the business owner has in mind for the company," says Taylor. In other words, the best growth strategy is a well-planned one.

"Rapid growth without planning can be devastating," Reimer agrees. In his line of work, Reimer sees a lot of small-business owners who don't plan for expansion. The pressures of daily operational concerns often leave little, if any, time for the entrepreneur to address the big picture. That's why experts recommend planning for growth before you even open your doors. Make it part of your business plan, but don't be too rigid. "The plans you have must be flexible enough to respond to opportunities that present themselves," says Reimer.

When Carolyn and Randy Gibbs chose to open their second Pet Food Savemart superstore, it was not a spur-of-the-moment decision. Their original business plan called for as many as five stores. Two years after the first location opened in Shawnee, Kansas, the Gibbses had outgrown the facility and were more than ready to expand. For them, there was no question the time was right to open a second location.

Behind Store Number Two

For retailers with one location, opening a second store is usually the most logical path to growth. Although they had always planned to open multiple locations, the Gibbses investigated other growth options, too. They decided against franchising because they felt the costs would be too high for potential franchisees. They also ruled out distributing other lines of pet products because they feared they'd have trouble selling to their competition. After weighing all their options, they decided opening another store was the way to go.

If you take this route, you need to open your second location far enough away from the original site so that new customers will shop there. After all, you don't want your second location to cannibalize your first. For the Gibbses, that meant opening their North Kansas City, Missouri, superstore 20 miles away-and across the state line-from the original store. Their third location, in Eastern Kansas City, is also about 20 miles away from its nearest sister store.

"Finding locations that are in the right areas has been a [concern] for us," says Carolyn Gibbs. At approximately 30,000 square feet apiece, sufficient distance between locations is a prominent issue.

Another concern is hiring a good manager for your second location. As an entrepreneur, it will probably be hard to relinquish even a little control over your business, but you can't be two-or more-places at once. The experts say it's important to find a team player who shares your vision and enthusiasm for the business. Look for someone with creativity, innovation and problem-solving abilities.

When you decide to open a second store, sometimes it makes sense to change the focus of the products you carry. For example, if you own a dress shop, you might consider having your second store specialize in related accessories. This will expose your first store's product lines to your new shop's customers-ideally without negatively impacting the first store's sales.

People Power

Growing even the most promising entrepreneurial company involves making some jarring psychological adjustments. Most important-and ironic-you'll have to suppress some of the entrepreneurial instincts that got you this far, namely, your need for complete control. To expand your company successfully, you need to be comfortable delegating and managing instead of doing everything yourself. And the bigger your company gets, the more you'll have to let go.

Making solid hiring decisions will help you feel good about delegating major responsibilities to others. You also need to recognize that your current staff may be apprehensive about your expansion plans. They may feel uncertain about job security; they may feel left out. Communicate your growth strategy to employees, keep them informed throughout the process and encourage your staff to give you feedback along the way. If you involve them in the expansion, it should foster a strong sense of commitment to the company.

One of the toughest questions a small-business owner may face in growing a business is whether to reorganize staff. But re-engineering is often a fact of life. "Sometimes you outgrow your staff," says Reimer.

Taylor agrees: "I've never done a strategic plan where [a company has] gone to the next level and not needed reorganization. That usually means people changes, too." This isn't to say a complete personnel purge is necessary. Just assess your team and work on strengthening any weak links.

At Pet Food Savemart, Carolyn Gibbs says a good management team helped facilitate a smooth transition when the second and third locations opened. Adding staff during the growth phase wasn't easy, but through trial and error, the Gibbses learned to make good hiring decisions. "Now we go beyond our gut feelings," says Gibbs. Opening multiple locations has also helped the Gibbses make plenty of contacts in the pet food industry, and those connections have helped them find skilled management staff.

Spin Doctor

The decision to open multiple locations isn't necessarily right for every retailer. For Mike Johnson, owner of Re·finery, a 1,200-square-foot home furnishings store in Laguna Beach, California, opening a second store may be an option down the road. For now, however, growth comes from a different source: a spinoff.

When Johnson opened Re·finery in 1994 out of a passion for furniture, he was certain he'd want to grow the business one day-he just wasn't sure exactly how. "I knew one location or one business wasn't going to be the end of it," says the former engineer. "The logical progression would have been a second store, but I decided that wasn't the best use of my resources."

With its eclectic array of merchandise-furniture and knickknacks that are mostly either refurbished or made from old wooden items like windows and doors-Re·finery requires a very specific type of location to be successful, according to Johnson. So instead of going the traditional route, he decided to launch a wholesale line of accessories, which he designs and sells in his own store and others like it in Arizona, California, and Nevada.

Overall sales have increased so much since Johnson debuted the wholesale line that he believes it may one day eclipse the retail store in terms of revenue. "Right now, I'm looking for all my growth to come from the wholesale line," says Johnson. "By next year, I expect wholesaling to be the bigger part of my business."

Before going the spinoff route, Johnson considered opening a second store similar to Re·finery or opening a tourist-oriented store in Laguna Beach to appeal to visitors to the seaside community. He even thought about launching a completely different business-a rubber stamp store. But he decided it wasn't in the best interests of the company. "Opening something completely different didn't make sense," he says, "especially when I started running through the numbers."

Johnson may one day open as many as three additional stores, but for now growth is occurring naturally through wholesaling. In the meantime, he's realistic about growth-and how long it will take to do it right.

"I want to focus on the wholesale line, and I expect it's going to take a few years of energy to make it pan out," he says. Above all, Johnson is determined to grow his business slowly and carefully. "I eventually want to expand [the wholesaling business] nationwide," says Johnson, "but not until we're ready."

Now or Later?

Many entrepreneurs either expand their businesses before they're ready or grow too quickly. Donald Reimer, president of The Small Business Strategy Group in Southfield, Michigan, recommends asking yourself the following questions before proceeding with expansion plans:

1. Have you built a strong management team?

2. Have you developed a strategic plan, and does the proposed expansion mesh with your overall goals?

3. Have you or a consultant conducted a strategic audit or assessment to evaluate your company's strengths and weaknesses?

4. Have you discussed the expansion with your board of directors and/or an outside consultant, and do they support it?

5. Do you have the necessary financial and human resources to handle an expansion?

6. Have you examined the external factors affecting your business (industry trends, the economy and the like)?

7. Have you compared your company's performance with other companies of similar size, and is your company performing well by comparison?