4 Tips for Entrepreneurs Embarking on an Amazon-Style Expansion
Amazon's meteoric rise is the stuff of business legends. From pioneering digital bookseller to retail behemoth to corporate services heavyweight to media juggernaut, Amazon's ambitions are limitless. As the company looks to hit $200 billion in annual sales, it seems there's no industry that founder Jeff Bezos won't touch.
The Amazon story isn't just remarkable; it's aspirational. When entrepreneurs see Amazon's everlasting expansion, they imagine making similar plays for industry dominance. While ambition is well and good, these would-be captains of industry need a dose of reality if they want to succeed.
Amazon didn't close its eyes, make a wish and become one of the world's most valuable companies through blind faith. It studied market needs, identified consumer demands and moved swiftly but smartly on new opportunities. Success stems from thoughtful, educated decision-making rooted in logistical realities -- not from emulating the Amazons of the world with no understanding of their strategies.Related: 6 Signs That You Should Stop a Business Expansion in Its Tracks
Keys to expansion success
If your company is blowing up (in a good way), congratulations. By all means, take advantage of that momentum and expand into new markets. Just make sure your processes are scalable and that you've done your due diligence before rocketing your company in a new direction.
The following pointers can help you cover the fundamentals of expansion and set your company up for world domination:
- Secure a license to operate in each state.
Operational standards and licensing requirements are unique to each state, and they're often more comprehensive than federal guidelines. If you plan to open physical stores or conduct virtual business with clients in a particular state, there's a good chance you'll need to file for "foreign qualification" -- among other critical legal paperwork.
Once you've decided where you want to expand, research the legal process for each location. Our company worked with a legal consulting service that launched two new businesses in other states. Before it could open the new locations, it was required to establish new bank accounts, licenses and other compliance filings. It can take quite a bit of time to file the necessary paperwork, and you don't want a minor issue to delay your expansion.
Burger chain Shake Shack has been grappling with this situation as the company expands from the East Coast to the Midwest and the Bay Area. The company went so far as to hire a dedicated compliance administrator who works to ensure restaurants in new markets are properly licensed.
Related: Your Papers, Please! Registering Your Business in Multiple States
- Understand your tax obligations.
You must file state tax returns anywhere you maintain operations. If you hire salespeople or agents in another state, rent an office space, employ telecommuters or use your own delivery vehicles, you likely need to file taxes in any applicable locations.
If you've overlooked past tax obligations, don't panic. We worked with a custom software firm that incorrectly filed its state taxes due to misguided advice. Our team was able to help it secure the proper licenses and refile its previous returns, and the company is now fully compliant. The key is to be proactive in addressing your mistakes rather than wait for the government to pursue outstanding bills.
- Research sales and use tax laws in each jurisdiction.
Multistate operations can spiral out of control if you don't understand the tax laws that apply to each jurisdiction. Every state is either origin-based or destination-based for the purpose of taxation. Origin-based states expect companies to collect sales tax based on the tax rates where they operate, which includes a flat state sales tax plus any local taxes that apply to the city where they're headquartered. Destination-based states require you to charge sales tax based on wherever your customers are.
The situation becomes more complex if you operate as a remote seller and must contend with complicated use taxes. Your best bet is working closely with your accounting team to determine what your particular tax obligations are and what those mean for your customers and your company.
For instance, California has the highest state sales tax rate at 7.25 percent. On the flip side, Colorado has a low sales tax rate of 2.9 percent. If that's still too much, states such as Alaska, Oregon, Delaware and Montana have no sales tax whatsoever. Do your homework on the tax situation in any locales you're considering for expansion, and keep these discrepancies in mind as you formulate your plans.
- Adjust your insurance policies as needed.
Just as tax requirements vary from state to state, so do insurance laws -- and the guidelines can be equally complex. The standards for workers' compensation and property insurance policies are highly dependent upon state laws, so don't expect to adopt a one-size-fits-all approach.
Research by Marshall &; Swift/Boeckh indicates that 75 percent of U.S. businesses are underinsured by at least 40 percent, which poses major issues for midsize and large companies. Talk with your insurance provider about the options for each location, and make sure your policies are in place before you expand.
Related: The Type of Insurance You Need for Your New Business
No business leader has come to regret overpaying taxes -- you'll receive a refund when you file annually -- or being too generous in employee protections, but leaning to the other end of the spectrum could derail your dreams of becoming the next Amazon. The logistical questions you might face during an expansion are as unique as your company's circumstances. That said, every expansion should begin with two basic principles: modeling the costs in time and money and erring on the side of caution when it comes to compliance.