Opening your first store was loads of fun, and you worked hard to make it a success. Now you’re pondering expanding to two locations, but you’re not ready to relive all the joys of starting from scratch. For you, purchasing an existing location is far more attractive. There are definite pros and cons with this scenario.
The bad news is that, next to opening your first store, adding a second location is the hardest transition. The good news is that if you choose this location wisely, you won’t have near the ramp-up period.
Before expanding, ask yourself a few questions. Are you willing to give up some level of control? There are only so many hours in a day, and you already know the time involved in making your first store a success. If you are to replicate that success, you’re going to have to rely on at least one staff member to keep the momentum going.
Store problems are going to happen at the most inopportune times. It’s important to feel comfortable that you have staff in place to take care of problems in store No. 1 while you are handling challenges at store No. 2, especially if the two locations are miles apart.
That brings up another question. What amount of distance between the two stores is too much? What if both locations are coin-operated? Chances are, you’ll want to personally take care of collections, and that could mean quite a bit of time if they’re far apart. The main point is to not underestimate the amount of time that comes with expansion. You can’t let one business suffer while you get the other up and running.
THE IDEAL SPOT
Don’t discount a dated store with old equipment. There are deals to be had, and we’re looking for what I call “good bones” — all the factors that represent a good site. That means a highly visible location, ample parking and solid demographics. A low purchase price combined with solid bones may make upgrading the store with new machines and paint a far more attractive option than a “Grade A” store you might also be considering.
Obviously, the benefits of buying the “Grade A” are its established base, newer machines and overall appearance. The downside is the higher price for the premium location. Buyers, however, have to review the financials to ensure the profits match the higher asking price.
Due diligence should focus heavily on the demographics of the area. You’re looking for a high renter population (at least 40-50%), old housing stock (at least 15 years) and middle- to low-income residents.
Once you are serious about a site, get an accurate snapshot of the business. Find out what type of money is being generated. This figure will help you put everything else in perspective. Due diligence should include a review of at least one year of utility bills. However, I recommend two years if you can get them. If the owner doesn’t have this data, a letter signed by this person will allow the utility company to release the data to you.
These expenditures should total roughly 25% of what the owner claims the business is generating. You’ll also have to temper this figure with the age of the equipment — obviously, the older equipment in that “diamond in the rough” may post a higher percentage compared to the “Grade A” store. Having a wider data sample gives a view into the range of prices for commodities such as natural gas. During a two-year period, we can see swings from 50 cents per therm to $1.70 per therm.
Get out and review competitors in the area. Note the condition of the stores, the equipment mixes, and whether they have room to expand. Likewise, these should all be considerations when reviewing the location you’re interested in buying. Talk to customers and get their thoughts on equipment, what they like about the stores, and what they don’t like.
Visit other area businesses. These owners can offer insight into the people frequenting their business and crime in the area, and provide a general comment on the vitality of the operation. Hearing that business has dropped in the area could save you from making a huge mistake.
Review the lease. If you plan to retool the store, I suggest not making a move without a 15-year lease. If there are only a few years left on the current lease, make sure you are able to add on an option. Have an exit strategy to handle developments in your life such as health issues, divorce, etc. If you need to sell the store and are sitting with only a few years left on a lease, you’ll be hard-pressed to find a buyer.
Don’t be afraid to sit down with the landlord and renegotiate lease terms. In many markets, there’s been a correction. Spaces that were renting for $25 per square foot are down to $18. But, like in any good negotiation, the landlord should benefit as well.
Many distributors are willing to work with owners in a consultant capacity, which can be beneficial when negotiating a lease. A consultant fee could keep you from making a big mistake. Often, distributors will waive the fee if owners end up purchasing equipment.
The key is to have a road map for where you’re going. Are you adding a second location just to expand, or is this a move to try and capture your entire market? These factors matter in figuring purchase costs, lease terms, etc. Successful owners have a playbook to guide expansion, and there’s no substitute for good planning. Don’t forget that there are people to assist you.