Should You Enlarge Your Small Business?

Jean Murray — Sat, 27 Jun 2009 10:47:59 +0000

To enlarge or not to enlarge, that is the question. Busines is going well and you are bursting at the seams. You are thinking about getting a bigger space, buying a bigger building, leasing that vacant space next to you in the strip mall. But, don’t be too hasty about expanding. Expanding your small business could lead you down a road to business problems.

Should This Pizza Restaurant Expand? Our favorite pizza place is a little hole-in-the-wall place where people stand in line for tables and wait hours for a take-out order on the weekends. Every time we go there, my husband says, “They should expand.” But should they?

Expansion means:

More overhead. Overhead includes rent or an additional mortgage, higher utilities, possibly more taxes if you own the facility. The pizza place, for example, would have to pay more for more ovens, and utilities and rent would certainly be higher.
Moving costs. Moves, like everything else, cost more than you expect, and you will need to either have the cash to pay the moving costs or increase your debt. Imagine the cost of moving all the restaurant equipment for the pizza place.
More employees. Increase your payroll costs very carefully. It is easy to get too many people, and payroll is one of your highest costs. More servers would be needed for a larger dining area.
Construction costs. If you can expand into an adjoining space, you won’t have the moving costs, but you will still need to pay for the construction. At $25 to $100 a square foot, depending on your location, those costs could be prohibitive.

Plan Carefully Before Expanding. If you are considering expanding, do a business plan. Carefully figure out the costs for the move and for operations and overhead. Determine how much money you would need to borrow and talk to a bank to see what your monthly loan payments would be and the total cost of the loan over its term, including total interest.

Loan Availability. If you are determined to expand, you may want to look into one of the SBA loan guarantee programs, like the 504 loan program, which helps small businesses purchase real estate and equipment. The SBA recently announced changes to this program which make it possible for small businesses to restructure current debt to make it easier to expand.

Over-estimate Expenses and Under-estimate Income. Assume higher costs than you would expect, and get verification of costs, as much as possible. Don’t over-estimate income. In the example of the pizza place, I would tell them to determine how many more people would have to buy pizzas to make the expansion break even. If this number doesn’t seem very reasonable, don’t expand.