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You’ve made it through the startup phase and business is good. Now, you’re wondering, could you make it better? After all, the best businesses are always looking for ways to grow and improve, whether that means innovating new products, making processes more efficient, entering new markets, or teaming up with other businesses to minimize competition or capitalize on synergies. While business expansion comes with many benefits, it also comes with risks. If not managed properly, a business expansion can lead to financial and qualify control problems that could put your business at risk.Read on for a closer look at how business expansion works, when and why you might consider expanding your small business, plus expansion strategies to consider.
Business Expansion Defined
Business expansion is the attempt of a company to grow the size of its business and generate more profit. At some point, virtually all successful businesses or startups will face the problem – and opportunity – of how to manage business expansion or development.There are a number of ways to go about expanding a business, including:
Adding sales employees
Increased marketing
Opening in another location
Adding franchisees
Forming an alliance
Offering new products or services
Entering new markets
Merging with or acquiring another business
Expanding globally
Expanding through the internet
How Business Expansion Works
The process of business expansion generally involves careful planning and analysis and the use of financial resources, such as different types of small business loans. Often, the first step is determining what type of expansion you want to carry out. This might involve conducting market research and/or consulting with financial experts, business mentors, and operations planners. Generally, the next step is to prepare a well-thought-out business expansion plan that lays out your vision, budget, the steps you’ll take to make your expansion plan a reality, plus the expected benefits of your expansion.Recommended: Loans for Expanding Your Business
Reasons for Expanding a Business
There are a number of reasons why you might want to expand your small business. Simply wanting to increase profits, however, generally isn’t reason enough to launch a business expansion. Below, however, are three reasons why you might consider expanding your business.
Your industry is positioned for growth. If your market or sector is expected to experience significant growth over the next five years, it could be an opportune time to grow your business right along with it.
You’ve had a few years of steady cash flow. Before launching any expansion plans, you’ll want to make sure your company is financially prepared. If you’ve had a consistently growing customer base and steady profits, that’s a good sign that you can sustain growth.
You have more business than you can handle. An occasional spike in business may be an anomaly, but if you consistently have more demand than you can supply, it can signal an opportunity for growth. You may want to first survey your customers to find out if they are interested in new products and get overall feedback about your business. If you learn they want more of your products, additional products or services, or faster delivery, it might be time to expand.
Expanding a business comes with many benefits, but also some perils. Going about a business expansion strategy thoughtfully, however, can help you enjoy the benefits and minimize the risks.
Pros of Business Expansion
Cons of Business Expansion
Gain an edge on your competitors
You may need to take on more debt
Creates economies of scale
Growing larger can lead to less control over your business
Diversification can better protect your business against market changes
Productivity and quality can become compromised
Larger businesses can be more appealing to lenders and investors
Expanding too quickly can put your business at risk
Increasing Customer Base to Expand
One common way to expand a small business is to increase your customer base. This is a form of organic growth, and you can do it in a number of ways, including opening up a new location, expanding your marketing efforts, and/or developing new products and services.
New Locations
Expanding a business to extend market reach is commonly done by adding locations. A new store, for example, can open you up to a new pool of potential customers if an existing area is saturated and growth opportunities are few. Your first thought might be to open an outlet across town, but that’s not the only way to branch out. Building an online presence through a website “location” can be a low-cost way to scale what you already do. Whether physical or virtual, opening new locations broadens your firm’s name recognition and can help grow sales. Franchising is another option that can allow you to tap new markets.Recommended: Top Franchise Loan Options
Marketing
You can also expand your customer base through new types of marketing. You might, for example, try affiliate marketing. This involves selling your product or service through a third-party who then gets a small cut of your profits. If you are a B2B company, you might want to tap your current customers to share your products with their own customers. This allows you to advertise and grow your reach with the help of like-minded companies, bloggers, or influencers. At the same time you may want to build your own online presence. Even if you don’t have an online business, expanding your online brand presence can get your product in front of more eyes. Whether you share content via a blog, newsletter, or Instagram account, posting regularly can help your followers stay interested and engage new followers.
New Products
New product development often increases sales without having to reach a whole new group of consumers. Before you expand your products or services, however, it can be a good idea to survey your customers and find out what products and services they want from your company, and what price they’ll be willing to pay for them. A good recipe for success is to diversify your offerings so that they complement each other, and not to stray too far from your core business. Other diversification strategies (like the ones outlined below), however, can also work.
Expanding by Diversifying
Diversification is a growth strategy that involves entering into a new market or industry while also creating a new product for that new market. One advantage of diversification is that it can grow your business while also helping to protect it from market fluctuations. There are several different types of diversification, including:
Horizontal diversification This involves acquiring or developing new products or services that are complementary to your core business and appeal to your current customers. To diversify in this way, you may need new technology and skills or a new marketing approach.
Concentric diversification With this type of diversification, you add new products that have some technological or marketing crossover with your existing products but will attract new customers. You may be able to leverage your existing technologies, equipment, and marketing to diversify in this way.
Conglomerate diversification This involves adding new products or services that are entirely different from and unrelated to your core business. The risks can be high with this type of diversification, since you’ll need to not only enter a new market but also to sell to a new consumer base.
Vertical diversification This is when you expand backward or forward along the production chain of your product. With this approach, you may control more than one stage of the supply chain.
Mergers and Acquisitions
Inorganic growth – through a merger or acquisition – is another type of business expansion strategy. By acquiring, or buying, an existing (and similar) business to your own, you can substantially increase the size of your business overnight. You might also be able to eliminate a competitor. A merger, on the other hand, is a business deal where two existing, independent companies (often equal in size) combine to form a new, singular legal entity. A merger can give your company a way to expand its reach, move into new segments, or gain market share. Your company as it currently stands, however, would no longer operate.
The Takeaway
If business has been booming, it might be time to consider expansion. This could mean selling more of what you currently offer, adding new products and services to your line, or teaming up with another company through a merger or acquisition.Whatever strategy you choose, it can be a good idea to write up a thorough business expansion plan and secure financing before you set the expansion gears in motion.
3 Small Business Loan Tips
Online lenders generally offer fast application reviews and quick access to cash. Conveniently, you can compare small business loans by filling out one application on Lantern by SoFi.
Traditionally, lenders like to see a business that’s at least two years old when considering a small business loan.
SBA loans are guaranteed by the U.S. Small Business Administration and typically offer favorable terms. They can also have more complicated applications and requirements than non-SBA business loans.
Frequently Asked Questions
What is an example of business expansion?
Why do businesses expand?
What are the main types of business expansion?
Photo credit: iStock/AsiaVision
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About the Author
Mike Zaccardi
Mike Zaccardi, CFA, CMT, is a finance expert and writer specializing in investments, markets, personal finance, and retirement planning. He enjoys putting a narrative to complex financial data and concepts; analyzing stock market sectors, ETFs, economic data, and broad market conditions; and producing snackable content for various audiences.
