Uncharted Waters

Maybe your company has saturated the local community. A second location can be a great way to increase business.

June 30, 2008
Lesson Learned
Five things to Consider

Maybe your company has saturated the local community. Maybe you want to grab a piece of a lucrative remodeling market. Or maybe you just are looking for an opportunity to grow.

Whatever the reason, many remodelers consider opening a second location at some point. While some fail, many succeed, and with careful planning, a second location can be a great way to increase business, even — maybe especially — in a down market.

Taking Advantage of a Downturn

It may seem counterintuitive to expand in the current market conditions, but it may be the best time. In many markets, employees will be easier to find, property will be cheaper and marketing costs are down.

The Neil Kelly Co., which has had two locations for years in Portland, Ore., has expanded recently into Eugene and Bend, both more than 100 miles away. The Eugene showroom opened three years ago; the Bend location earlier this year.

"Deschutes County (where Bend is located) was one of the fastest growing counties in the country over the last few years," says company President Tom Kelly. "But because of what I just told you it's also been one of the hardest hit markets in the downturn."

That doesn't change the fact that the Bend market will be an important one for the company for years to come, Kelly says. That is why the company had been targeting the market for expansion for years. The key is having realistic expectations.

"The market has great long-term growth prospects but is currently a tough market," he says. "We planned for a tough market, so, so far we're on budget."

Coming into the market as it was slowing was probably easier than trying to start up in a booming market, Kelly says. It's paying off as the company scouts future employees.

"The Bend market was so hot, we probably wouldn't have been able to hire the people we needed," he says. "Now they're looking for work and we're creating relationships. The key to being an effective remodeler is having a great cadre of trade contractors who know you and want to work with you, and I'm not sure we could have gotten that before."

Opening a new location isn't the way to survive a downturn, but it can be an important part of a long-term growth strategy for a solid firm.

"The long-term perspective is much more important than the short-term," Kelly says. "Downturns are an opportunity to grow and expand market share if one is in a strong financial situation."

That sentiment is echoed by Larry Weinberg, CEO of BOWA Builders in McLean, Va., which opened an office about 35 miles away in Middleburg, Va. in late 2005.

"I see this as much easier to do right now than it was three years ago," Weinberg says. "It's a slower ramp-up, but if we can succeed in a slower time, when this turns around we'll be in a great position. The current economy is almost inconsequential."

To run each of its geographic divisions — whether run out of McLean or the new office in Middleburg — the company has team leaders, often former remodeling company owners themselves. During the best times, they were doing well enough that they weren't interested in coming to work for BOWA.

"This looks a lot more attractive now," Weinberg says. "It's just a lot easier to find good people."

Taking the Plunge

Opening a new location requires more employees and more capital, so it has to open up enough business to make it worth it.

BOWA has long had separate divisions built around the geography they serve in the Washington, D.C., area. Until they expanded to serve Loudoun and Fauquier counties in Virginia, they'd never needed an office in those new markets.

"When we started talking with the business leaders and the architects that served that area, they let us know pretty early on that people in Middleburg don't like doing business with someone who doesn't have an office there," Weinberg says. "We're swimming upstream when we open up in a new market to begin with, and then when we were told it's going to be even harder if you don't have a presence, we decided to go ahead and do it."

Before expanding into an area, BOWA looks at several factors, including real-estate values, age of the homes in the area and incomes. Because the company focuses on high-end renovations, they are particularly interested in the number of homes over $1 million. The Middleburg area has a lot of older homes and some of the most valuable homes in the D.C. area, which made it worth the expense and effort to open an office there, Weinberg says.

In general, deciding to expand geographically has become a necessity for BOWA if the company wants to continue to grow.

"I don't want to say that we've saturated the Washington, D.C., market, but we've done well," Weinberg says. "The only way to maintain growth is to expand into other markets."

The addition of new divisions also means more career opportunities for employees, which is important in keeping the best and brightest.

"If you're going to hire and retain the best people, the best people don't want to stagnate," Weinberg says. "We have a lot of good, loyal employees that have the opportunity to take more responsibility as we open up new divisions."

The same factors have driven the growth for the Neil Kelly Co. When choosing where to expand, the decision on the Bend location was similar to those made by BOWA — high household incomes, high home values and an opportunity for growth. Both Bend and Eugene came about through acquisitions of existing small kitchen and bath showrooms. While the Bend market was targeted in Neil Kelly's business plan, the decision to expand into Eugene was more sudden. The owner of a showroom that was selling the company's cabinet line called to tell Neil Kelly he was retiring and ask if he wanted to buy the business. At the time, Kelly said no, but continued to think about it, especially once one of his former employees expressed interest in running that location.

"Expanding into the Eugene market was not something that was in our plans," Kelly says. "But then we had someone in the company who was interested in going there to be the manager, which was a key for me."

At that point, management was already thinking about opening up in Bend or elsewhere, and this was an opportunity to see if it would work.

"We have two locations in Portland, but that's a different animal than managing a business that's 110 miles away," Kelly says. "It ended up being a fairly reasonable purchase price, and we wanted to see if managing a remote location was something that worked in our business model."

While both the Bend and Eugene locations were somewhat distant, both, particularly Eugene, are within range of the television, radio and newspaper advertising Neil Kelly does.

"We were pleasantly surprised by the level of brand recognition we had," Kelly says. "Previous brand recognition is something I really want to underscore as something a remodeler should consider if they're looking at expanding."

Safe Harbor

Once a new office opens, having the right people in place is probably the most important part of success.

"We have to make sure that it's the BOWA brand," Weinberg says. "People in that division have to be empowered to make their own decisions, but also know to work within the BOWA framework. It's not the kind of thing where you can just hire somebody and send them off and expect them to do it."

That's why BOWA prefers to start a division from within rather than acquire an existing company, although the company has acquired two in the past.

"I would be nervous about taking another company and slapping the BOWA name on it, then crossing my fingers that they're going to be treating customers the way we want them to," Weinberg says. "If we lose money, we can get over it, but damaging our brand can have long-term effects."

Kelly prefers to buy existing businesses instead of start from scratch because of the value of having an existing showroom and client list, but still put previous Portland employees in charge of both the Bend and Eugene showrooms.

"I wouldn't have done this if I didn't have people who wanted to go over there from the company," Kelly says. "I trusted their management abilities as well as trusted them in general."


Lesson Learned

Opening a second location doesn't always work out for the best. That was the lesson learned by Washington, D.C.-based Landis Construction.

In 2006, the company opened a second location in Frederick, Md. (about 40 miles north), but quickly found the market wasn't for them and shut the office down after a short time. The biggest mistake, says principal Chris Landis, was that the company didn't research the market enough before expanding out of their base in the district.

Instead, the company had opted to open the location with relatively little planning after a remodeler who had run his own company there had applied for a job with Landis.

"He had his own business there, he'd won a couple of awards and we thought he could cultivate his old clients and generate some business for us up there," Landis says. "It was an opportunity that was presented to us and we thought, 'This will be easy,' but we should really have gone and looked at the marketplace."

Landis found that the market was completely different than what they were used to. Homes aren't worth as much in Frederick, the projects are less complicated and the competition costs a lot less — all factors that worked against Landis.

"I even talked to some of our subs who live up there, and they tell me the reason they come down here is they can earn twice as much," Landis says.

The company made a mistake by counting on the new hire to know the market and be able to generate business on his own.

"I think we were really relying on this individual to know all that stuff and have that expertise, but he was coming to us because his business was failing, and I think that's the key right there," Landis says.

Landis says the company still looks to expand in the future but would need to have a larger, dedicated sales staff, as well as do a much better job of studying the market.

"It was something that just fell in our laps, but just because that happens doesn't mean you can end-run the due-diligence part," he says.

Five things to Consider

David Meier, founder of The Small Business Advantage, a business coaching firm, says there are five things business owners should think about before opening a second location.

  1. Can the business run without you? If not, a second location can't be expected to survive because you can't be two places at once.
  2. Research the new market. Make sure the demand is there for what you have to offer and that people are willing to pay for it.
  3. How strong is your current location? Would the new location hurt business at the old location? Do you have enough good employees to manage two shops without hurting the existing one?
  4. Make sure you have enough money. The new location should be viewed as a second business. It shouldn't count on the existing location to pay its way.
  5. Are there other growth alternatives? Explore other ways to improve sales/profits at the existing location before going to the expense of opening additional locations.

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