Expert Expansion

1007 43Growing a business is tricky, especially if it's family owned, as many pool and spa dealerships are. You have to figure out where to set up another showroom, find more good help and get additional financing. And you have to be sure you're doing it all for the right reasons, or the expanded business will most likely bring the whole operation down.

"The biggest question is why do you want to expand to another location?" says Rick Vaughan, co-owner of Vaughan Pools & Spas, which is based in Jefferson City, Mo., but has expanded to five stores in central Missouri since it was founded by his father, Richard Vaughan, in 1971. "Are you trying to get name recognition? Are you trying to service a bigger area? Is there an ego that you want to feed?"

Vaughan Pools & Spas has expanded over the years for perhaps the best reason there is to grow: customers in communities near Jefferson City wanted Vaughan and the products and services it offers in their towns. "For instance," says Richard Vaughan, "when we moved into the Rolla area, we had built pools in that area for several years, and were also servicing that area and they kept wanting to know: When are you going to be down here? And sooner or later, we just had to go."

According to Rob Carter, president of retail operations for Litehouse Products, a Cleveland-area company that in recent years has opened locations in Arizona, California and Nevada, this is the reason to expand. "You expand if there is consumer demand," he says. "If there's a demand for your products and services, the money just follows."

But even if a demand exists, the process of expanding to a second or third location is not simple. Business owners in your community that have already grown their companies - whether they sell pools and spas or something else - can be a big help. Ann Kinkade, director of the Family Business Center and a faculty associate at the University of Wisconsin in Madison, says assembling an advisory board is a Family Business Center best practice.

"A group of independent advisors who have already done some sort of expansion can give you advice about the pitfalls and red flags," she says. "Or you could just call it an expansion committee if you want it to be a more short-term situation. And you could pay this group of trusted business people to advise you over the year while you're planning to expand."

Kinkade notes that the amount of decision-making power given to the board is totally up to the business owner, but it's best to have individuals on the board who will challenge and question the business owner's ideas. "You don't need to meet with people who think like you do. That's not the independent advice you need."

Hearing from other pool and spa dealers that have successfully grown their businesses can also help guide you through the sometimes murky waters of expansion. Kathleen Carlson, senior vice president of sales and marketing at Aqua-Quip, a company founded in 1959 that has since grown to 10 locations in the Seattle area, says: "We think there are three factors in growth: One of them is employees.

You have to have good employees to grow because if you grow and you can't really man it well, it's doomed to fail. Next, you do have to have some funds to open another store, and having those funds available and making sure you don't short yourself is very important. Third is location. We designated growth areas, but literally would wait until a location opened. For our 10th location that we're just now opening, we first starting looking for a location in that area two years ago."

Man It Well

Carlson says long ago Aqua-Quip decided to "grow where we could," and with that in mind, the company is always fostering employees to be sure they have the personnel on hand to staff a new location should the ideal spot become available.

If you don't already have personnel to staff a new location, Carter recommends hiring a few key people at least six months before it opens. "Some might say they can't afford to pay three or four people for six months before the store opens, but what is going to cost you more money in the long run: paying four people for six months or opening a new store that fails? And you have a five-year lease commitment on it.

"Look at the big picture," says Carter. "Consider it part of the expense of opening the new store, because you only have one chance to make a first impression. If a customer brings in his water to be tested, and the person helping him doesn't know how to do it, and they don't give good information and they don't fix the green pool, then it's not likely that customer will come back."

For the new location to succeed, it will need a skilled, motivated manager. Financial incentives tied to the success of the new store are an obvious motivator, but not the only one, and arguably not the best. While Aqua- Quip does base managers' bonuses on budgets, Carlson says: "If you don't have a manager who wants the location to succeed, you're going to have some issues. The personality of the person opening the store is really important. You have to have somebody who has the energy level to do the extra things, to network in the community, to build customer relationships, to be involved, to really get it up and running - because it's not a short-term thing, it's a long haul." Finding these managers can be difficult.

In a couple of instances, Vaughan Pools & Spas has promoted from within to fill these key positions. "At two of our locations, we offered management positions to service technicians who had been with Vaughan Pools for 15-plus years," says Rick Vaughan.

If you're buying out another pool and spa business, consider keeping the current owner/operator as your manager at that location. That's what Vaughan did at two of its other locations, and this situation has worked out well. "In Columbia," says Rick Vaughan, "the guy we bought out years ago is still our manager, and is now a part owner, so there really weren't a lot of changes there. As far as the community was concerned, he lived there and he still had a business there, so he maintained all of those contacts. The same went for our Sedalia location in buying out the store up there."

Location, Location, Location

Finding just the right site for a new location can be almost as tough as finding a great manager. To figure out where another location would work well, examine your current location and client base. "You've got to know your customer," says Carter.

"So it's imperative that you build a good database. For every customer you sell something to, you should get all of their information: address, telephone number, e-mail address, so that you can form a good database. Then you can look at your database, and it can tell you where you're selling your product, and it can tell you if there seems to be demand in another area.

"Another big piece of all of this is you have to look at your business model and decide what it is that makes it work," Carter adds. "You have to determine this model internally. You'll need to determine the overhead and expenses associated with opening another location, and you'll need to figure out what square footage, rent and utilities you can afford."

"Then," Carter continues, "set a budget and a projection, like we need to do this much revenue at this gross margin to achieve this profit after expenses. Once you've built your model, don't deviate from it. You have a much better chance of being successful if you stick to your model."

Next, contact a realtor. Your database may indicate where a new location would succeed, but either way, a commercial real estate broker can help you find the right spot. "You need to get a real estate broker that asks you the necessary questions," says Carter. "They need to understand your business almost as well as you do. They need to understand the model and your customer so they can eliminate any of the sites that won't work for you. And then they can plug the demographics in and come back to you and say: here's your top five places in this marketplace."

Carlson also uses real estate brokers, but has found that she needs to work with more than one. "We've had to put it out there to a lot of realtors because, for example, with one of our stores, we had a realtor looking in the area for two years and an employee found a site," she says. "So we just put it out there and if we have two or three realtors, they don't all seem to bring us the same stuff. You have to be resourceful because some sites get rented or sold before they even really make it to the market."

Aside from the demographic information realtors can provide, census information can also help you find the right area for your next store. In searching for the ideal location, don't forget intangibles like driving and shopping patterns. There are lines people don't cross, notes Carlson. "If people live north of the line, they go north to shop; and if they're south of the line, they go south to shop, and you have to know this. Some of it you learn over time, and some of it a really good realtor can let you know. Networking with other business owners doesn't hurt, either.

Sometimes you can find out how they're doing, what their best stores are, things like this." Setting up an advisory board comprising local business owners can be a big help at this stage since they know these local idiosyncrasies. Part of the reason Vaughan expanded where it did was because its TV ads, which the company has found to be its most successful form of advertising, would reach consumers in these other communities, and Vaughan could thereby get even more out of its advertising dollars.

Funds

When it comes time to ask your bank for a loan, you'll need your rubber duckies in a row. "They need financial statements from the existing company," says Rick Vaughan. "They need to know how much you need to borrow, what your existing loan debt is and how you're able to pay back your existing loan debt. The amount of paperwork is ungodly."

If it's a family business that will at some point be passed down to a younger generation, Kinkade says multiple generations should meet with the potential lender. "Because often what happens is dad goes and meets with the lender, yet other family members who are also working there day to day don't have any idea about the financial aspects of what this expansion means," she says. "Also, the senior generation tends to be more risk averse and willing to take on less debt than the junior generation because they are probably thinking about retirement. But the point is that communication about the finances amongst the key management as well as the family is very important."

Your suppliers may also be able to help at this stage. "Sometimes manufacturers will give you some extra terms to open up a store, but it's something you have to negotiate," says Carlson. "Hopefully, you're in good standing. If you're not, you're less likely to be able to negotiate some extra terms," which would allow you more time than usual - maybe six months rather than three - to pay for floor merchandise, she adds.

While it may seem obvious, be sure you have enough money. Says Carlson, "Going to a second location that's undercapitalized can really hurt both locations."

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