What to consider before expanding a home business

2013-03-17T14:01:00Z What to consider before expanding a home businessBy Ralph Hershberger Special to the Arizona Daily Star Arizona Daily Star

Nearly every large business started as a small business, frequently in the owner’s basement or garage.

Apple and Hewlett-Packard are two classic examples.

Although a strong vision is a key element in expanding a business it must be tempered with a healthy dose of reality. Expansion is a risky proposition — expenses increase immediately while the revenue doesn’t and cash management becomes a daily concern.

First, examine why an expansion makes sense and if you are ready for the additional stress. The only valid economic reasons to expand are that customer demand for your existing product is growing, additional space is required for new product lines or you want to move into new market locations.

Here are some of the steps to consider before expanding a home business. Keep in mind that it is always cheaper to plan on paper than after a lease is signed or inventory and equipment are purchased.

• Consider forms of incorporation. Many home businesses are unincorporated, but now is the time to start acting like a business. In general, incorporation separates and protects your personal assets from the business. Since each form has specific legal, tax, and owner implications, first consult an attorney and a tax professional.

• Arrange for appropriate financing. Develop multiple financial pro formas that incorporate a range of revenue and expense scenarios. Lenders are not only evaluating the business plan but you as a manager. A good manager considers all possibilities.

• Validate and stimulate customer demand. Do everything possible to minimize the cash crunch following the expansion. Offer discounts for pre-expansion orders; initiate a teaser campaign prior to opening, schedule an open house with local press coverage — anything to stimulate traffic into the new location.

• Implement appropriate infrastructure to support the expanded footprint. This includes key operations employees who must be trained, payroll systems that are crucial to avoid payroll tax issues and human-resources policies and procedures to comply with multiple federal and state regulations.

Given the risks and tasks, it makes sense to hire a consultant to help navigate the process.

Your objective is a successful expansion, not to save a few pennies.

Ralph Hershberger is president of SCORE Southern Arizona, a nonprofit group that offers free small-business counseling and mentoring by appointment at several locations. For more information, go to www.southernarizona.score.org, send email to mentoring@scoresouthernaz.org or call 505-3636.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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