When, Why, and How to Expand
By Gary Ray, owner of Black Diamond Games
It seems there are always projects to be done exceeding available cash. For the lucky successes, who find themselves with nothing left to do, expansion is often their next step.
There are a lot of pitfalls to expanding, and there are a lot of bad reasons to expand. You may be bored with your current operation. You may feel you’ve plateaued and need a new challenge. A lot of times ego is the driver.
But with the stakes so high, it’s important to start with proper motivation.
The best reason to expand is you’ve tapped out your current market.
You’ve had strong growth for several years, but that growth has tapered down to a few percent a year. Despite having your finger on the pulse of your communities, the well is dry.
If you’re seeing double-digit year-over-year growth, you’re doing the thing correctly and you don’t really need to expand. Your resources are better used in determining current demands and meeting them, possibly using capital to expand into new product lines or more fixtures.
Once you know expansion is the right call, it’s time to work out some calculations to determine how.
You might do some sales-per-square-foot calculations and learn your retail space is too small. Or you might face the multiple-store versus single-large-store dilemma. Before our expansion, we spent months tracking usage of our game center and decided that, even with only 20% of our customers using it, it was too impacted.
That resulted in a plan to build a bigger store with more activity and higher revenue, adding a 1,000 square foot mezzanine level to the existing space.
When it comes to construction, you really have no idea how much a project will cost until you consult a professional.
Even they’re guessing, it turns out. Our initial estimate was $50,000. Contractor estimates were as high as $500,000. When it was finished—five months over the estimated construction time—it cost $133,000.
I used to be an IT project manager and one rule with sourcing was everything should have three bids. Share your attendance data and customer demographics with your architects. If you’re planning a massive change, like adding a café, you’ll want an entirely new business plan.
With our expansion, we spent so many years planning that we were successfully paying construction loans before ground was broken.
You'll need either cash on hand, or a plan to acquire financing and pay it back.
Our expansion used crowdfunding to raise seed capital, but it was a small amount of money in comparison to the completed costs—about 20% of the 20% that used our game center contributed. We ended up directly borrowing $90,000 from Kickstarter backers in the form of promissory notes.
If you’ve got a solid community, you may find some capital this way. But I don’t think this is likely for most store owners, and there are certainly other sources to explore.
If you own your home and have good credit, home equity lines are possible. You can also add new partners (I gave up 10% of my business equity when we moved to a bigger store). Or, in the U.S., an experienced owner might get a Small Business Administration loan.
However you finance your project, expect cost overruns. A month before our construction was scheduled to be finished, I bought an Aeron chair because we were $20,000 under budget. By the time construction finished, we were $14,000 over. This was money we didn’t have. But I had a cool chair.
If you’ve got a successful store, you’ve won.
There’s nothing wrong with stopping where you are now. Nobody needs to expand. There is no Yogi Berra moment where people stop coming because it got too crowded. Consider crowded a sign of success rather than a problem in need of fixing. Start a new hobby. Work on your home life.
But if you do expand, do it for the right reasons, with a strong analysis of demand, a solid plan, and a realistic scheme to acquire funding.
Gary is the owner of Black Diamond Games in Concord, California. He writes the game industry blog, Quest for Fun, has a YouTube channel, and is writing a book on starting and profiting from a hobby game store, due out in December.