• Businesses should assess whether their cash flow and capital reserves are sufficient to support expansion without compromising existing operations.
  • Accurate budgeting requires factoring in hidden costs, ramp-up delays, and a realistic contingency buffer.
  • Multi-location success is influenced in part by the use of centralized financial systems, rigorous forecasting, and proactive tax planning.

Opening a second location is a major business milestone. Still, it’s also a significant financial commitment that may strain your cash flow, reserves, and resources if you’re not financially prepared. Before moving to another location, set it up for sustainable success by treating it like an investment that needs careful planning and strong financials. Below are the key financial aspects you need to consider. 

1. Evaluating Your Financial Readiness

Consistent profitability over multiple quarters or years can indicate financial readiness. Start by taking a close look at your books to ensure your first location’s cash flow is consistently positive and can withstand expansion. You’ll want to evaluate your finances to ensure there’s sufficient revenue, profit, and cash flow to support the new shop while keeping the original one running smoothly. 

For example, if your restaurant has met or surpassed industry-average profit margins and you have more customers or orders than a single location can handle, that suggests you may have a formula worth replicating. 

Additionally, consider whether you have sufficient funds to set aside an extra 10% to 20% of the second location’s total project cost as a buffer for unexpected expansion expenses. 

2. Budgeting for Expansion Costs

In this financial consideration, create a detailed budget that lists every cost category for your current location and new expenses for your second location. Expansion costs may include: 

  • Real estate
  • Build-out and renovations
  • Equipment purchases
  • Initial inventory
  • Staffing
  • Licenses and permits 
  • Insurance
  • Professional fees for lawyers (lease negotiations, permits)
  • Accountant
  • Marketing for a grand opening

Even if you think you have everything covered, it never hurts to talk to fellow business owners or mentors in your industry to see if you missed something. 

The SBA also suggests projecting at least one year of monthly expenses (and ideally up to five years) when calculating the costs of a new location.[1] Having at least that much in savings may help see you through the first year, in case business doesn’t pick up as fast as expected. 

3. Securing Funding and Financing Options

Once you have a solid estimate of how much capital you need, consider the best ways to fund the expansion. Many small business owners use a combination of financing sources, such as: 

Before applying for financing, prepare updated financial statements for your existing business. It can be helpful to have a CPA audit your documents. Lenders will likely require tax returns, financial projections, breakdowns of fund usage, and other supporting documents. 

4. Operational Cash Flow Management

Running two locations will naturally increase your overhead, from doubling rent and utility bills to higher payroll and inventory costs. Consider managing your expenses by updating your budgets to account for the new recurring costs line by line, and track them closely once the second store opens. 

Having two locations can make cash flow forecasting more complex. Consider using a centralized financial management system, such as a cloud-based accounting platform with multi-location support, which will enable you to monitor each store’s performance in real-time. 

Use the system to create and maintain an up-to-date cash flow forecast that projects both inflows (sales receipts) and outflows (expenses, loan payments, inventory purchases) for each location and your business as a whole.

5. Understanding Tax and Regulatory Implications

Expanding into a new city or state can introduce new tax burdens and rules. For example, if your second location is in a different state (or even a different county), you will likely need to register as a foreign business in that state and pay that state’s taxes and annual report fees in addition to those in your home state.[2] This may require filing additional tax returns, such as state income or franchise tax returns, for the new state, as well as local city business taxes. 

It may be worth investing in a reputable payroll service or hiring an accountant familiar with the new location’s laws and local procedures, ensuring you follow all regulations correctly. 

Research and ask your accountant about any available local incentives, such as tax credits, grants, or rebate programs. Resources like SCORE mentors or small business development centers can also provide free guidance about local regulations and incentives. 

Position Your Expansion for Success

Opening a second business location takes careful financial planning and strategy. Ensuring you’re financially ready with stable cash flow, solid profits, and ample reserves is a solid first step. From there, meticulous budgeting and securing the right funding will set the foundation for success. Talk with a local banker today about your options and what you need to get started financing your second business location.