Running the numbers for a second location.
Have you passed the test so far? Over the last few weeks, my goal has been to give you insight on the potential of opening a second location and specifically what impact it would have on your existing location, your financial situation, and your team. If you are still considering moving forward with another location, this would be a good time to run some basic numbers. So this brings us to our next question:
What will your expenses be?
You have several things to consider: a location you will either have to rent or purchase, parts inventory, as well as wholegoods. Keep in mind you will probably have dating on your parts and accessories, and floorplan for your wholegoods. You will have to staff your new location with a minimum number of people (at least 3). You will need a sales person, a parts person and a service tech. You will require marketing, signage, computers, software, parts cabinets or shelves as well as basics for your shop which would include a compressor, lifts of some sort, and specialty tools.
Let’s say, after you work through all your projected expenses, you find that you will burn through $20,000 per month. It’s important to understand that as you open a new location, whether it is a second, third or fourth, the majority of the initial sales will most likely be coming from your sales of wholegoods. As the new location matures, you will find that parts and labor sales will continue to grow and add much needed profit to your bottom line.
So, where’s the revenue going to come from?
A healthy dealership works to maintain a revenue balance of 60% – 25% and 15% with 60% of the revenue coming from wholegoods, 25% coming from parts and 15% coming from labor sales. So to cover the $240,000 year one cost of the location you would need to generate $144,000 in profit from wholegoods, $60,000 of profit from parts sales and $36,000 in labor profit.
In a new location for the first year, you will find the ratios will look more like 85% for wholegoods, 10% for parts, and 5% for labor. Based upon those percentages, you will need to produce $204,000 in wholegoods profit, about $24,000 in parts profit and around $12,000 in labor sales. If you are selling compact or utility tractors and you are currently getting 30% of the market, with your average sale being $35,000, to generate $204,000 in gross profit at a 8% margin you will need to sell over 70 tractors or $2,500,000 in year one. If the total market for your second store is 200 tractors, you would need to capture 36% of the market to make the numbers work. Regardless of what you sell, it is important as you look at expanding to know your numbers and what you need to make the second location profitable from year one.
Next week, we’ll discuss marketing and how it will be an essential part of your business and your expenses as you move forward.