I am an experimental physicist, primarily lasers and optics. I have done this sort of thing many times, and I have also taught any number of undergraduate and graduate students how to do this setup correctly. Of course it is much easier in person - then you can show and tell, and watch them check their own work. If the correct equipment is already available it takes ten to twenty minutes to guide a student through this procedure.
They also learn the value of Poisson's rings!
See
http://physicsed.buffalostate.edu/pubs/StudentIndepStudy/EURP09/Spot/spot.html
and
http://io9.com/5707749/poissons-spot--the-greatest-burn-in-physics
I assume that you have had proper training in laser safety, and have the correct safety glasses, and are able to attenuate the laser beam during all of the setup stages. You must also have lenses which are designed to handle the power levels that are being used.
What you describe is a telescope being used as a beam expander/compressor.
Here is the theory:
http://www.edmundoptics.com/technical-resources-center/lasers/beam-expanders/
To make the beam smaller the light must enter thru the converging lens. You should construct the telescope on a small optical breadboard, with a two-axis stage for the second lens. This will allow you to adjust the centering and the focal length later. You will use the post to adjust the vertical centering.
You must also have the incoming beam perfectly centered on _both_ lenses.
You can do this with the aid of a pair of iris diaphragms:
http://www.edmundoptics.com/optomechanics/apertures/iris-diaphragms/stainless-steel-series-iris-diaphragms/1374
Before setting up your lenses you must generate a "sight line" with the laser beam going through both diaphragms; a greater the distance between the diaphragms allows for more precise centering. Now slowly close the first diaphragm so that "Poisson rings" are visible on a test card. These rings should be perfectly round if the beam is well centered on that diaphragm. Use these rings to center the second diaphragm; you may open/close the first diaphragm in order to generate the most useful Poisson rings at the second diaphragm.
With the beam "perfectly centered" on these "pinholes" you can now place your optical telescope in between the two diaphragms. Block the laser beam while doing this. If you have followed good technique with your optical table this placement should be pretty good. Now place the test card immediately behind the converging lens - and check the Poisson rings. Move the telescope breadboard until they are perfectly centered on the lens. For an even better alignment - check the back reflection from the forward lens surface: it should go directly thru the forward pinhole. With these two conditions met you now have the laser wavefront perfectly aligned with the converging lens. Clamp the telescope breadboard down onto the optical table loosely - recheck the centering - and then tighten a bit more: just enough so that it doesn't move around when touched.
Now move the laser test card to the back surface of the expanding lens. Use the adjusters to center the Poisson rings. When it is well centered, move the laser test card behind the second diaphragm. If the compressed beam is well centered - then you are done. Otherwise you will need to make more adjustments to the expanding lens.
Now open both iris diaphragms ... but leave them clamped in place. You will find them useful later to verify alignment. You may have to make slight adjustment from day to day.
You can also use an extra iris diaphragm which is left unclamped so that it is free to move. Set the diameter to your desired beam diameter - or you can use a fixed pinhole of the correct diameter - and slide it along the compressed beam line. Again use the Poisson rings to get its height perfect, and to get it well centered on the beam. Now test again further away - if the beam is well collimated the beam diameter will not change very much. Otherwise your beam is diverging/converging - and the telescope lens to lens distance will need to be adjusted a bit.
If you are still having trouble - then you actually have the wrong lenses! It is easy to check the 500 mm converging lens.
Let us know how things go ...