As companies look for growth opportunities, owners and stakeholders must develop strategies to achieve objectives and provide a return to those individuals. Strategic investments should be at the forefront of owners’ and stakeholders’ mindset to facilitate revenue growth opportunities, strengthen market and geographical footprint, add talent, and develop and improve technology and intellectual property.
Strategic investments include, but are not limited to the following:
- Mergers and acquisitions – acquiring a business(es) that can supplement the acquiror’s existing business by increasing capabilities, adding technology and intellectual property, expanding customer base and geographic locations, and more.
- Research and development – Investing in innovation and developing technology to improve and expand a business’s capabilities and offerings to its existing customers as well as obtain new customers.
- Ownership – Purchasing ownership in other companies or collaborating with other businesses in joint ventures/partnerships to develop and expand products and technology utilizing each other’s mutual strengths and resources.
There are significant benefits to making strategic investments which can contribute to your company’s long-term growth and success:
Benefit #1: Diversification
Strategic investments can lead to improved diversification, thereby reducing your company’s risk. For example, customer concentration is a risk that many businesses face, and it can result in a great deal of pressure since a significant amount of revenue may be concentrated with one or two companies. Significant customer concentrations may also give customers more control over pricing and terms. If the customer(s) were ever to reduce a significant amount of their buying from your business, or leave entirely, the impact could severely impair operations.
Benefit #2: Market Expansion
Any one of the strategic investment initiatives noted above can lead to expanding your customer and product bases, as well as geographical presence. This allows your company to expand into previously untapped markets which can expand revenue growth potential.
Benefit #3: Technology
Strategic investment can also be an avenue to develop and improve technology and intellectual property which can add value to your existing business or be the catalyst to developing new revenue streams or increase revenues with existing customers.
There can also be challenges to making strategic investments, which include:
Challenge #1: Financial Risks
Strategic investments require capital, which can come from existing assets and operations, outside investors, debt, or a combination of the three. All the strategic investments noted above may require a significant amount of capital and demanding work to be successful. If the strategic investment has slower than expected growth, or does not work out, the result may be a strain on your company and its resources. For example, if a business acquires another business at an expected EBITDA multiple of five, but the cost to integrate the business is higher than expected and synergies that were anticipated are slow to materialize, the realized cash flow from the acquisition may be less than expected. This in turn can strain your business operations. In other words, it will take the acquiror longer to pay for the acquisition due to lower-than-expected cash flows.
Challenge #2: Integration
This is always a critical area with regards to acquisitions or collaborative joint ventures. Each business has its own culture and sometimes merging two companies results in culture clashes or missed expectations. Other integration challenges can include human resources and system technology, both of which require significant planning and execution to ensure success.
Next Steps to Achieving Your Company’s Long-Term Goals
A company should always have long-term goals to grow and improve its business, and strategic investments should be considered as a way to meet those goals. Having well thought out long-term goals incorporating strategic investment initiatives can help your business better address challenges and position your company to improve and grow in order to provide stronger returns to its stakeholders. If you would like to discuss how your company can make strategic investments that will promote growth, please contact us.