At Crater of Diamonds State Park in Arkansas, visitors mine fields looking for diamonds. Or better said, their proverbial lottery ticket. In today’s marketplace, it can be as hard to discover a good investment as it is to unearth a diamond in that park.
For every successful company out there, there’s a handful that have yet to realize their full potential. These underperforming companies are great investment or acquisition targets. But only if they outperform their peers in the future.
Institutional investors often look to improve EBITDA margins by reducing general and administrative expenses or optimizing supply chains. To grow revenue and bypass the competition, investors should look at go-to-market (GTM) strategies—in particular, product, marketing, and sales strategies. However, GTM strategies are only as good as the execution. And translating strategy into tactical execution is often the point of failure.
How would an investor know whether the strategy is sound, or executed effectively? A traditional metric looks at the total dollar investment in strategic areas as a percentage of revenue. Why this metric? Simply put, if the company you are looking to invest in has overallocated or underallocated capital, this presents an opportunity for improvement. Let’s look at a couple of examples.
Scenario #1. Acme Corporation, a potential investment opportunity, spends a total of 25 percent on product, marketing, and sales. Comparatively, Acme’s peer group is spending 35 percent of total revenue and is growing 15 percent faster than Acme. On the surface it appears you are 10 percent more profitable, but growing 15 percent slower. Acme is missing out on additional EBITDA dollars. Failure to fund growth hurts the value creation.
Scenario #2. On the flip side, Acme is spending 45 percent on product, marketing, and sales. Its peer group is spending 35 percent but all companies, including Acme, are growing at the same rate. In this case, Acme’s spend is inefficient and can increase EBITDA if allocated appropriately. This is where you need to optimize spend, without losing the growth momentum of the company and the market.
In either scenario, knowing what to look for and how to optimize your investment is key. By screening your potential acquisition investments, you can assess the target company’s sales and marketing effectiveness. Screening also creates an upside and risk hypothesis that enables you to make an informed investment decision. This is determined by understanding how GTM strategies and tactics come together.
An informed investment decision helps ensure your acquisition target outperforms its peer group and becomes the diamond in the rough you were seeking.
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