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A Modern Dilemma - Invest, Divest or Stagnate
Published in
April 2024
It is no secret that recently economic business sentiment as been in decline. While we are not economists, we act for a variety of clients in many different industries and the consensus among them is that, for now gone are the days where a business can expect large growth without actively seeking it out.
In our experience, it seems that currently, businesses that want to grow must seek it by active investment or aggressive pursuit. And for those who are no longer engaged with or excited by their businesses, some tough choices are to be made: Divest or risk stagnating.
The Investment Decision
Investing in your business involves allocating resources, whether financial, human, or technological, to expand operations, develop new products or services, enter new markets, or enhance operational efficiency.
Strategic investments can fuel growth, strengthen competitive positioning, and capitalize on emerging opportunities. When considering investment opportunities, it's essential to conduct thorough due diligence, assess potential risks and returns, and develop a clear roadmap for execution. Whether pursuing organic growth initiatives or strategic acquisitions, investing in your business can position you for long-term success and sustainable value creation.
Within this matrix of investment, there are many legal nuances which should be considered closely. It is important to ensure that investment opportunities are thoroughly assessed to mitigate potential risks. Comprehensive due diligence reviews and thoroughly scrutinizing proposed contractual arrangements remain fundamental to investment decisions.
The Divestment Decision
Divesting involves strategically exiting or disposing of non-core assets, underperforming business units, or investments that no longer align with your strategic objectives.
By divesting assets or businesses that detract from value creation, you can reallocate resources to focus on core competencies, strengthen balance sheets, and unlock capital for reinvestment in higher-growth opportunities.
Divestment decisions should be guided by a comprehensive assessment of the strategic objectives, financial performance, and potential impact on stakeholders. Whether through asset sales, share sales, or strategic partnerships, divesting can streamline operations, improve efficiency, and enhance shareholder value.
Common examples of divestiture we have been advising on recently follow the theme of business owners who have lost interest in their business, those who ready to move on from their business, or those owners wanting to share the burden of business ownership with others.
While these are big decisions to make, there is often also an element of creating synergies and efficiencies for the business. For example, allowing existing senior managers or employees the opportunity to step into business ownership may have several benefits to the disinterested owner:
- Retaining and motivating key members within the business;
- Aligning the interests of key performers with the interest of shareholders;
- Sharing the burden of management; and
- Putting in place a formal succession plan to ensure business continuity.
Stagnating
Choosing to stagnate, or maintain the status quo, may seem like the least disruptive option in the short term, but it carries inherent risks of falling behind competitors, missing out on growth opportunities, and becoming obsolete in rapidly evolving markets.
In today's business economic declining and high inflationary environment, complacency is not a recommended option. While maintaining stability and preserving existing operations are important, it is equally crucial to continuously evaluate market dynamics, customer needs, and industry trends to identify opportunities for growth and renewal.
For those who make the conscious choice to stagnate, there is not much we can do for you.