10 WAYS TO BOOST YOUR COMPANY’S VALUE
Practice #9: “Breed” new products
Most companies have cut R&D over the past few years to save money; however, this can be a losing strategy over the long term. Even one new successful product, if launched properly, can have lasting positive effects on company valuation. You don’t have to have the next Apple iPad up your sleeve, but “signaling,” or creating the impression that you are continuing to develop new products sends an important message to the market, competition, staff, and future investors who expect continuing innovation.
In addition, because suppliers may also be looking for new business opportunities, consider developing new products with suppliers as a combined R&D team effort. Working with suppliers in R&D not only combines lower cost with better supplier relations; it also signals confidence internally and externally to retailers and customers that your business isn’t sitting around waiting for demand to improve.
Typical R&D budgets for an industrial sector company average 3.5 percent of sales, while high tech companies can start at 7 percent of sales and biotech firms can reach 40 percent or more. Having no R&D budget, on the other hand, is not only the kiss of death for the future, but also signals to everyone (including bankers, suppliers and customers) that your company is a one-product venture, and may not be around in the long term.
The consequences of no R&D translates to lower enterprise value, lower margins and lower competitive advantage in the market. While you may not see the wisdom of an R&D expense budget today, by next year you may find yourself out-maneuvered as competitors seize new market trends ahead of your expectations and at the expense of your profits and your future. Becoming a “breeder” of well designed new products exemplifies a commitment to growth, and can lead to a significant increase in business valuation over your competition.
In part 10 we look at Capital Structure, and why it’s a key to your success.