Small businesses face tough choices on growth

In every small business’ life there comes a point where they have to make a decision. Do you try to push into the full-and-open world? Do you stay small? Is there another option?

For Sev1Tech CEO Bob Lohfeld Jr., that decision point came when the company hit $30 million in annual revenue. He and his partners decided they were going to push forward.

The goal was to get to $50 million and find a private equity firm to buy the company and finance further growth, he said at the Washington Technology Power Breakfast M&A Outlook on Friday.

He was part of a panel about private equity ownership in the federal market. Sev1Tech has found two: first in DFW Capital Partners and later Enlightenment Capital.

But Sev1Tech first had to do several things, such as bid on full-and-open contracts and put a management team in place. That took at least one year.

“You need a clear path and plan to migrate to full-and-open,” Lohfeld Jr. said. “You need that runway.”

One path is recompetes on multiple-award contracts. If you hold a small business spot, bid on the full-and-open when the recompete comes up. If you win that spot, you can start migrating small business work to full-and-open work.

That is a very positive sign that can entice private equity investment, he said.

But all is not lost if you can’t convert small business work to full-and-open, said Susan Gabay, a managing director at investment bank Houlihan Lokey.

“You still have value but your work needs to be strategic to a buyer,” she said.

Jason Rigoli, a partner at investment group Enlightenment Capital, said that his firm often makes minority investments in businesses. In fact, seven out the 10 investments it currently has are minority stakes.

But his firm works with those companies to help them find that path to more full-and-open work, he said.

Converting small business work to full-and-open can be a challenge and requires knowing your customer. Some will always go with a small business and you can’t change their minds, Lohfeld Jr. said. Some like the idea of working with a mid-tier because of flexibility and access to the CEO.

Others don’t care either way. “They are just focused on cost,” he said.

As a company, you also have to make a decision. Do you focus on high-end, high cost services? Do you go to the bottom and compete just on price? Or do you go for something in the middle?

And if you are in the middle, “how do you differentiate yourself,” he said.

For Lohfeld’s Sev1Tech, the path has been straight into the full-and-open world. They got backing from DFW in early 2019 and then acquired Engineering Solutions and Products in September. That brought with them coveted spots on the OASIS and SeaPort-e contracts.

OASIS, in particular, is an important “runway” for new business for Sev1Tech, Lohfeld said.