Seller's perspective: Factors to weigh and consider
- By Ross Wilkers
- Nov 14, 2017
With some exceptions, the analysis of mergers and acquisitions in the government market invariably focuses on the buyer or the combined company in deals of equals.
Analysts and observers are closely watching Northrop Grumman’s large bet on military space with Orbital ATK for the year’s biggest example, plus the IT-focused deals that CSRA and ManTech International have made. And eventually we will hear from the leadership at the future DXC U.S. government-Vencore-KeyPoint trifecta, which will be a public company.
But what about the other side of the equation? What about the sellers in a time of an expected upturn in the federal market after several years of contraction?
There is also the environment for small businesses to consider in a world of set-asides and their need to progress to full-and-open work in order to find a buyer.
Some answers on how sellers should approach the M&A market came Tuesday from a panel of former government contracting CEOs and founders that have been there and done that. One main take away from them: Trying to perfectly time a sale is nearly impossible as the process must start years in advance.
For Faye Coleman, former CEO of Westover Consultants, the pre-sale planning process should take place between three and five years before the deal. “There will come a time… to envision what your life will look like when you’re no longer running a business,” Coleman said at the event hosted by Live Oak Bank and George Mason University’s School of Business.
Then there is how the company is set up to compete over the long-term and where it plays. Nicole Geller, founder and former CEO of Government Contract Solutions, said her company charted its path from the civilian and defense arenas, and then spent the next five years investing in the intelligence space.
GCS also experienced the effects of many services being commoditized and there was sequestration, Geller said, but it still grew thanks to its intell footprint that was largely shielded from those trends. “We knew that buyers would be interested in that,” Geller said.
There is also the work small businesses must do to move up the food chain, an effort only getting harder for mid-sized companies as large companies have gotten bigger through consolidation.
The federal market’s M&A landscape radically changed in 2007 when a Small Business Administration rule went into effect that required small firms to recertify their status after either they acquire, get acquired or merge. In essence, they could stop being legally considered a small business upon the deal’s closure.
Revenue from existing contracts does not always go away as the larger company often can complete work first awarded through small business set-asides. The issue arises when the contract is up for recompete and the agency decides whether it should stay reserved for small business or be a full-and-open competition.
Prospective buyers see increased risk in a potential acquisition target if all of the revenue comes from set-aside contracts, said Matt Whitaker, a director at investment advisory firm Clear Rock Capital. “Restricted contracts limit the buyer pool (and) make it less competitive,” he said.
There are alternative ways for small business owners to exit their investment other than an outright sale though. Andy Smith, a director at investment bank The McLean Group, said employee stock ownership plans and management buyouts are potential options for an owner in lieu of finding a buyer.
Even with their restrictions, Smith said contracts for restricted businesses do have fair market value that can contribute to ESOP transactions. But those contracts should also signal growth into more competitive spaces up the food chain.
That growth is displayed “if someone else comes in and buys it, there’s a transition plan and that can eventually be moved over to a full-and-open for a larger company,” Smith said.
Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at firstname.lastname@example.org. Follow him on Twitter: @rosswilkers. Also connect with him on LinkedIn.