Considering Leaving the Small GovCon Roller Coaster? Answer These Questions First.

Set-Aside Alert

By Scott E. Semple, Senior Advisor & Sharon Heaton, Founder & CEO, sbLiftOff

Many company founders and owners—provoked by the constant changes, challenges, and uncertainties of the federal small business marketplace—are pondering if 2022 is the year to transfer their business.

Many company founders and owners—provoked by the constant changes, challenges, and uncertainties of the federal small business marketplace—are pondering if 2022 is the year to transfer their business.

It’s hard to argue with the logic. With wildly competitive on-ramps and new contract vehicles, combined with changing SBA set-aside regulations and a hyperactive M&A marketplace, there are ample reasons to think 2022 may be the year when your firm’s valuation peaks, and the timing is right to move on to other dreams and endeavors.

But are these factors enough to push your company toward a liftoff? To get clarity on this, there are questions you should be asking yourself. Here are a few to get started:

How important are you to the company?

This is a loaded question. Let’s say you’ve been onsite at the Pentagon or State Department for ten years and a company sprang up around you. Almost without noticing, you have 73 FTEs who have the same email domain as you, managers tending to the daily grind of financials and timesheets, and a mix of prime and subcontract work that looks like something someone will want to acquire.

You’re sitting on an unintended goldmine – or are you?

The answer is: It depends upon how important you are to the business. Understanding the basis of underlying value in a small business lies far below the top line revenue. The value of your firm depends in large part not on what you can do to keep the cash flowing in but what assurances a new owner will have that revenue will grow in your absence. What keeps your clients loyal to your firm – is it you or your team of capable staff members?

Who has looked at your financials as an investment, and not just for annual tax reporting?

Maintaining orderly financials is important to any well-run business, and it pays dividends with financial institutions and the IRS. But financial presentations required for M&A transactions look at the same numbers from a different perspective: The point of view of a potential buyer. Has a third party objectively reviewed your financials not as your bookkeeper or tax advisor but as your adviser on the value of the asset called your company? Do your books reflect the value of your firm to a buyer and not just to you the founder/owner? Understanding the ‘buyers view’ of your company is a critical input to your transfer strategy evaluation.

Revenue vs ‘bottom line’ vs EBITDA vs adjusted EBITDA – what do these terms mean for your business?

When considering a transfer—or even just understanding what a transfer could look like—a deep dive into the numbers is a must. When doing so, begin with the low-hanging fruit, and ask yourself a basic question: Are you underreporting what your real net income is? What’s hiding in the numbers that might scare a buyer away from a deal? A spouse on the payroll or other family compensation? Car, vacation home, or other personal expenditures?

These are the kinds of numbers that need to be factored out—for current and preceding years— before the buyers are let in. Keep in mind that trimming $500,000 in expenses in a transaction with a 5x multiple equates to an extra $2.5 million at sale. If that isn’t motivation to clear the books, we don’t know what is!

Who’s on your team? 

M&A is a team sport, and you need a team that knows the GovCon small business arena and brings the right tools. Your uncle the lawyer who negotiated your building lease is not the transaction lawyer you need on a GovCon small business sale. The same goes for financial team members – running journal entries in Deltek is not the skillset needed to prepare sell-side financial presentations, backlogs and forecasts, and quality of earnings. You need professionals who specialize in GovCon and do financial presentations for a living.

Build your Olympic-level transaction team based on their skills and readiness for the task at hand in order to present your firm in the most favorable light and attract the right buyers to the negotiating table.

Change is a constant, and the GovCon M&A marketplace changes quickly. If 2022 is the right year to evaluate your company’s potential as a sell-side winner, make sure to ask the right questions. And get the professionals on your team to make an informed M&A decision. We’re standing by for your call.