By Scott E. Semple, Senior Advisor & Sharon Heaton, Founder & CEO, sbLiftOff
Small government contracting founders and owners are participating in the M&A market in ever-growing numbers, fueled by several general market trends; cheap money, looming capital gains tax increases and a clear understanding that smart acquisitions can super-charge growth.
Expanding what was once an exclusive "Large GovCons Only" membership club, acquisitions by sub-$30 million revenue business owners have brought small business M&A into focus for many forward-leaning, growth-minded firms.
Do the same rules apply to big firm and small firm acquisitions? And do each lead to the same results?
The answer to both questions is a resounding No.
While the legal and financial processing may look similar–and even use the same terminology (the ‘book’, data room, LOI, term sheet, etc.) — the strategies underlying small firm acquisitions are unique to that marketplace. They need to be.
With this in mind, what should guide your thinking when it comes to small firm M&A? A great place to start is Timing, Tuning, and Tweaking.
TIMING: When to execute an acquisition strategy?
In order to acquire, a buyer must be able to pay for the transaction. But many potential buyers mistakenly believe they either (1) must have the entire purchase price up front; or (2) can borrow the entire purchase price.
The most successful buyers have access to 10% to 20% of the potential purchase price available as equity. This equity base makes the buyer attractive to sellers and, more importantly, attractive to lenders. To have these funds available, a buyer should be considering an acquisition 1 to 2 years before beginning the process.
The buyer should also be able to prove to the lender that they can run a viable company, which is often done by providing evidence that the buyer is currently, or has recently, led a well-managed firm. Lenders care primarily about getting paid back.
Will the track record of your company inspire confidence in lenders? One approach to enhance credibility is to borrow a limited sum for investment in your own company and pay it back on time or early. Use of the SBA 7(a) loan program is ideal for this purpose. Creating a history of borrowing and repaying debt shows responsible stewardship.
Buyers purchase companies to accelerate growth. During the time that an acquisition is being considered, the buyer must consider the kind of growth they want. Is the buyer looking to stay within the small business designation market or to prepare to move into the full and open market? If the goal is to stay small, the acquisition will occur earlier in the buyer’s life cycle than if the acquisition is intended to launch your future.
TUNING: What are you really buying? And why?
Tuning acquisitions to complement your small business strategy is key to avoiding buyer’s remorse. Tuning starts with understanding what you are buying and why. For example, does your small business acquisition strategy suggest you acquire:
- Additional revenue in an existing core competency?
- A new core competency with enough revenue to compete for an upcoming IDIQ vehicle?
- A new contract vehicle with little or no revenue but great solicitation flow?
- Full-time Equivalent headcount because you have work and can’t hire sufficient resources quickly enough to avoid losing the award?
Any of these could be the correct answer, but which one applies to your firm? What your firm needs to succeed is based on your unique market position. And your acquisition strategy must translate that specific requirement into your plan of action. Working with an M&A advisor who understands the idiosyncrasies of your firm within your niche can accelerate this process significantly.
TWEAKING: Post acquisition integration – the key to accretive transactions
So, you have an acquisition candidate identified and the match to your firm and your strategy seems made in heaven. When do you start post-acquisition integration planning to ensure the newly merged team members feel the same way?
The key to successful accretive transactions is retaining most of the acquired resources, and that process starts well before the transaction is completed from a financial or legal perspective.
Acquisition integration planning starts with a well thought out strategic communication plan to ensure that both legacy and new team members see the value of the new larger entity.
“How will this improve our careers?” “What new cross training may become available?”
“How will our larger firm allow me to better use the skills, certifications and degrees I have?”
The conversations that produce the answers to these and other questions start with an open, two-way dialogue, which includes the vision of the future firm and the opportunities for all team members to contribute to building that future.
Planning how you will grow your firm, using both organic growth and acquisition strategies, lays the groundwork for success. Understanding how M&A fits into your game plan is a key determinant for success in 2022 and beyond.