Column: M&A for Small GovCons -- Buying Without Buyer’s Remorse!

By Sharon B. Heaton, CEO and Scott Semple, Senior Advisor, sbLiftOff

      Small government contracting founder/owners are participating in the business acquisition market in ever-growing numbers, fueled by the general market trends we detailed in our previous article – cheap money, looming capital gains tax increases, and a clear understanding that smart acquisitions can fast-forward growth. (See 11/5/2021 Set-Aside Alert).

      Expanding what was once an exclusive “Large GovCons Only” membership club, acquisitions by sub-$30 million revenue business owners have brought small business mergers and acquisitions (M&A) into focus for many forward-leaning, growth-minded firms.

      Do the same rules and--more importantly--results apply to big firm and small firm acquisitions?

      The answer 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 and need to be unique to that marketplace.

      What should guide your small firm M&A thinking? We can point to three important issues: 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. Many potential buyers mistakenly believe they either (1) must have the entire purchase price saved; or (2) can borrow the entire purchase price.

      In fact, 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 1-2 years in advance of beginning the process.

      The buyer should also be able to prove to the lender that they can run a solid company, generally 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?

      Each of these could be the correct answer, but which one is applicable for 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 firm 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 the majority 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 skills cross training may become available?” “How will our larger firm allow me to better use the skills, certifications, and degrees I have?”

      These conversations 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.

Conclusion

      Planning how you will grow your firm, using both organic growth and acquisition strategies, creates your roadmap to success. Understanding how M&A will factor into your game plan is a key factor for assuring success in FY2022 and beyond.

For further information or assistance email Scott Semple at ssemple@sbliftoff.com or visit http://www.sbliftoff.com.

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Column: M&A for Small GovCons -- Buying Without Buyer’s Remorse!

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