Column: Considering Leaving the Small GovCon Roller Coaster?
Answer These Questions First
By Scott E. Semple, Senior Advisor and Sharon B. Heaton, Founder and 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.
It’s hard to argue with the logic. With wildly competitive on-ramps and new contract vehicles, combined with changing Small Business Administration set-aside regulations and a hyperactive Mergers & Acquisitions (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 Dept. for 10 years and a company sprang up around you. Almost without noticing, you have 73 Full-Time-Equivalent employees 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 is it your team of capable staff members?
Who has looked at your financials as an investment, and not just for annual tax reporting?
Maintaining orderly financial data and reporting is important to any well-run business, and it pays dividends with financial institutions and the Internal Revenue Service.
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 (Earnings Before Interest, Tax, Depreciation and Amortization) 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? Are you underreporting what your real net income is? What’s hiding in the numbers that might scare a buyer away from a deal? Are your financial statements showing expenses that aren’t related to the business going forward? Are you prepared to explain each item of expense and its value to the business being sold?
Identify the expenses that potentially could be trimmed going forward and explain them to buyers. Present a pro forma income statement for the future so that the buyer can estimate the impact that will make on future years, likely resulting in additional value to the business at sale.
Who is 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 financial journal entries on your own in an online application 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.
For further information or assistance email Scott Semple at ssemple@sbliftoff.com or visit http://www.sbliftoff.com.
