Increasing Your Company’s Value Part 3 – Management Infrastructure

by Michael Smigocki, CPA, CVA, ABV, Senior managing director, Federal Strategies Group LLC

One of the most overlooked areas for the growing contractor is its investment (or more correctly stated – lack thereof) in a strong management infrastructure.

Fear of future contract opportunities not happening, efforts to keep rates as competitive as possible, inability of the CEO to delegate, among others, are all typical reasons for this lack of infrastructure investment.

However, such decisions made for near-term reasons can significantly impact (i.e. reduce) the value of your company. This article will discuss the role management infrastructure plays in the value equation.

A buyer’s perspective

There are many different aspects to a management infrastructure including Operations, Finance/Accounting, Human Resources, Contracts, Information Technology, Business Development, Proposal Management and Program/Project Management. Each one of these areas plays a vital role in the growth and success of the company. While it is true that many prospective buyers will implant their own management team/infrastructure into the target company after acquisition, there are many other buyers that plan on leaving things intact.

From a buyer’s perspective, your Program and/or Project Management team is the most important. The relationships that these persons hold with your customers are critical to ensuring continued contract performance as well as facilitating additional growth opportunities post-acquisition. If a deal is subject to any sort of earn-out (which many deals are), having strong Program/Project management in place can significantly aid in its achievement.

The Finance/Accounting department is another important area. The ability to produce timely and accurate financial statements and reports, manage the financial performance of the company and its cash flows and project future financial performance and identification of issues before they occur, are all valuable traits of an effective department. Understand that your historical and projected financial performance will be the starting point for developing the valuation model by the buyer. If there is any uncertainty in this financial reporting, the result will be a decreased valuation to “hedge” against this uncertainty.

Human Resources, Contracts and Legal all play extremely important compliance roles within the company. I have been involved in a number of due diligence efforts where contractual, Service Contract Act and other legal issues were identified by the due diligence team but were unknown to the seller. The identification and possible elimination of any such issues should be performed before a company considers itself a sale candidate.

Issues to consider

Some suggestions you should consider as it pertains to the infrastructure of your Company.

1. Don’t skimp. Hiring strong management personnel will be rewarded with satisfied customers, better financial performance and an increased valuation.
2. Implement a Performance Management System. Tying one’s compensation and bonus structure into the achievement of performance goals and objectives is the best way to incentivize and reward desired performance. The goals for each area of management infrastructure should be documented and measurable objectives determined for both the department and each individual within it.
3. Consider “golden handcuffs” for key personnel. Many companies will use various forms of retention incentives (stock options, phantom stock, deferred compensation, etc.) for their key personnel. Knowing they will be rewarded as part of a sale event helps ensure loyalty and dedication towards its achievement.
4. Make the CEO expendable. For most of the CEO’s I have worked with, this is the most difficult strategy for them to implement. Their belief (and perhaps it is true in many instances) is that they are the best at what they do and no one could replace them. However, the ability of an organization to run on its own, without the day-to-day input of the CEO, is a characteristic of having a strong management infrastructure.

Conclusion

While it is difficult to place a numerical value on having a strong management infrastructure in place, my experience has been that not having one has led to many deals not being completed and for those that were completed, having material contingencies placed in the deal. Always remember the axiom of “the greater the risk, the lower the price” as well as its inverse “the lower the risk, the greater the price.” Having a strong management infrastructure significantly reduces the buyer’s risk!

Michael Smigocki, CPA, CVA, ABV is the senior managing director of Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, forensic accounting and expert testimony services to the government contracting and technology industries. He can be reached via email at MikeS@FedStrat.com.

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