Column: Increasing Your Company's Value Part 4 - Product/Service Offering
by Mike Smigocki, CPA, CVA, ABV
Senior managing director, Federal Strategies Group LLC
My previous articles on increasing your company’s value have focused on how financial performance, the types of contracts you are performing under and your management infrastructure impact valuation from the perspective of the buyer. This last article will discuss how your product/service offering can impact the value of your organization.
Valuations
Companies doing business with the federal government provide a wide range of products and/or services to the government. However, in the eyes of a prospective buyer, your product/service offering can generate a wide range of valuation.
Factors that any buyer is looking for include:
- Opportunities for growth within the marketplace you are servicing;
- Ability to generate increasing profits;
- Ability to limit the competition.
Regardless of what your company provides, the best strategy that you could employ is to differentiate yourself from your competitors by any means possible. When bidding on contract opportunities, be sure the proposal answers the question “Why Choose Me?” throughout its contents. In this current highly-competitive environment we are operating in, product/service differentiation is a must.
Factors that increase valuation
When analyzing your current product or service offerings, and especially if you are contemplating entering new areas, understanding the viewpoint of a prospective buyer and the value drivers they employ, and aligning your offerings with them, will help increase your valuation. Some of these factors include:
- 1. The product/services that you offer should be aligned with the growth areas in the federal budget.
Most companies conducting acquisitions are seeking targets that have the ability to grow organically. In addition, they want to know that the marketplace that you are servicing (areas of the budget) is also growing. This provides them with the best opportunities for growth into the future, reducing the acquisition risk that they face. Always remember that the lower the risk of an acquisition, the greater the value a buyer can place upon it.
- 2. Performance of highly-specialized/in-demand services is desired.
A buyer would prefer to acquire a company that is performing higher-end services as opposed to “commoditized” services. Commoditized services are facing the greatest amount of competition and pricing pressure currently in the industry. Performing higher-end services that are in demand of the customer provides the ability to negotiate higher rates and greater profitability for these efforts.
- 3. Become a “solutions provider”.
This strategy can be the best way to differentiate your company in the marketplace. The ability to provide a full solution to the government’s issue or problem better differentiates you from those companies that can only provide an element of the solution. If you are unable to provide the full solution, you will always be relegated to a minority role on the team and unable to capture the attention of the government buyer.
- 4. Having some form of unique technology or intellectual property.
Once again, this is another form of differentiation. Having a technology or form of intellectual property can be an integral part of being a solutions provider. This too provides for the ability to charge higher fees for its products/services and thus achieve higher profit margins. Research and development investments in technology or other intellectual property have resulted in tremendous returns on those investments upon sale of the company.
- 5. Performing work with higher security clearance needs.
Having the necessary facility security clearances, as well as having personnel with high security clearances enables the company to pursue the higher-end contracts where competition can be greatly limited. Having such security clearances, especially to a buyer that does not have them in place, will result in an increased valuation.
Hot markets of today
So what are some of the product/service areas that are hot in today’s marketplace? These include:
- Healthcare IT
- Cybersecurity
- Big Data
- Intelligence Agency solutions.
Aligning your current/prospective product/service offerings in these areas would result in a higher valuation for the company.
Conclusion:
This series of articles has discussed the various value drivers in the government contracting marketplace. When a company undergoes strategic planning, it should always look to the ultimate finish line (potential sale of the organization) and what strategies it could employ today to maximize the value upon sale. Aligning the company with these value drivers will help ensure that this occurs.
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 .
