Govcon M&A is hot. Three considerations to boost your 8a's valuation.

November 7, 2022 - The M&A market in government contracting continues to be very active. 

For buyers - they might be looking to get into new Agencies, get on a contracting vehicle to steer/retain work, or simply diversify their revenues. And, for sellers - they might be looking to move on to their next endeavor or retire after a challenging time running a business during COVID-19. 

Whatever the case might be, here are three considerations for 8(a) businesses when exploring a purchase (or selling) of a government contracting firm: 

Consider your Teaming Agreements (TAs) and Subcontracting Agreements (SubKs). Oftentimes a company’s TA or SubK have prohibitive language about the assignment or transferring of the agreement to another entity. 

For buyers considering a purchase of a company with these restrictive clauses, it introduces a level of risk of a contract / relationship to not be transferred over. And, for sellers it may drop a company’s valuation based on the increased risk. Regardless of your intent to sell in the short-term, always negotiate these clauses to allow for reassignment/transfer. It might be difficult, particularly when working with larger firms. However, we’ve seen a lot of success coming to a middle ground and making it more flexible. For example, we’ve often limited it to a specific finite set of companies to give the prime contractor a feeling of comfort that they won’t need to do business with one of their competitors. 

Maximize your backlog. Contract backlog is a very important metric when looking at buying or selling a company. And, with government contracting (unlike many other industries), it can often be forecasted. 

Maximizing your contract backlog relates to not only the dollar amount, but the duration for the contracts to be anticipated. For example, a $10M company whose major contracts end next year might be valued less than a $5M company who has secured contracts through 2026.

Secure as many contracts in less restrictive environments as possible. Not all contracts are created equal. Having a company that has demonstrated the ability (with revenues and contracts to support) to compete not just as an 8(a), but also in Small Business or Unrestricted procurements is valuable. While the 8(a) sole sources help from a revenue standpoint, it likely limits the pool of possible buyers. 

Instead, having an outsize portion of a company’s revenue in less restrictive environments opens the aperture for maximum transferability (and a company’s valuation). 

ACTIVE OPPORTUNITY – We have several 8(a) clients that are interested in purchasing an 8(a) company that specializes in IT and/or medical staffing. The company must have active prime contracts. Please reach out ASAP if this is something you would be interested in exploring.