What Buyers Are Looking For – Key Valuation Drivers

April 1, 2013

By Greg Hogan, Senior Vice President, SC&H Capital & Justin Reaves, Senior Associate, SC&H Capital

Federal Government contractors have long relied on acquisitions to supplement organic growth, diversify capabilities, gain access to specific contracts and agencies, increase market share and achieve earnings estimates.

 

In the not so distant past, rising Federal budgets created an environment that was conducive and forgiving for rapid fire M&A.  However, in today’s more austere federal budgetary environment, acquirers are implementing a more disciplined approach to targeting and executing strategic acquisitions. Buyers are focusing on acquisition targets that possess several key, value-building characteristics.  Acquisition targets that have these characteristics will likely attract higher valuation multiples in acquisition scenarios.

 

1.       Market Position: What does the company do for its customers?

 

Companies solving mission critical problems and providing differentiated services to well-funded agencies receive more attention from buyers.  Differentiation implies higher pricing power and security of future revenue streams.  Customer intimacy and knowledge of key customer issues is also important, as many buyers associate customer intimacy and depth of expertise with long-term stability.  Customer interviews prior to closing are now routine as buyers seek to confirm differentiation from the customer’s point of view.

 

2.       Revenue growth: Is the company growing?

 

In years past, many contractors were growing revenue as the Federal Government spending levels grew.  Today, far fewer companies can show any growth at all.  Buyers are seeking targets with consistent double digit revenue growth, and strong prospects to continue growing at the same pace on long term, funded contracts.

3.       Profitability: Does this company have strong earnings margins?

 

Buyers today are increasingly focused  on gross profit margins (GPM) and EBITDA margins, whereas some buyers in the past focused more on revenue. A strong GPM shows an ability to manage the cost of generating revenue, particularly important in an environment of bill rate pressure from the government.  In addition, strong EBITDA margins show the company’s ability to generate profit and cash flow through the effective management of indirect.

 

4.       Contracts: What is the company’s contract composition?

 

Budget pressures have led to additional diligence around a company’s contracts as buyers seek to understand the composition of future revenue streams.  Buyers seek diversity, visibility, predictability and stability in a company’s contract base.  This can be the result of a target’s positions on key contracts at well-funded agencies or a contract backlog with a high percentage of long term, full and open, prime contracts.  Tracking both existing contracts and pipeline opportunities in a “Contract Waterfall” can be beneficial to owners to support future revenue projections and demonstrate growth potential.

 

The changes in the budget environment have shifted the focus for acquirers and raised the bar for acquisition targets.  Target shareholders that desire to realize maximum value in a liquidity transaction should be aware of the significant change in the M&A landscape and tailor their strategic plan accordingly.

 

For more detailed information concerning the current state of the M&A market for Federal Government contractors, please contact Greg Hogan (ghogan@scandh.com) at (410) 403-1500.


Federal Allies News April 2013

April 1, 2013

The March 27-28 Region 6 Roundtable produced by Mid America Industry Government Coalition in collaboration with Federal Allies Institute Oklahoma Chapter was an informative, successful and fully-subscribed event.  With FAI’s input the Roundtable set into motion a grassroots gathering of comments on Mentor Protégé to be followed up upon at Federal Allies Institute’s Washington Days Conference May 6-7, 2013 in Washington, D.C.  The beneficiaries of our collective comments are the U.S. Small Business Administration and other areas of the Federal government.  Regulators will accept the comments, consider and respond to them before making final decisions.

 

As the readership of Federal Allies News knows, the National Defense Authorization Act contains many small business issues, including Mentor Protégé that the Federal Allies Institute has tracked and promoted dating from the 111th Congress unto today.

 

We note the government’s move online has not produced a fundamental shift in the nature of notice-and-comment rulemaking. A decade into e-Rulemaking, and four years since the Open Government Memorandum – that promised to incorporate rulemaking within a Social Media setting – it has not achieved the gains in efficiency and democratic legitimacy that were anticipated.  It is simply not used to any great extent, but we certainly appreciate the effort and look forward to the day that e-Rulemaking may be the norm.  For now our engaged and informed members still use the traditional methods of notice-and-comment.

 

As you attend Washington Days Conference to find your next contract and to establish new relationships, should you have comments for rulemaking we encourage you to voice your comments at Washington Days in person.

 

David T. Boddie

Executive Director


Register for Washington Days Conference, May 6-7, 2013

April 1, 2013

By Ralph E. Winnie, Jr.

As a national non-profit dedicated to small business and federal acquisition best practices, Federal Allies Institute is proud to host its annual Washington Days Conference from May 6th-7th, 2013 in the heart of our nation’s capital, Washington, D.C.

Federal Allies recognizes that business development and relationship building go hand in hand, especially for small and medium size enterprises.  Washington Days Conference is your opportunity to develop and maintain close personal relationships with DoD, the Agencies and Congress.

On May 6th we will focus on the Business Development opportunities important to you, plus will provide registrants with a tool kit to effectively understand and navigate current and pending changes to Mentor Protégé programs resulting from the National Defense Authorization Act of Fiscal Year 2013.  If you would like a plain English explanation about Mentor Protégé, from this nation’s top experts, then attend Washington Days Conference on May 6.  We’ve got it covered.

A wide spectrum of people from diverse socio and economic backgrounds help to shape the conference agenda to ensure the event highlights their business sectors and objectives.   The results?  “Many discussions will be tailor-made, one-on-one education planned, and match-making sessions where informal question and answer sessions will explain the intricacies of federal contracting,” said David T. Boddie, Executive Director, Federal Allies Institute.

On May 7th Federal Allies extends those relationship building opportunities to Capitol Hill to your members of Congress and their staffs and to relevant committees of both Senate and House that impact how you do business.

On May 7th Federal Allies once again “marches” on Capitol Hill and carries with it banners for continuous improvement to Mentor Protégé and the many other small business issues Federal Allies is known to represent and champion such as Veterans Entrepreneurial Transition Act.  This is an excellent opportunity for all involved, and for those who would like to learn how to conduct your own pro-business Congressional Office Visits, to walk with us and underscore the year round work accomplished by FAI’s highly effective Government Relations Program.   Previous advocacy work on the Hill and with the Agencies, represent our calling card, and is the foundation on which we can offer you opportunity to advance your legislative and rulemaking agenda.  FAI’s relationship building plan for freshmen Senators and House representatives of the 113th Congress is best voiced by U.S. Representative Markwayne Mullin (OK-2).  “Thank you for all the work that you do. As a businessman myself, I know the difficulties businesses are faced with over regulation from the state and federal government. I hope that you enjoy your time in Washington and look forward to seeing you,” said Congressman Markwayne Mullin, (OK -2).

 
That said, the goal is for every registrant to come away from Washington Days Conference 2013 with a keener perspective of the inter-relationship between government and business and with a foundation for growth and business development in this challenging economy.

Federal Allies will actively encourage all registrants at Washington Days Conference 2013 to
establish and build personal and professional relationships to ensure your success in the future.  If you have not already done so, register now to attend Washington Days Conference 2013 by visiting FederalAllies.org.  Should you have any questions, please call (571) 217-0823.