4 TIPS WHEN LOOKING AT GOV'T-FOCUSED BUSINESSES
I came into search fund investing after spending my career as a serial entrepreneur with 3X exits in government technology. As such, I often connect with searchers that are looking at government-related businesses.
As you may guess, I'm generally a fan of gov-related businesses as they hit a lot of the key items looking for in search - sticky recurring customers who pay their bills and grow their spend with you if you do a good job.
But like all sectors, there are good government businesses and bad government businesses.
Here are three tips to focus on when looking at gov't-focused businesses:
1 - Full & Open vs Set-Asides - Across federal, state, and local government, there are numerous set-aside programs to encourage government contracts to be awarded based on certain socio-demographic criteria (small-business, HUB-Zone, women-owned, veteran, etc). When you look at buying a gov't-focused business, look at the contracts and see how much was won as set-aside contracts (which may not transfer) and which were won as full & open competition. There are often limitations in set-asides in terms of transferability as well as revenue $ caps where can't grow above.
2 - What's the Competition? - Government is full of niches whether it is military vs civilian government, state vs local government, big vs small cities. Some areas can be a big market (say federal gov't project management consulting) but high competition as there's little differentiation, new outside entries can hop in (often companies focused on private-sector flood into gov't contracting when the economy is bad) and it gets down to lowest cost (and low margin). But other areas (think niche nuclear, Aerospace, regional focus, etc) require specific clearances and certifications and certain past performances that limit competition and keep margins high.
3 - What's the timing? Government contracts are often multi-year deals - this is great as you have stability and can forecast out years. When you are looking at a government business, there is often a large contract expiring with an upcoming recompete that the owners say "is a lock" and you have to figure out what's the truth to model out. You are in an adverse situation as the information is limited, the customer is limited in what they can share with you, and you'll have to come to your own conclusion. Be skeptical and try to get as much information you can from former/current employees, former/current on the government side, other contractors on site.
4 - What's the upside? Experience and good past performance is a good calling card to move into other areas in government. Government agencies love to buy more from existing reputable vendors - what more can you sell back to them? Related agencies trust their peers - if they have success with local cities, they should be able to go to counties and special districts? Success in one branch of the military, they should be able to move into another branch. Dig into what other additional offerings or parts of government they've explored (often they haven't) and where the lowest hanging fruit might be.
Are you a searcher looking at government deals? What's your experience - where do you agree/disagree with the above?
As always, let me know if I can help - DM or [redacted] . Sign-up for my monthly musings at bit.ly/etamusings