Government Contracting & SBA(8a) businesses.
July 05, 2021
by a searcher in Dallas, TX, USA
Anybody that has done deals involving government contracting and/or SBA 8(a) certified companies (such as SDVOSB or Woman-owned) I would really appreciate your insight.
For companies with Federal Clients that deal with sensitive information you usually need a government clearance before you can take them on as a client; would it be possible to transfer over that clearance during the acquisition? such as when doing a stock purchase & the clearance stays with the legal entity? or it dependent on who the actual owner is?
Also I haven't seen private equity or any other investment firms going after SDVOSB or Woman-owned;
are these types of businesses worth buying if you're not able to maintain the certification? I constantly come across them & would like to know if it's an opportunity worth pursuing; and if you can actually do a roll-up with these types of businesses?
from Rice University in Washington, DC, USA
TS / SCI clearances are solid gold in the Defense / Intel industry, if you and your workforce don't mind working in dark hallways (SCIF's) all day. Clearances, as said before, are important for those delivering work, but if you're the owner anda growth oriented owner you'll need one as well - to pursue contract solicitations / shape new opportunities / walk the halls. Retaining a workforce that has a TS / SCI clearance is very difficult, largely b/c it can take 18 months to get a clearance and once an employee has one they can jump from contractor to contractor raising their incomes - due to the logjam of clearance processes.
PE Firms are in the industry, read the recent GOVCIO acquisition. Most PE firms value small businesses in the range of 6X-12X EBITDA. Lower end of the range is only small business contracts, limited agencies, reduced pricing, legacy capabilities - larger end of the spectrum is dependent on contracts competing "other than small" meaning competitive against the bigs, diversified agencies, modern capabilities (cloud, analytics) and profitable work.
The best financial exits for entrepreneurs are strategic acquisitions - consider Liberty IT. They sold for 30X EBITDA - you're reading that right - 30X. Most of the industry was baffled by this, not because of the company's reputation, but just because it seems so out of bounds. Booze Allen Hamilton bought them b/c they were on a tear on a specific contract vehicle, this contract vehicle (T4NG at the VA) was midway through its 10 year lifecycle, they had large market share, the onramp for more companies to grow is still 18 months out and w/ Booze buying this it allowed Booze immediate access to even more customers in a protected fashion for at least 18 months head start over the next 5 years remaining on the vehicle, and to continue growing the lion share of the work on that vehicle - think monopoly.
This above high-level yet somewhat concrete example is a great segue into how you can drive value for a govcon IT consulting business.
* Small SDVOSB or 8A firms can grow through JV's with big firms (ideally you partner w/ a small firm growing out of its size status that has a great reputation and wants to protect revenue streams from customers)
* Usually you compete for access on a contract vehicle (IDIQ or BPA) both at a government wide level and an agency wide level. We prefer to be 1 of 4 or 5 companies on a small contract vehicle for 5 years than 1 of 100 on a gov-wide contract vehicle; reason being is that we have better odds of winning work on a small vehicle whereas when work is solicited on a vehicle that caters to so many vendors, it's usually shaped before its pushed to market
* Civilian agencies have less restrictions than Defense and Intel (Markets = Civilian, Health, Defense, Justice, Intel)
* Capabilities that favor smaller teams rather than large systems integrators are better off to compete on w/ small companies
* Your best bet is finding your early customers, servicing them and growing capabilities for them
* You can try to expand in SLED markets but those are highly diffuse and hard to build BD pipeline around.
Of course, there are challenges within our industry....
* Pricing: The majority of the professional services revenue in this industry is IT contracting through modernizing old IT infrastructure, think volume not profit so there is a low resistance in labor category pricing and as a result when the market is hot it's hard to recruit talented, or really any technologists.
* Business Model: Clients often expect staff augmentation - so it's easy to turn into a staffing firm w/ lower margins and no brand value or value prop in the market
* Access: Contracts are king, those contracts that allow many companies on are usually competed against price (econ buys) and as such the only way to win work from an incumbent is through price (I've seen an $1B+ incumbent lose a 15 person strategy team to a 7 person new vendor b.c of price, even though the program office was unhappy it still occurs)
Some suggested resources:
*Bloomberg Gov - $10k annually
* Deltek GovWin - $5k annually
* GovTribe - $30 monthly
* Google: GSA Advantage and a company name to get public figures on their pricing labor categories to understand the market (most actuals are usually 5-10% lower than these GSA figures) - you can model revenue per employee / project, etc. - assume 20-40% project margin and 5-12% net on the business.
Suggested market entry: SDVOSB - expand across VA (nearly 100% Of VA small business contracts go to SDVOSBs)
So you have to ask yourself...If you started a business from nothing, gained socioeconomic status certification (can be a 2 year process), built relationships with clients and partner companies, defined your position in the market and are within earshot of landing a few more contract vehicles that will nearly guarantee your success from 10M revenue to $30M revenue ... would you sell that company? Or would you simply wait it out and enjoy the benefits of your hard work?
The rub in govcon is that lengthy sales cycles, and black box / arcane techniques of business development usually take more than 2 years for a small govcon business to go from nothing to something (say $5M) likely another 2 years to hit $10M, but once you're at $10M you likely have traction means in your sights, solidified internal processes, etc so why would you sell a $10M revenue company when you could likely double or triple revenue in as long as a time as it took you to get to $10M?
If a small business w/ an EBITDA in the range suitable for a search fund is up for sale - what are you buying? How long will your cashflow / runway be if they're willing to sell once they've done all the hard work to accelerate from 0-1. It's likely not worth it, unless you have a vision, credibility in the market, access to partners and customers and you have a well-defined roadmap to gain traction from day 1 - otherwise you're fighting a clock of levered debt and contracts that will expire. You could always buy BD too, or have key employees in BD positions, but ultimately you'll be the connection for marquee clients and partnerships at a $10M business probably through a $100M business.
All of that being said...I love our industry (and my company), I think we work on impactful projects that span the our nation's digital infrastructure, and I am still a believer that the USG is the largest change agent in the world and with effective and efficient operations we can provision the congressionally mandated resources (programs) for our neighbors as they were intended. Despite rhetoric to the contrary, all of my clients are earnest, hard working, and care deeply about delivering on their missions.
Sorry for being so long winded, hope this was helpful!
from Erasmus University Rotterdam in Philadelphia, PA, USA
Another level of clearance is to have DCSA check the cap table and people / investors with influence (usually majority investors). With a diversified cap table that was not a problem in our case but again you have to go through the process. The investors are "cleared" but do not get security clearance.
Finally, certain contractors (veterans, woman owned etc) get preferential treatment when bidding on contracts i.e. they get better rates and thus are more competitive. You lose that advantage when you buy as search fund such federal contractor as you will lose that status.
Biggest issue in the federal contracting space is not getting contracts but finding staff to put on contracts. This staff needs security clearance and a certain skill set. Very very difficult to find.
I would not invest in a roll up in this space.