Operating capital for Contractor focused on public bid market

October 15, 2021

by a searcher from Georgetown University in Raleigh-Durham, Durham, North Carolina, USA

I'm early in diligence (pre-LOI) with a contractor with 90% revenue coming from public bids. Appx $10M top line with 10-13% adjusted EBITDA margins. A balance sheet from within the last 3 months shows the company holding over $1.8M in cash. This seems high to me, but I'm trying to dig in to determine if that is a reasonable/expected need going forward, as obviously this would dramatically impact the ability to finance the deal.

Specifically, I'm wondering if anyone has experience in determining a conservative amount of operating capital required for companies operating in the public bid market and if so, how I should be thinking about and calculating this (ie-what variables go into this analysis?)

Thanks!
Matt

Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA

Great question. We recently financed the acquisition of a construction company that was in a similar situation. You will need to do some cash flow forecasting and look at past collections to determine the working capital need going forward. You will also want to check to see if they need some of that cash on hand for bonding. Often times keeping equity in the company and maintaining liquidity is needed to keep their bonding level where it needs to be. On the last transaction we did we were able to secure the client a large working capital line of credit to provide capital. They also structured the deal keeping liquidity in the company for bonding as part of the purchase price. Happy to discuss any time. Best to reach me at redacted Thank you.

Reply by a searcher
from Massachusetts Institute of Technology in Colorado Springs, CO, USA

What kind of public bids does the company go after? Is this providing goods or services? Is it the Federal government or state and local? I have a lot of experience in DOD work and run a company that focuses on that kind of work. Happy to provide some more insight, but it's a big space so would need to know a bit more.

Another aspect to think about is whether the company goes after Least Price Technically Acceptable (LPTA) or Best Value opportunities. One is more financially competitive than the other.

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