As a search investor I'm a big fan of gov't-related businesses as a search opportunity (biased though as my career is as serial GovTech entrepreneur).

In the last year, I've seen an increase in number of searchers looking at gov't-related deals as well as investors looking into the space.

On federal revenue, a lot of the value is in the details (short or long-term contracts, prime or sub-contracts, set-aside or full compete contracts, how long left in contracts, how much customer concentration).

Happy to talk to any searchers / investors looking at gov't-deals - send me a DM or sressler at gmail.com.

Live Oak Bank has an entire vertical dedicated to and deep industry experience in the government contract niche. Email me at [redacted] to discuss further.

Here are some thoughts based on my recent work with a friend interested in the space. Happy to chat live as you further flesh this out too.

Based on my experience evaluating larger middle market business in the sector, in general, I think it can be an interesting sector and very leveragable if you can find a smaller company with long term contracts, successful history renewing, and in a niche segment that is more differentiated and attracts less attention from larger vendors. However, margins tend to be somewhat thin if providing a more generic service and need to attach to good programs/contract vehicles that are growing, and ideally diversified, otherwise can be pretty concentrated and limited organic growth.

General pros of strong companies in this segment:
1) plays in a segment that has strong budget support and is a growing focus area for the DOD, providing a tailwind for new contracts and a big pie to win business from over an extended period of time
2) ideally, multi year contracts and a history of renewing
3) if you play in a specialty segment/more niche then can be protected from larger generic contractors which helps insulate you
4) If you have a good operational team, can drive good margins from fixed fee contracts
5) Good roll-up opportunity within smaller players that can be mostly debt financed
6) Purchase multiples tend to be decent for smaller providers (<10x for middle market companies and lower for smaller)

Key focus areas and considerations when thinking about a specific biz in this sector:

* If founder owned or smaller, key man risk is a big focus. How critical are the current owner’s relationships with contracting parties? Are there a couple key producers/relationship managers at the company? How are contracts sourced? Through direct relationships or agents?
* Funding sources and lifecycle for the government platforms you are supporting. Are they long term or more susceptible to budget risk. Long term relationships, stable platforms, and stable funding are key
* Platform / contract concentration is often high in smaller contractors. Not necessarily a deal killer but want to feel really good if you are relying on a couple large contracts. Sometimes there are lots of smaller contracts under a large contract that can help mitigate.
* Ties into contract structure – fixed price or cost plus – if good at managing, fixed price can lead to better margins. Do you have to recompete every year? F&O contracts not guaranteed but if longer term and history usually tough to get booted.
* How big and long term is the contract backlog and is it funded via defined budget programs yet or unfunded
* Contract renewal history – ideally see lots of success renewing and staying on contracts
* History of winning and contract award slippage
* How differentiated / specialized are the contracted services the firm is providing? If less specialized, how does the firm compete with larger providers that may have cost advantages?
* Our institutional view is more generic contractors/consulting firms are tougher long term business models given the lack of differentiation
* Margin trends by platform and overall. If less differentiated, usually lower margins. In general, margins are lower than other tech enabled services type businesses.

Hope this helps!

Tough space to break into which makes acquisition ideal. Although the extreme administrative burden and contract compliance means that often businesses get totally built around federal work. That is the natural result since it is its own world (has its own vocabulary, culture, etc.). There was one for sale on this platform... contact: Justin Schaffer

Our experience with Federal is it can be good or bad - no different than commercial. The biggest issue we typically see if often smaller companies in the Federal space are subcontractors to large OEMs and/or they win much of their work based on a small business or minority ownership set asides - can really complicate your exit strategy