The sale of a home and the sale of a business may differ greatly in the technical details, but the basic approach is similar: assess the value of what you’ve got, polish and improve to extract maximum value, and make sure to dot and cross the legal/financial i’s and t’s. Each step is crucial to stacking the profitability deck in your favor.
In a previous blog, we provided a how-to for enterprise valuation and discussed where it fits in your strategic planning. Now it’s time to see how valuation, improvements, and due diligence contribute to a lucrative outcome when you decide to sell your GovCon.
1. Take stock of what you’ve got.
If you haven’t already done so, download our Enterprise Valuation Calculator and run the numbers for a clear-eyed assessment of what value your company would likely command on the market. Also, talk to an investment advisor for an independent estimate of market value.
2. Make improvements for maximum value.
Here are six areas where improvements can increase your company’s valuation:
- Transition from set-aside contracts to full and open contracts. The federal government has created programs that set aside contracts for businesses that meet certain criteria, such as small, disadvantaged, and veteran- or woman-owned. If the buyer does not meet the criteria for contracts you’ve been awarded, regulations may prohibit their transfer or future rebids.
- Increase organic revenue growth. This means you increase output and boost sales internally, using your firm’s own resources, not through mergers or acquisitions. Increasing organic growth is not generally a short-term strategy, as it takes time to acquire new customers or expand sales with current clients.
- Improve profit margins. There are a variety of ways to increase your profit margin (percentage of revenue remaining after subtracting the cost of goods sold and indirect costs), but beware—some come with major caveats. Here are a few examples:
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- Raise prices – Determine first, however, whether sales would drop because competitors are charging lower rates. Also, consider whether a higher price would mean fewer customers.
- Reduce cost of goods sold – Are you paying unnecessary labor costs, such as too much overtime? Is there room for price negotiations with suppliers?
- Eliminate a product/service – Run profit margins for everything you sell, keeping an eye out for a product that might not be generating enough sales compared with production costs.
- Reduce indirect costs – Do you have any operating costs that can be reduced or eliminated. Also, track the costs you incur that will not transfer to a buyer. For example, the portion of owner compensation that is higher than the market average could be an add back. Excess or one-time, non-recurring costs can be added back to your income if a buyer will not incur the cost.
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- Increase contract backlog. Potential buyers see increased or decreased risk according to the speculative nature of a company’s revenue stream. If a large percentage of your projected revenue consists of new business, buyers perceive a greater risk. If contract backlog makes up a large part of total revenue, the lower perceived risk means a higher valuation.
- Transition from subcontracts to prime contracts. Potential buyers consider a backlog of prime contracts as more valuable than subs. As a prime contractor, you have more control with a direct relationship with the customer. This makes it more likely to gain insights that could lead to future sales.
- Acquiring key indefinite delivery/indefinite quantity (IDIQ) contract vehicles. When you win an IDIQ, the agency has awarded you the opportunity to bid on individual task orders under an umbrella contract. Although the competitive field is reduced to only approved vendors, you must still beat out your competitors.
3. Get your internal house in order.
In addition to strategic valuation moves, you must prepare for due diligence—the buyer’s investigation of your business, legal, and financial operations prior to sale. Make sure you have the infrastructure in place to support all requests. This includes:
- A clean accounting system that can easily churn financial reporting, such as income statements, balance sheets, and project reporting. A must-have report is a contract waterfall. This report will estimate revenue, cost, and profit by existing job and for your pipeline. A contract waterfall is one of the most highly reviewed reports. We describe this in our previous blog, Contract Waterfall – An Essential GovCon Tool.
- Solid business development practices. A potential buyer may want to explore vendor and customer relationships, major competitors, advertising campaigns, market research, and marketing materials.
- A fully documented infrastructure, including legal, human resources, contracts; past, pending, and threatened legal and liability issues; permits and licenses; and intellectual property.
Conduct a mock due diligence before you start the transaction process to ensure you are strategically prepared and have all relevant documents in order. There are many items on the list. It pays to run through a sample and start to organize your information and identify gaps in advance. You will look good and competent having your information organized and available. This will provide a sense of comfort to a buyer. On the other hand, waiting to prepare your data room can hold up your sale process, or worse, cause a deal to fall apart when diligence drags on and buyers get cold feet.
Consult the GovCon financial experts at CAVU for experienced guidance as you contemplate, prepare for, and navigate through the sale of your business.