In sales, experts always say “know your customer.” That advice also holds true in large part for owners of Government and Defense industry firms considering the sale of their business. In this year of transition and uncertainty, sellers can complete successful transactions, but they need to be aware of how the market psyche has changed and be prepared to execute their transaction strategy perfectly.
All’s not been fairy tales and unicorns for most GovCon industry participants over the past couple years. Matters have only become more volatile during the first four months of 2013. Like almost everyone else, the bigger firms are experiencing contract delays, sequestration cutbacks, mistreatment by their primes (when they are a subcontractor), a squeeze on their rates and margin, reduced confidence about holding onto incumbent work and procurement changes where their unrestricted (Full & Open) work gets pulled into Small Business or other restricted competitions. Can we get a witness?
Further, the larger industry firms are often at the front of the line with respect to other treats like “visits” from agency inspector generals or the DCAA, labor category classification reviews, DOL inquiries regarding employee/independent contractor categorization and declining public share prices (after missing or reducing their business projections).
While misery loves company and buyers may associate with sellers whose performance has been impacted by some of the above, the larger strategic buyers are being hyper-selective because they really are not looking to spend money (much less, in their minds, overpay) for more of this agony and frustration. Private equity has filled some of this void (albeit, generally, at lower valuations).
What do these market attributes mean to business owners looking to maximize the valuation of their business? Even for the lucky few firms less affected by the above, you need to aware of this buyer sentiment (formed from the above experiences) and be ready to explain why and how your business has avoided these market vices via its reputation, intellectual property and/or market position. In the sale process, your customer is the buying community and you need to treat them as such. It’s critical to diffuse the predispositions that the buyers are experiencing themselves and casting onto you. Perception can be as powerful as reality.
For those experiencing some (or all) of the above trends, this market requires careful consideration of transaction timing, comprehensive preparedness and a thoughtful strategy to navigate these perceptions and realities. Timing-wise, while specific circumstances do not always allow for this, owners generally control when they choose to sell their company. Ideally, sellers should try to avoid periods when government behavior (and the timing or outcome of such behavior) on items like contract recompetes or material new business opportunities can materially affect your businesses’ prospects.
Secondly, sellers need to be fully prepared for the buyer inquiry and skepticism regarding profit margin continuity and recompete win rates (both have been under pressure over the past few years). Similarly, owners need to be ready to defend why their work is mission critical (vs lower priority/more discretionary) and their firm’s value proposition is distinctive.
Public market valuations for government and defense firms remain near all-time lows reflecting the tighter budget environment and the market’s elevated business risk factors. The larger industry firms are almost all actively looking to acquire firms that are better positioned for this market than themselves and are able and willing to pay premiums for such targets. However, to receive a valuation above the 5-6X EBITDA range (which Wall Street’s placing on the industry publicly-traded firms), sellers need to effectively convince cynical and skeptical suitors as to why their prospects are brighter than the market overall and they belong in this top category.
Bob Kipps has more than 20 years of experience providing transaction advisory and financial consulting services to defense and technology firms. Prior to founding KippsDeSanto, he served as a managing director in Houlihan Lokey’s Washington office and helped lead the firm’s Aerospace∙Defense∙Government industry investment banking group.
Named the 2007 Dealmaker of the Year – Investment Banker by the Association for Corporate Growth’s National Capital Chapter, Kipps has also held executive posts with Peterson Consulting and Tucker Alan, advising aerospace and defense, engineering, construction and IT companies.
Kipps graduated from the University of Virginia with distinction as a bachelor of science in commerce. He is registered with FINRA as a General Securities Registered Representative and Principal (Series 7, 63, 24, and 79).