Are Set-Asides Bad For You When You Sell Your Business?

Almost every small GovCon company leverages at least Small Business (SB) set-asides and many also leverage other programs such as SDVOSB, WOSB, 8(a) and HUBZone. These set-side programs are obviously very beneficial in helping small companies win business and grow.

But is there too much of a good thing? Some owners we talk to do not realize the negative impact of set-aside revenue on their ability to sell their company.

When a company acquires another company, they have 30 days to recertify on the contracts of both the acquired company and the acquirer’s own contracts. If both companies had revenue from small business (SB) contracts and are still able to recertify as SB post-closing (i.e., after taking an average of the past 5 years of revenue of both companies) then everything is still fine at that point in time. So far so good.

But what if your business has 50% of its revenue coming from SB and 50% coming from another set-aside type such as WOSB? If a given buyer only qualifies as SB and not WOSB, they will be able to perform your WOSB contracts through their periods of performance but will be unable to bid on the recompetes if they come out as WOSB again.

Now take pipeline into account. If you are a WOSB you may well be pursuing lots of WOSB new business opportunities in your pipeline but a non-WOSB buyer cannot pursue WOSB opportunities which means that portion of your pipeline will be washed away at closing and growth is likely to be slower that it would as a WOSB.

In the case of both recompetes and new business, a buyer could pursue them as a sub to a WOSB company or form a JV with a WOSB but in neither case can they bid for 100% of the work. That affects value that a non-WOSB buyer would get from buying your company, likely resulting in a lower offer or no offer at all.

Now take it to the extreme. You have probably seen SB’s that also qualify for multiple other set-aside categories. Let’s say 25% of their revenue comes from each of SB, SDVOSB, WOSB and HUBZone. That means a buyer who only qualifies as SB is likely to only apply full value to 25% of your revenue streams and discount the other set-aside revenue streams coming from backlog and attribute very little value to the pipeline they cannot pursue as prime.

We are not against set-aside programs. We simply want to be sure you are aware of the problems coming down the road and can take appropriate actions along the way to mitigate them.

If you want a better outcome when you sell your GovCon business, please feel free to reach out to us here at Rock Hall Partners, LLC now. We would be happy to enjoy a coffee and a chat with you, strategizing ways to improve your eventual sale.