Did you realize making your GovCon company bigger and more profitable does not necessarily translate into making it more valuable or easier to sell? If like most small and mid-sized government contracting companies you are relying heaving on contracts awarded on the basis of any one or more set-aside categories (e.g., SB, SDVOSB, WOSB, 8(a), etc.) you need to bear in mind the size standards associated with the NAICS codes you are working in.
While your company is still somewhat small, you may expect to find a buyer large enough to acquire your company but also small enough to recertify as still being a small business under those NAICS codes after combining your 5-year revenue average with their own. That means they still have runway in which to position to graduate and compete as a Full & Open company.
Over time as your company gets larger and your trailing 5-year revenue average approaches the size standards, however, it becomes unlikely another company can acquire yours and still recertify as a small business. The more likely buyers will be other “large small businesses”, themselves still under the size standards, or companies that are already Other Than Small Business (OTSB).
If a large small business acquires your company, and collectively the companies now exceed the size standards, under the latest SBA rules the buyer could still use all of the small business IDIQ contracts held by both companies to pursue new small business task orders. They would not, however, be able to pursue new small business IDIQ contracts nor small business contracts, only new task orders on existing small business IDIQ contracts.
It will also limit the period in which the buyer can use those small business IDIQ’s. For instance, if they have GSA OASIS+ small business contract, they would be able to pursue new task orders for the initial 5 year base period but would be unable to recertify as SB at the 5 year mark in the IDIQ period of performance so lose that 5 year option period. Buyers are going to take those limitations into account when determining the value they are willing to pay for your company.
The issue is more extreme for Full & Open buyers. If a large company acquires your business, it will be recertifying as OTSB and under the SBA rules will be unable to continue bidding any new small business task orders on any of your small business IDIQ contracts. Their recertification will also eliminate any small business contract or task order opportunities remaining in your pipeline. Clearly that impacts what a F&O buyer is likely to offer for your company, if they are even willing to do an acquisition with a lot of small business revenue exposure.
So as you plan for the future and when you might want to sell your company, you should take into account how size can affect things. In particular, if you have in mind a purchase price at which you need to sell to hit “your number”, you need to have a clear-eyed view as to whether that number is feasible to reach without transitioning into winning F&O revenue of your own that a buyer will value more highly.
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.
