The majority of the completed Government Services transactions involve targets with annual revenue of less than $50M. This sector is incredibly fragmented, largely due to the government’s preferential awards, and it usually takes significant reinvestment and commitment of the shareholders to grow their business beyond this threshold. Therefore, most transactions involve targets with a contract portfolio comprised of (i) prime, F&O work; (ii) prime, small business set aside (“SBSA”) contracts or other preferential awards; and (iii) subcontracts.
We are often asked if it is easier to market and sell a business with prime, SBSA contracts or subcontractor work. Unfortunately, the answer is not clear-cut and is largely case specific based on the target company’s solutions and relationships.
All things being equal, a target with prime, F&O contracts will command greater buyer interest and a higher valuation than a firm with SBSA contracts and subcontractor work. These targets have proven that they can compete and win against the larger primes, which validates their future growth prospects, capabilities, customer relationships and competitive positioning. Moreover, there is minimal post-closing contract retention risk since there are no recertification requirements and the target company holds the direct relationship with its customers.
Targets that have relied on SBSA awards pose an increased risk profile for an acquirer and therefore require enhanced scrutiny. For each SBSA contract, buyers evaluate if the remaining option years will be exercised, and if the eventual recompete will stay in the SBSA program or be competed on an F&O basis. There are many factors that buyers consider in this evaluation:
Despite the contractual recertification requirements of prime, SBSA contracts, it is fairly unusual for a contracting officer to terminate a contract without exercising the remaining options years. However, based on the aforementioned considerations, it is — Continue reading Aronson Capital Partners‘ December Market Update HERE.