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Breaking Down the Numbers – Invest to Meet Your Goals (A Case Study in F&O Contract Pursuit)


With the wealth of information, resources, and advisors available to the owners and senior leadership of Federal contractors, it’s important to remember the risk / reward trade-off applies to broader strategies beyond just day-to-day operations.

The financial snapshot of two illustrative companies is detailed in Exhibits A and B; both with exceptional successes during 2010 and 2011.  Aside from the exhibits, assume in each year the companies’ characteristics are identical (e.g., clients, capabilities, depreciation, recompete timing, employee base).

Holding all else equal, Company A was more profitable and set to generate more cash flow to its shareholders.  However, adding the context that both companies are planning to sell in 2012 changes the dynamics significantly.

What’s happening?  Company B made bid / proposal and business development investments to target strategic full and open (“F&O”) opportunities.  In early 2011 these paid off, and it was awarded two, five-year F&O contracts worth $35 million and $40 million.  Company A continued to leverage its set-aside status and was awarded $75 million of small business contracts.

Why does it matter?  Market multiples (e.g., EBITDA multiples) are often misunderstood, inconsistent, and many times used as sanity checks rather than buyers’ valuation methodology.  As a business grows, an owner may be inclined to take current market multiples and apply.  In this example, using this approach without recognizing the importance of contract mix results in a higher anticipated transaction value for Company A than Company B.  However, taking Exhibit B into account, it’s quite possible the opposite is true.

Where does the logic break down?  Uncertainty equates to risk; risk lends itself to discounted future cash flows.  There’s often greater uncertainty to set-aside contracts than F&O upon a change of control, as explained here [October 2011 blog “Focus on the High Value Revenue”].

Should my Company exclusively target F&O work?  Not necessarily.  The above case study ignores the risk / reward balance that owners and senior leadership navigate daily.  Objectives and priorities drive day-to-day decisions.  If an eventual sale is a shareholder objective, then making calculated investments in strategic F&O opportunities can significantly impact buyer interest and valuation.

Contributors: Marc Marlin and Robert Dowling