Focus on the High Value Revenue
While “value” from the owner-operator perspective is often characterized by revenue size and cash in the bank, it’s important to appreciate that all revenue is not treated the same from an M&A perspective. Contract award type matters. Prime / F&O contracts remain the most valuable revenue producers, as they’re more likely to cleanly transition post deal. Moreover, they also demonstrate program ownership and customer control that hold strategic value and increase the certainty that the revenue stream will continue for the long-term, a critical value driver.
Subcontracts on the other hand, at minimum normally require prime contractor consent upon a change of control; a speed bump in the integration process. The defacto buyer belief also assumes less control over program participation and distanced customer access compared to the prime. For small to mid-size subcontractors, buyers also presume the target’s being used as a recruiter / staff augmenter and / or to help the larger prime meet a Small Business goal or requirement. This is especially true if the nature of the subcontractor’s work is more commoditized. These characteristics introduce a heightened level of uncertainty around contract continuity. Small business set-asides (including 8(a) or other preferential designations) are also typically heavily discounted. The inability of the customer to claim credit post deal and termination absent a waiver for 8(a) work inherently carry more risk.
That said, set-aside or subcontracts should not be completely abandoned. Irrespective of award type, solutions that solve complex problems and are embedded in the customer’s core mission encourage incumbency value of the to be acquired contractor, and de-risk the revenue potential going forward. A significant work share, specific domain expertise, or IP enabled solutions further enforce a sense program criticality. Customer directed subcontracts also exemplify ownership of a program. In some cases, an acquirer of a company in a strong subcontractor role can use its own vehicles and scale in combination with the target’s performance history and relationships to win a large contract away from the incumbent prime, creating significant synergy value for the acquirer.
To help build long-term value and better the chance of the eye-popping multiple, remember the following tips:
Tip 1 – Grow with purpose. Depth, focus, and differentiation build value in today’s market more so than size
Tip 2 – Invest for the long term. Invest in those areas that drive value and incentivize the team accordingly. Aligning business development objectives with owner objectives improves the probability of success. Encourage the capture of new business overall irrespective of the award type as it takes investment dollars to build value, but really reward the prime, F&O.
Tip 3 – Always own something. Identify something critical to the program and business pursuit and own it. This “something” may be domain expertise around a technology, a customer relationship, or an important part of the capture process that can be parlayed into a work share guarantee (when a sub). This ownership increases the customer’s or partner’s pain point to replace you.