Since the last wave in 2012, mostly brought on by a fear of tax changes, we haven’t seen a lot of activity with small business M&A. Many 50m to 500m government contractors went the way of the ESOP during the last decade. These entities, and small businesses in general have enjoyed organic growth during the past 5 years as more and more procurements came out for small businesses. The ESOP’s are sitting on a pile of cash and the shareholders are clamoring for more net income/increased share values. As these companies blow through their NAICS codes, their appetite for growth is steering them in an M&A direction.
I am predicting a significant increase in deals in the 2 to 20m range. If you are a small services government contractor and your EBITDA is in the 1m to 10m range, you could be a target for a potential buyer. If you are contemplating selling, here are a few tips to remember as you head toward a planned exit.
- Clean up your balance sheet. Go ahead and pay for an audit, even if it isn’t required by your bank or the SBA.
- Ensure all unbilled A/R issues are cleaned up and bad A/R is written off before suitors start looking.
- Get your DSO down and make sure you are in the 45 day range or less. Buyers want and need fast turning A/R. You can also overcome working capital issues with the buyer easier if your current assets are turning quickly. The banker financing the LOC or term debt for the deal will need this as well.
- Clean up your compliance issues. Incurred cost submissions should be filed. If you had an inadequate accounting system, purchasing system, or have DCAA questioned costs issues hanging out there then get those cleaned up and resolved before due diligence begins. Run a tax compliance check for both federal and the states you are operating in. Your attorney can assist you with this to make sure you are in good standing before the buyers start looking.
- Clean up personnel issues and make sure your files are current and up to date.
- If you have a lot of related party transactions you need to clean those up because the buyer will not want any part of those.
- The more prime contract vehicles you have the better chance for you to get a higher than normal EBITDA factor. The best time to sell is when you are on the front end of a new large contract vehicle. Keep your rate structure as competitive as possible as you head toward an exit.
- Focus on getting your margins up and minimize your unallowable costs. The closer to 10% the better. Sub 5% margins won’t attract too many buyers. If you have a sizable percentage of fixed price contracts and your fringe packages are better than most, then you need to consider making some changes now, well ahead of your planned exit.
- Consider deferring key hires or significant changes to your infrastructure.