Thinking of Selling Your GovCon Business?

GovCon stands for government contractor, a private company producing goods and services for public government agencies.

The United States government is the largest buyer of goods and services globally, spending about $200 billion on procurement. This presents an excellent business opportunity for entrepreneurs to work with the US government. Government contracts help owners expand their businesses and provide them opportunities to meet their business goals in slow months. The procurement process mainly requires business owners to match their products or services with a particular federal agency’s needs.

Whether your company is a government contractor, you will eventually exit it. A GovCon with contracts that guarantee years of future income poses an attractive investment to buyers when the GovCon’s owner is ready to sell it.

When Is It Time To Sell?

Despite the differences in client focus, selling a GovCon business is much like selling any other business. Historical data related to selling businesses reveals that when an owner feels like selling their business, that is actually the time to build business value. The ideal time to sell your business is when it has achieved all its strategic value-building targets. This signifies that your company is performing at its best, which invites the best prices from buyers who see potential in your business.

According to GF Data’s analysis of private M&A deals for companies with a total enterprise value of $10 to $250 million, valuations have remained stable since 2019. While the number of mergers and M&A deals decreased in the first half of 2020, the earnings before interest, taxes, depreciation, and amortization (EBITDA) increased. The data shows that companies that built strong and took calculated steps did exceptionally well in 2020.

GovCon companies present intriguing investment opportunities by the very nature of their clientele. Regardless, value building is essential to allow a buyer to understand where the business stands in its market and whether its current value meets the buyer’s goals.

Pitching your company to buyers differs from selling your products to customers. No buyer wants to step into a business uninformed. A prospective buyer looks for the return of investment over the years and expects your company to produce higher revenues in the coming years. Hence, the best time to sell your business is when you can see your company doing well in the present and future, which may be ensured by lucrative government contracts.

Questions to can focus on before selling your GovCon business include:

  • Given the current macroeconomic climate, will any prospective buyer willingly invest in GovCon?
  • What is the current state of the prospective buyer pool?
  • Are buyers willing to consider different contract structures?
  • Will it take long to sell your company? If yes, then are you happy with the expected delay?
  • Can you consider the current situation a good time to take advantage of the potential for a profitable liquidity event?

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How to Prepare Your Business for Sale

Study, evaluate, and re-evaluate your exit plan at least twice a year as the company approaches its exit strategy. Changes in a company’s assets and contracts do affect the exit. Whether you are ready with your exit plan and wish to exit today or even after two years, you must know your company’s market value. More importantly, the best time to sell is right after winning a large contract because your company will already be in the news and anticipating profits.

When to Sell

If you’re thinking of selling your business, you’re not alone. Exiting your business may take years. Selling a business without bringing it to its actual value is a loss of time and money. When your business reaches its full potential is when you can make a profit by selling it to a prospective buyer.

Find a Buyer

Finding a buyer is a complex process and requires discretion. Marketing the company openly might startle and worry your employees, lowering morale and reducing productivity. According to the Small Business Administration, completing a sale may take six months to two years. However, limiting the search for buyers and slowing down the process is not an option because you may lose potential buyers. What are the possible solutions?

  • Keep conversations going with more than one potential buyer if one deal doesn’t work out, your plan to sell continues.
  • Stay connected to your advisors and make sure buyers are financially capable of buying and running your business before giving out any important information.
  • If you are financing the sale, hire a qualified, experienced attorney who can work on forming an agreement that benefits you.
  • Negotiate the deal, keeping in mind the future value of the company.
  • Make sure your buyer signs a nondisclosure agreement to ensure they will not divulge any sensitive information. Put all agreements in writing.

Create a Deal

Once you have found your buyer(s), structure the agreement to take all the tax and financial repercussions into account. Structuring a deal is a time-consuming process, but when you have put a lot of time into building a business, you may try to sell it for what it is worth.

During this process, dig up any documents that could be essential for you or the buyer. Your current lease, sales transactions, important contacts, and other crucial paperwork for your business must be presented. Make copies of all essential documents and keep records of everything, including any assets or equipment you would be selling.

Attend to any areas needing recovery. The information you provide your buyer must include the functioning of your business, be it an operating manual or a guide. In addition, notify your employees about the possible changes happening. This is an important step because havoc in your workforce contributes to the loss of production.

Conduct Due Diligence

Before you sell your business or pitch it to a buyer, it is essential to keep your financials clean. Clean recordkeeping is key to a successful deal. Buyers don’t want to step into a mess and will conduct their own review. You don’t want to be caught hiding anything you should have disclosed.

Create a due diligence checklist:

  • Review your business licenses, financial statements, and accounting documents.
  • All your intellectual properties must have registered trademarks, and your products must be copyrighted.
  • Present a detailed review of the buyer’s company assets, contracts, inventory, or leases.
  • Review the company’s compensation schedules, employee handbook, past-present litigations, and recent resignations or terminations.
  • Present corporate documents, such as charter documents, subsidiaries, and sale agreements. Buyers also want to see stockholder records and board of directors’ meeting minutes.
  • Your company should meet the buyer’s strategic goals. The seller must have all the required business permits and licenses. The seller must also present all the required financial statements, audit data, and revenue stream details.

Sell and Prepare the Business for Transition

Selling a business is an intricate process. Before selling, make sure the transaction will meet your goals. You are giving away your business, and the buyer should be able to give you enough in return. Here are a few questions to consider before proceeding with the transaction.

  • Will the company’s organizational structure change?
  • Is the transaction going to be a buyout or a reorganization?
  • What will the payment structure be?
  • Is it better to sell stocks or assets?
  • Will you continue to be a part of the company?
  • Is it necessary to have post-sale non-compete agreements in place?

The exit process is a different experience for different owners. Remember that you have put valuable effort into building what you’re going to sell. The decision you make should be profitable to you before it benefits anybody else.

Conclusion

Whether you want to expand or sell your business, one thing is certain: you will ultimately exit it. Exiting on your terms means selling when you want to whomever you want for the best price possible. Value Scout offers you services enabling you to discuss your company’s future with our experienced advisors. Connect with us to plan your exit!

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Matt Lawver

Matt Lawver

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