When these lessons are implemented by management, government contracting company’s business profits, resiliency, and business value all increase.
As a business valuator and business broker who spent much of his career in the Washington, DC area I have frequently worked with government contractors. For a list of industries we have prepared valuations for click here. Technically, government contractors are not a specific category of business. They get lumped into their specific underlying industry. Yet, government contractors are usually quite different from companies serving private industry.
Here are a few things I have learned.
LESSON 1 – Obtain Transferable Long Term Contracts
In order to increase transfer or business sales value long term contracts that can be transferred to a reasonable cross section of buyers should be sought out. Many government contractors have status certifications. These status certifications are important for obtaining work in a competitive market. But, if the focus is on building value also consider the effect if the status used to obtain the contract are difficult to transfer to a larger organization with capital to invest. 8(a) because of it’s limited life can be a great way to grow a firm but check carefully about transferability if you are counting on 8(a) contracts to increase your business value.
LESSON 2 – Obtain Profitable Fixed Fee Contracts
Fixed Fee contracts where you can make a profit are preferable to Time and Material contracts. Typically there are two types of contracts, fixed fee where you take the risk of the cost of performance. But, you also get the benefit of a larger profit if you can do the work for less cost. When properly managed by a government contractor that knows their costs fixed fee can be much more lucrative. Time and material allows a specified mark-up above costs. While these are safe, unless they are very large they cap your profitability at a low rate and frankly, small dollars.
LESSON 3 – Obtain multiple vehicles (contracts) to facilitate growth.
Many small government contractors win one award and think they are fine. But this leaves the company susceptible to contract termination. Contracts can terminate for many reasons often that have little to do with your performance. Government contracts can take years to obtain so set goals and begin working on this now. (Need a free goal setting / planning system, click here) Over time obtain multiple contracts so if one terminates the company has work and is still in business.
LESSON 4 – Take 8(a) contracts anyway
Due to the profitability of the right 8(a) contracts it may be prudent to continue obtaining them even if they are not transferable. Lets face it, earnings / money in your pocket today is always good. Yes, Lesson 1 is important but so are profits today. But, do not take 8(a) contracts if better less restricted contracts are available. If using this strategy both save some of the profits and look for non-8(a) work for when graduation day comes. (SBA statistics indicate that over 60% of government contractors do not survive 8(a) graduation. Don’t join this statistic.)
Obviously leadership, team building, hard work, and a little luck play a HUGE role but the four lessons shown above when properly implemented will increase business value.
Questions, want to know more, contact Gregory R. Caruso, Harvest Business, LLC, t/a The Art of Business Valuation.