November 18, 2024
Written and edited by Mac Lillard. Research assistance by AI.
High-Level Strategies for Financial, Operational, and Sustainability Excellence
Government contractors planning for a sale must adopt a strategic approach to positioning themselves as attractive acquisition targets. In today’s competitive marketplace, just one to three years of improved earnings and/or operations prior to an exit or acquisition can greatly optimize government contractor value.
Generally speaking, there are two ways to improve the value of your business: 1) improve your bottom line through increasing revenue and decreasing costs and 2) reducing the risk premiums applied in the valuation calculations. If you are planning for a sale, this checklist provides a comprehensive framework for optimizing your operations, sustaining growth, and ultimately, maximizing the company’s attractiveness for acquisition.
Financial Health and Transparency
✔ Ensure all financial records are accurate, up-to-date, and in compliance with accounting standards. Audited financial statements increase credibility.
✔ Demonstrate consistent profitability and revenue growth. Highlight any recurring revenue streams and long-term contracts.
✔ Show effective cost control measures and a strong understanding of cost structures.
✔ Be sure you have accurate information on items that impact revenue, expenses, operating margins. Historical earnings are one of the most important considerations in a valuation:
- Special projects meant to improve the operations of the company may be incorporated into normalizing adjustments depending on the valuation analyst’s interpretation and available documentation. Detail regarding the project expenses, outcomes, and benefits derived can be helpful in adjusting historical figures and projecting future activity.
Projections and Benchmarks
✔ Provide detailed projections that are supported by historical budget-to-actual results. This data can assist a valuation analyst in assessing the organization’s ability to generate future benefits, as well as demonstrate management’s ability to properly budget and manage expenses.
✔ Benchmark against comparable organizations – especially for private and/or small-mid sized organizations for which business comparables may not be readily available – can assist a valuation analyst in identifying companies to analyze under the market approach to business valuation. These exercises also help management periodically assess their performance relative to their peers, demonstrating financial savvy and mitigating risks from competing companies.
Increase Sales, Reduce Costs, and Improve Margins
✔ Improve customer experience via staff training, personalized customer interactions, and loyalty programs to reward repeat customers.
- Use AI tools to build profiles on prospective people and companies to target in the sales process.
✔ Optimize your supply chain to reduce costs. Tactics include negotiating better rates with suppliers or improving the procurement process to identify cost-saving alternative vendors. You can also implement just-in-time inventory to reduce holding costs and consolidate orders to achieve economies of scale.
✔ Increase operational efficiency through automation of repetitive tasks and streamlining processes to reduce waste and improve productivity. This will help to improve your bottom-line, thus increasing the overall valuation.
✔ Consider outsourcing non-essential functions, such as temporary work or specialized tasks to reduce costs. Salaries and benefits are generally one of the largest expense line items for any company.
✔ Perform an analysis of revenue streams to find opportunities to diversify and improve pricing models. Companies with revenue concentrated in one revenue stream or customer base will be viewed as riskier.
Operational Excellence
✔ Streamline operations to maximize efficiency. This can include optimizing information technology to create a robust enterprise resource planning system, improving project management practices, and implementing lean processes.
✔ Maintain strict compliance with all relevant regulations and standards (e.g., FAR, DFARS). Ensure all certifications are current and all audits are clear.
Contract Portfolio
✔ Strive for a mix of short-term and long-term contracts, as well as a variety of clients. A diversified contract portfolio reduces risk.
✔ Balance your portfolio between being a prime contractor and a subcontractor. Prime contracts often carry more prestige and higher margins.
✔ Develop a strong pipeline with a backlog of contracts to demonstrate future revenue streams.
Market Position and Competitive Advantage
✔ Clearly articulate what sets your company apart from competitors. These attributes could include specialized technology, unique expertise, or proprietary processes.
✔ Showcase strong, long-term relationships with key clients. Positive references and case studies are powerful.
✔ Maintain a strong reputation in the industry. Seek out and collect positive press stories, awards, and adhere to a strong brand identity.
Intellectual Property and Technology
✔ Highlight any proprietary technologies or intellectual property you have that adds value and differentiates your company.
✔ Demonstrate a culture of innovation through an ability to stay ahead of technological advancements that may disrupt your industry and through proactive implementation of new technologies that differentiate you from competitors.
Management Team
✔ Highlight the expertise and track record of key executives. Having a strong, experienced management team is crucial.
✔ Have a solid succession plan in place to ensure continuity.
Human Capital
✔ Emphasize a skilled and stable workforce. Highlight any special certifications or clearances held by employees.
✔ Demonstrate strong employee retention rates and a positive company culture.
✔ Deploy hiring practices that recruit a diverse pool of talent.
Risk Management and Controls
✔ Clearly identify potential risks (e.g., dependency on a single client, regulatory changes) and demonstrate how you manage and mitigate these risks.
✔ Implement and maintain robust anti-fraud measures. This includes establishing internal controls, regular audits, and a whistleblower policy.
✔ Ensure that robust cybersecurity measures are in place to protect sensitive information. Highlight your compliance with cybersecurity standards and best practices.
✔ Manage risks associated with third-party vendors and partners. Conduct regular assessments and maintain strong contractual protections.
✔ Establish a strong internal audit or outside independent assurance function to regularly review and improve internal processes and controls.
ESG (Environmental, Social, and Governance) / Sustainability
✔ Highlight efforts to minimize environmental impact, such as energy efficiency measures, waste reduction, and sustainable sourcing. This includes Greenhouse Gas Emissions (GHG), initiatives to lower carbon footprint, and efforts to enhance sustainability.
✔ Showcase community engagement, employee welfare initiatives, and contributions to social causes.
✔ Demonstrate strong governance practices, including a transparent corporate structure, ethical business practices, and board oversight.
Strategic Growth Opportunities
✔ Outline potential growth opportunities, such as new market opportunities, new service offerings, or strategic partnerships.
✔ Show a robust pipeline of upcoming opportunities and contracts.
Marketing and Brand Awareness
✔ Leverage search engine optimization (SEO) by making improvements to your website to increase visibility and drive traffic to your website.
✔ Create and maintain social media accounts for the company.
✔ Develop and distribute insightful content in articles, blogs, or white papers to demonstrate your expertise, drive traffic to your website, and generate leads. Using AI tools like ChatGPT to assist makes this significantly easier than it was just a couple of years ago.
Preparation for Due Diligence
✔ Prepare comprehensive documentation for the due diligence process, including financials, contracts, compliance records, and operational procedures. Thorough documentation will address all areas noted above and should be organized in a way to emphasize key items relevant to the contract/award/audit/acquisition.
Positioning your government contracting business for acquisition requires a strategic, holistic approach that encompasses financial health, operational excellence, comprehensive risk management, and a strong commitment to ESG principles. By implementing the strategies outlined, contractors can not only enhance their market appeal but also ensure sustainable growth and long-term success.
GRF Can Help
With deep expertise in the government contracting sector, GRF provides tailored audit, tax and advisory services that address the unique challenges and opportunities faced by contractors. Our team of seasoned professionals is committed to delivering comprehensive solutions. By leveraging GRF’s extensive experience and local market knowledge, government contractors can confidently navigate the complexities of the acquisition process and achieve their strategic goals.
For more information, listen to our recent ExitReadiness® podcast on Protecting Value with Risk Management and Controls. We can help guide you on your path to becoming an attractive, acquisition-ready enterprise. Contact us online or reach out to us at the information below.
