What is Your GovCon Business Worth?
Justin Siken06/23/2024
Mergers & Acquisitions Strategy
HigherGov
With an average of more than 350 acquisitions annually, the government contracting (GovCon) market is consistently one of the most active industry markets for buyers and sellers. Understanding the factors driving valuation is critical for business owners to position their businesses to maximize value at exit. The below analysis is based on HigherGov's proprietary database of M&A transactions available to our Leader Plan subscribers.
GovCon Valuation Trends
Most GovCon companies are valued based on a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). So if a company has an EBITDA of $5 million and is valued at a 10x EBITDA multiple, it is worth $50 million. If a company isn't profitable or is in certain specific niches (such as subscription software) it may be valued based on a multiple of revenue instead.
Median EBITDA Multiples By Year
HigherGov Analysis
Median EBITDA Multiples in the GovCon market have been surprisingly stable over the past 10 years, within a median range of 10-14x EBITDA, though companies often sell for well below and above this level. One important caveat to these multiples is that they reflect publicly disclosed multiples, which are biased towards larger companies and those with full & open contracts. Smaller contractors and those with majority set-aside revenue often sell at a significant discount.
Factors Affecting Valuation Multiples
Many factors affect a GovCon's valuation. Some of the most important are highlighted below.
Market Sub-Sector
Average valuations vary widely by the type of work that a contractor performs. The average multiples over the last 10 years for the different sub-markets tracked by HigherGov are listed below. Generally, companies with a technology focus (service or product) or that serve the intel community command higher valuations than other types of companies.
Median EBITDA Multiples By GovCon Subsector
HigherGov Analysis
Percentage of Set-Aside Contracts
Companies with a high proportion of revenue derived from set-side contracts (such as small business, 8(a), SDVOSB, WOSB) often sell at a significant discount relative to companies with full & open revenue. The acquisition of a small business by a large corporate or financial buyer often puts the small business above the size standard thresholds and prevents them from recompeting existing work. Accordingly, large companies and investors will often not buy (or will only buy at a significant discount) companies with a large percentage of set-aside contracts.
Median EBITDA Multiples by Majority Set-Aside (2020-2024)
HigherGov Analysis
Based on our analysis of historical acquisitions, companies with more than half of their revenue coming from set-aside work traded at an average discount of 45% to full & open companies. At the extreme end, a GovCon with 100% set-aside revenue with undifferentiated capabilities may only be valued based on the remaining cash flow to be generated from its ongoing contracts. On the other hand, majority set-aside companies that have truly differentiated capabilities, strong customer relationships, and a history of converting set-aside contracts to full & open contracts may sell without any valuation discount.
Other Factors Affecting Valuation
Many other factors can increase a company's valuation, some of the major ones are listed below:
- Intellectual Property: Companies with differentiated intellectual property, such as patents, software, or a strong brand name can command significant valuation premiums. Buyers focusing on research or technology will also often look for companies with successfully completed Other Transaction Authority (OTA) and Small Business Innovation Research (SBIR) contracts.
- Robust Business Development Processes: Strong business development processes, demonstrated by high new business win rates (20% or higher), high recompete rates (80% or higher), attractive teaming partners, and robust hiring processes often command higher valuations.
- Agency Relationships: Proven relationships with key agency customers and teaming partners can support higher valuations. Companies with mostly prime contracts sometimes command higher valuations than those with mostly subcontracts, but this depends largely on the work being performed and the level of interaction with the government customer.
- Generational Programs: Supporting long-term programs with growing budgets can increase valuations as it provides greater visibility and comfort that an acquired company will maintain and grow revenue.
- Sole Source Contracts: A record of winning sole source contracts can increase valuations because it limits the risk that a competitor will take work away after acquisition and demonstrates strong customer relationships.
- Cleared Employees: Given the difficulties and long timeframes in acquiring and badging cleared employees, many acquirers will pay a premium for a workforce with security clearances.
- Vehicle Access: Holding contract vehicles (particularly ones with a limited number of awardees and a long period of performance remaining on the vehicle) can be highly valuable for a potential acquirer as it enables access to opportunities and relationships that they cannot otherwise obtain.
How to Increase Your Company's Valuation
Positioning a company to maximize value is a multi-year effort. For GovCons that are not currently positioned to maximize valuation, there are typically three broad areas of effort:
- Developing Differentiated Capabilities: For product companies, this typically requires investments in research and development, pursuing patents, and getting products embedded in agency programs. For service companies, this typically requires developing differentiated and hard-to-replicate processes and a unique brand.
- Strengthening Business Development Processes: Winning full & open work and building strong agency and teaming relationships requires robust business development processes and people to identify market opportunities. Hiring skilled people, acquiring business development tools, and developing repeatable processes all help support this goal.
- Preparing for a Sale Early: Successfully selling a company can take as little as a couple of months or multiple years depending on the success of the process and a company's positioning before beginning the process. Experienced consultants or investment bankers can advise companies on specific steps to maximize value and prepare for a successful sale.
