Marc Marlin is managing director at the technology solutions and aerospace/defense investment bank KippsDeSanto & Co.
As a fast food aficionado, I always loved the concept of “supersize” – little incremental cost, meaningful extra value. While McDonalds – which helped popularize the concept – started to phase out the supersize in 2004, nearly 10 years later, the opportunity to supersize valuation is gaining momentum in the government contracting space. Unfortunately, the opportunity to supersize valuation doesn’t always come at little incremental cost, but rather seemingly small nuances in the business can drive an outsized return on investment. So what’s on the extra value menu you may ask? Scalability (burger), Technology (fries), and Credibility (soda).
Scalability is an under-appreciated value driver for most companies. It’s what separates enterprise value from lifestyle businesses. When folks think M&A, they think “cost synergies.” Not so fast. Cost synergies are relatively finite and one-time in nature. However, revenue synergies present greater upside. It’s all about growth. Sellers should ask themselves, “What do I bring to buyers that facilitates substantial growth opportunity to the buyer’s platform, for the longer term?”
Growing a business from $50 million to $75 million doesn’t move the needle for a potential acquirer worth multiple billions of dollars. The steeper the growth curve and potential, the greater the valuation. So where is the nuance? It’s often a customer relationship, capability, or contract vehicles, and often, may or may not be the historical driver of the business.
Accenture’s last two federal transactions – ASM Research and Agilex – are great examples. ASM was historically a DoD business with deep health expertise, that had leveraged its expertise into success on VA T4. Eighteen months post deal, the combined ASM/Accenture business has continued to thrive within the VA, and also support HealthCare.gov. More recently, the Agilex deal augments the broader campaign of Accenture Digital, focused on hyper growth areas to include interactive, mobile, cloud, social and analytics. Both businesses were founded and built to succeed and accelerate on a larger platform.
While not the main course, Technology (for services businesses vs. pure software) can have significant impact on the value creation and opportunity. The market remains thirsty for competitive differentiation and the opportunity to drive margin. Technology checks both boxes. Services firms are increasingly looking to IRAD to develop such differentiations. When thinking about technology investment, which can be a few million dollars to get from concept to operational, the key is making sure it allows your firm to be better, faster, cheaper, or some combination. These are the ingredients of “best value” which is the preferable competitive environment for most services contractors. The most aggressive buyers like the shiny toy with growth-appeal, and don’t walk out the door every night. A little bit of investment can go a long way. While a solutions business, the Advanced Systems Line of Business recently acquired by MacDonald, Dettwiler was ripe with tools and technology leveraged to deliver services and solutions in the areas of intelligence, surveillance, and reconnaissance capabilities.
Last but not least is Credibility. Credibility makes it all work when pursing a transaction. When thinking about value creation, credibility is what you’ve done, what you’re doing, and what you say you’re going to do. From a sale perspective, maintaining credibility is critical. It starts with key predictive indicators (KPI) for the business. These are the dozen or so metrics that can codify past performance and exude confidence going forward. These include, budget-to-actual, pending awards to trailing-twelve-month revenue, book-to-bill, average fill time of open billets, dollar value new business win and recompete rates, amongst others. But more importantly, are the KPI consistent with the go forward plan, and if performance veers off track, can the variance be explained quickly, clearly and confidently. Credibility encouraged collaboration and solutions of the known, unknown speed bumps that arise in the sales of most businesses. Credibility gets deals done.
How to supersize your valuation
