Buyers targeting companies with set-aside contracts need to consider several key factors. These factors often revolve around the requirements and criteria set forth in the procurement process that can greatly influence the continuation of that contract if an acquisition occurs. Here are some of the key considerations:
- Backlog: Buyers of companies with set-aside work generally fall into two categories large or small business. Large businesses most often can be disqualified at the recompete, or small businesses, that may breach their size standard. Backlog provides confidence in a prospective buyer that, at a minimum, there is a foundation with which to work. It also provides runway for a buyer to leverage the existing set-aside work for profits or transition into unrestricted work. Furthermore, analyzing the capabilities deployed, past performance gained, and relationships with customers is instrumental in unlocking opportunities for the acquiring entity. A general rule of thumb that generates strong interest from buyers is backlog of approximately three times the revenue of the selling business.
- Eligibility Criteria: Buyers will first look at whether the targeted companies meet the eligibility criteria for set-aside contracts. This includes factors such as size, ownership (e.g., minority-owned, women-owned, veteran-owned, etc.), location, and other specific qualifications mandated for the contract.
- Past Performance: Buyers often evaluate the past performance of potential contractors. This includes reviewing previous contracts, assessing the quality of work, adherence to deadlines, and overall satisfaction of past clients or buyers.
- Capability and Capacity: Buyers assess the capability and capacity of the targeted companies to fulfill the requirements of the contract. This includes evaluating technical expertise, workforce skills, equipment, financial stability, and the ability to scale up operations if needed.
- Price Competitiveness: While not always the primary factor, price competitiveness is still important. Buyers need to ensure that the proposed prices are reasonable and competitive within the market while also considering factors such as life-cycle costs and value for money.
- Compliance and Certifications: Buyers verify that the targeted companies comply with all relevant regulations and possess necessary certifications. This might include certifications related to quality management systems, environmental standards, safety protocols, and specific industry regulations.
- Innovation and Value Proposition: Buyers may favor companies that offer innovative solutions or have a strong value proposition beyond meeting the basic requirements of the contract. This could include unique technologies, processes, or approaches that add value to the project.
- Risk Management: Buyers assess the risks associated with each potential contractor, considering factors such as financial stability, legal history, insurance coverage, and contingency plans for mitigating potential risks that could arise during the execution of the contract.
- Local Economic Impact: Some contracts may prioritize companies that contribute to the local economy or provide employment opportunities within the region where the contract is being awarded.
- Prime vs. Sub Work: Prime contracts are often seen as more prestigious and lucrative, offering greater visibility and direct access to federal opportunities. In contrast, subcontract work, while sometimes perceived as secondary, can play a crucial role in a company’s overall strategy and success. Understanding the nuances of these roles becomes especially critical in the context of mergers and acquisitions (M&A).
By considering these factors, buyers aim to identify companies that not only meet the specific requirements of the set-aside contract but also demonstrate the capacity, capability, and commitment necessary to successfully fulfill the contract obligations.