The Mergers and Acquisition (M&A) market has been healthy and strong going into 2017, and there is no indication that the market will do anything but grow. For those mid-tier firms looking for a new source of growth and revenue, the M&A market is a good source to consider.
One of the many positive attributes of the government contracting market is a very strong crop of next-generation small businesses that grow into the mid-market category, replacing those that had been recently acquired.
Another factor is the mid-market squeeze, as the government continues to utilize more set-aside contracts on one end, combined with more contract bundling and greater utilization of General Service Administration (GSA) vehicles and GSA, and non-GSA government wide acquisition contracts.
Add to this is now the budget uncertainty, combined with continued use of lowest-priced, technically available procurements, the net result is a transformed growth strategy for emerging businesses where M&A activity can solve many gaps in these strategies.
Companies that successfully grow into the mid-tier ranks, with unrestricted contracts, are garnering premium valuations. This is because buyers purse businesses that have these strategic contracts, technology or other capability differentiators, and perhaps most importantly, that provide buyers with a high level of confidence that the original set-aside contracts will continue after the firm is acquired.
As a result, private equity firms hope to buy these government services companies, attempt to drive a higher premium for the acquisition, and then sell them at a gain to either another private equity firm or, potentially, a big government services company.
Lastly, the current M&A market has an expanding array of viable liquidity alternatives for a broader set of businesses beyond traditional targets, such as firms with employee stock ownership plans or ESOPs.
Firms looking at the crystal ball with uncertainty should understand that there is a current vibrant and creative M&A market. This market has manifested from a tumultuous decade of budget cuts and uncertainty, but has nonetheless morphed and adapted into a healthy possible strategy for many firms, both buyers and sellers.