May 8, 2018
5 Steps to Acquire $100m in New Revenue for Less Than a $5m Investment
The SBA’s new All-Small Mentor Protégé Program (https://www.sba.gov/federal-contracting/contracting-assistance-programs/all-small-mentor-protege-program) is nearing its 18th month of existence. The previous program only allowed 8(a) minority-owned businesses to participate with large prime government contractors – these limitations and other factors made the program widely unappealing. However, as per its name, the All-Small MPP allows for every small business designation (Women, Veteran, HUBZone, regular small, etc) to participate and win contracts that they may not have been able to win without the help of a larger, more experienced partner.
Further, the new Program allows for the Mentor to invest upwards of 40% equity in the Small Business without incurring any affiliation limitations on the Small’s size (13 CFR 122.103 https://www.sba.gov/sites/default/files/affiliation_discussion.pdf). Joint Ventures are formed between the Mentor and Protégé to acquire new government contracts, and the JVs maintain the status of the Small Business – a huge benefit to both participants which does not apply to regular teaming agreements outside of the MPP.
Thus, government contractors in growth mode are wise to strongly consider the All-Small MPP for its most pleasant unintended consequence: The Best Mergers & Acquisitions Platform In Government Contracting. Consider this five step illustration:
1. Large Prime contractor vets and agrees to mentor a Small Veteran-owned company with $10m gross revenues / $2m EBITA. Companies apply to SBA and are formally approved under the All-Small Mentor Protégé Program.
2. After due diligence, Mentor agrees to invest the maximum allowed 40% equity in the Protégé based on $2m EBITA at a 2x multiple. $2m x 2 x .40 = $1.6m equity investment.
3. Joint Ventures formed by the companies can attack opportunities with joint past performance as a small business. Agencies are encouraged to do business with smalls, particularly under $5m contract values. Thanks to strong work ethic and capture strategies, the JVs formed by the Mentor and Protégé win $100m in forward looking revenue over the next 5 years (approx. $20m of task orders per year).
4. A 50/50 workshare is established, equating to $10m of annual gross revenues for the Small, doubling their revenues and adding another $2m of EBITA.
5. For the Mentor to earn majority ownership on a $4m EBITA valuation at an improved 4x multiple, the Mentor would be required to lay out an additional $1.76m for the next 11% (51% total) of the company. Total Mentor investment: $3.36m for $100m of total revenue.
I encourage you to reach out to us to learn more. You’ve always wanted to find the right teaming partner with which to earn more government contracting business. Do it the most expeditious and potentially lucrative way by leveraging the SBA All-Small Mentor Protégé Program to your long term advantage.
** Caveats: This article is for demonstration purposes only. Your actual mileage may vary. Yes, the Mentor is more likely to request the maximum 60% workshare and, yes, the Protégé is likely to value their business higher due to these new revenue streams. But even if you double the Mentor’s total asking price, where / how else can you buy and fully integrate a company into yours for less than 7% of its nearly guaranteed forward looking revenue?
Elvis Oxley, all rights reserved.