Welcome to Off Ramp Strategies, a blog and chat forum hosted by Venture Management, Inc.
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We developed this site to encourage the discussion surrounding the challenges among "graduating" professional services contractors in realizing the value that they have created in their business and continuing to compete in the market space.
The federal government has made many in-roads in getting entrepreneurs access to contracts and positioned to build significant professional services contracting firms. Through the use of preferential contracts in the procurement and acquisition process, the federal government has attracted various disadvantaged groups to vie for contracts. The intent had been to give disadvantaged individuals an on-ramp to government contracting. Once the company was stable and of significant size, it could transition to competing for contracts on a full & open basis. The founder could sell their company, and realize the value they created.
Winning Full & Open Prime Contracts
Recent changes in procurement practices have made it increasingly more difficult for companies to compete full & open.
As companies grow, they reach the size limits imposed on preferential contracts. The use of Government Wide Acquisition Contracts (GWACs) requires competing firms to be able to provide a full array of services. This limits competition to only the largest contractors which can offer the full gamut of services. Previously, a company could compete to prime the task that fit their niche. Now, they must sub to the industry giants, who would rather give the work to a firm that gets them preferential credits. This may mean that a $50m revenue company can't win the work as prime, and can't win the work as sub. Consequently, this practice has made it a serious challenge for a $50m revenue company to continue its successful pattern of growth.
Companies increasingly find themselves too big to compete as small, to small to compete as big.
Realizing Value
In the past, a larger company could acquire a smaller firm and fulfill the contracts. The preferential contract was awarded based on the size of the bidder at the time of proposal. If the company sold the day after the proposal was submitted, the acquirer could fulfill the contract if awarded. Now, the acquirer needs to re-represent the company's size to the contracting officer. Changes made to representation and certification requirements have made it nearly impossible for owners of a business based upon set-aside contracts to sell their small business.
Another issue for small business owners is the SBA affiliation rule. If a company forms a business combination with another (through the sale, merger or acquisition of/to a second company) the SBA requires the company to recalculate and report the past three years revenues for both companies. This can quickly disqualify a company from competing on set-aside contracts due to the trailing three years revenue being beyond the size standard.
When a company raises capital through the sale of equity or has certain debt covenants protecting lenders, the affiliation rule applied by the SBA can be triggered and disqualify the company from competing. Thus a company is limited in its ability to raise capital, to sell shares and to realize value to companies that either enjoy permanent preferential status (i.e.: tribes & ANCs), other small businesses (who have enough room under the cap not to be disqualified, and somehow enough capital to make the acquisition), or other individuals (though this can be tricky as well). All of these represent real challenges, and removes the most attractive buyers from the auction process. Private Equity Groups and larger contractors, who typically have the deepest pockets, will trigger the jump in revenue.
EXIT CLOSED
In other words, the government has done a great job creating on ramps to the highway, but the off ramps all seem to be closed.
Off Ramp Strategies Discussion
The blog and chat forum is intended to illicit participation from the entire small- and mid-sized government contracting community: the business owners, their advisers, contracting officers, strategic investors, industry advocates and more. We welcome your thoughts, and encourage you to contribute to the discussions. We wish this to be constructive board, and ask that people refrain from getting emotional in their posts.
Friday, November 6, 2009
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ReplyDeleteFederal Government “Investing In” Keeping Small Business Small?
ReplyDeleteI recently attended a conference sponsored by the National Chamber of Commerce and the Professional Services Council which was aimed at small and mid-tier companies and included among its topics to be addressed “Barriers in Federal Contracting.” The panelists and speakers included a broad cross section from both the contractor community and agencies of the federal government. The conference was informative not only from the insights offered by business and government panelists but also from the quality of the questions and concerns expressed by the attendees.
Unfortunately, the conference did not provide either more information or encouragement for a “small business” owner seeking (a) to manage either a transition to “other than small” or “non-preferential” status or (b) to fund a retirement through the sale of the business. The discussion appeared to confirm that there was not sufficient political impetus to drive either legislative or regulatory change that would support “re-opening the off-ramp.” (See the introduction to this blog.)
One of the most striking, for me, perspectives came from a Presidential appointee and expert in government procurement. I asked about recent procurement practices (e.g., OPTARS II) which appear to be aimed at preventing continued eligibility for award of small business contracts to those small businesses which are successful at growing their business to a level that exceeds NAICS code guidelines. I expressed concern about such businesses being “trapped” and forced to remain small as a result of both procurement practices and the re-registration requirement in the event of a business combination aimed at strengthening the company’s ability to compete as “other than small.”
The perspective which I did not expect was that the Federal Government’s procurement practices associated with preferential treatment and contracting goals represented an “investment in” these businesses. The result of these businesses growing to, or merging with, a “large” business results in, from this point of view, the “…loss of the federal government’s investment in the small business…..”, the larger business “taking advantage of…” the government’s investment in this business, and the federal government’s being “…charged a higher overhead and G&A rate….” for the same work than would have occurred if the business had remained small.
I do not know if the view expressed by the panelist is a widely held view. I also do not know if the statements implying a higher cost to the government for the same work are true. However, policies resulting in “keeping small businesses small” do not seem to me to be desirable public policy from either an economic or a social perspective.