Changes Needed to Spawn More Competition

The Federal Government needs to fix flaws in regulations to encourage more competition in government contracting.

Core to the philosophy of U.S. federal government contracting is the assertion that the greatest competition results in the best goods and services at the best value. The Federal Government has created many paths to induce entrepreneurs to make the investment in building a government professional services business. However, the government has created complex policies and regulations that make it challenging for the entrepreneur to see this investment through the corporate lifecycle and ultimately reach liquidity. The inconsistent policies towards small business growth and the burdensome regulations for achieving liquidity reduce the investment’s expected value. Reducing the existing hurdles will result in more investors viewing this as an attractive investment opportunity.

Success that Kills the Business
As part of the efforts to stimulate competition, the government must create policies and regulations that encourage economic growth throughout a company’s lifecycle. A company that has proven its abilities to provide goods and services should be in a better position to compete for future opportunities. Such a company should be encouraged to invest in corporate infrastructure to grow in scale, which provides efficiencies to government customers. A contract award winner should have the incentive to provide continuity of services at improving costs over the long term. Currently, the government has set small business policies that run contrary to this.

Once contractors graduate from these set aside programs, they must compete for contracts with more established companies, who have more resources for business development and more past performance history. Frequently, the act of winning a large dollar contract set-aside for small businesses makes the awardee ineligible to win additional small business work (or even the future recompete of that contract). Many of these one-time small businesses find their success has made themselves too big to be considered “small”, and too small to compete effectively. These companies are essentially in a form of “no-man’s land”.

Several small businesses were awarded the Missile Defense Agency Engineering and Support Services (MiDAESS) contract, an IDIQ with a several hundred million dollar ceiling. If a small business wins more than $25m a year in task orders, the company winning the work will no longer be considered small when the recompete comes. This also hurts the government because when the contract must be renewed, either the contracting officer must make the recompete full & open or bring in a new small business and go through an unnecessary transition period. The government should be encouraging companies to grow, not incentivizing companies to stay small. One solution is to create a means by which successful contract completion allows a company to transition a small business contract to either a “mid-sized business” contract or full & open. The creation of a “mid-sized business” category would resolve much of the challenges these successful small businesses face, and encourage further investment.

Liquidity
Key to any investor is a clear path to liquidating an investment. The burdensome regulations for achieving liquidity ultimate reduce the investment’s expected value. The Federal Government has added undue restrictions on selling equity both for raising capital and for achieving liquidity. Reducing the existing hurdles towards liquidity will result in more investors viewing this as an attractive investment opportunity.

Selling a company to a strategic acquirer or financial investor represents the most realistic exit opportunity for the entrepreneur who built the business. Transactions represent the best means of realizing the value created, compared to selling to employees or ceasing operations after fulfilling the contract obligations.

Allow private equity investors to invest in non-affiliated small businesses without triggering affiliation. These companies require investment capital just as large businesses do. The current regulations create an impediment by triggering affiliation between portfolio companies. Currently a Small Business Investment Company (SBIC) is the only recognized organizational structure that can invest in multiple small businesses and the businesses remain unaffiliated. Oddly enough, in order to qualify as an SBIC, the applying entity must be a private equity group with relevant history. The regulations should consider that as long as the two businesses operate in different markets and have independent boards (similar to the requirements for foreign buyers) the operations of one should not limit the bid & proposal opportunities of the other.

Modify the small business regulations. The regulations on a business with small business contracts are vague and complex, and are not treated equally by contracting officers. The uncertainty makes strategic acquirers leery of the transaction risks associated with buying small businesses.

Hire more contract novation specialists. A transaction is in limbo while the contracting office determines if the contract can be transferred to a new owner. The contracting offices are understaffed throughout the country, which results in increased time required for novation. Increased time equates to increased transaction risk.