There are many encouraging signs that the U.S. economy is recovering from the devastating lows of the COVID-19 pandemic — and even reaching new heights. In particular, mergers and acquisitions have been proceeding at a frenzied pitch after the sharp shock of the pandemic during the first half of 2020. For example, The Economist reports that in Q1 2021, there were 16,000 M&A transactions that involved at least one U.S. company — roughly 150% of typical M&A activity during the same time frame in the previous several years.
Savvy GovTech firm owners in search of an exit strategy should view all this M&A dealmaking as an excellent opportunity. So how can GovTech entrepreneurs best plan for the sale or acquisition of their business in the post-pandemic economy?
Below, we’ll discuss a crucial realization for any business owner contemplating a sale: Future promise outweighs past results. This article is the first in a two-part series that will explore how to increase the value of your GovTech or government contracting firm in the post-pandemic economy.
Deciding to Sell Your GovTech Business
Resolving to sell your stake in a business is never easy. Both internal factors (such as your personal priorities) and external factors (such as the health of the economy) come into play. When your company is doing well, and with the prospect of future growth on the horizon, it can be hard to make the conscious decision to give up the reins to someone else, no matter how capable they are.
The choice is made even tougher due to fluctuations in business value. Like the stocks in your portfolio, the value of your GovTech firm may increase or decrease on a regular basis, and even from day to day. Many factors are responsible for this shift — some of which you can control (e.g., winning a valuable government technology contract) and others that you cannot (e.g., a broader slowdown in M&A activity).
Regardless of external conditions, there’s one important factor for any GovTech firm owner considering an M&A deal: the impact on their net worth. On average, it’s estimated that 50%–80% of entrepreneurs’ net worth is tied up in their business value — a tremendously high amount for a single asset.
However, many business owners have no idea what their company is truly worth, nor how to make it worth more in the acquisition marketplace. Over the past decade, the business valuation game has dramatically changed, with historical performance no longer the predominant concern.
Why Future Promise Outweighs Past Results
So-called “unicorns” (billion-dollar startups such as Uber, Airbnb, Snapchat, and SpaceX) have built their eye-popping valuations on the promise of future rewards, rather than past performance. Tech giants such as Uber and Snapchat have yet to reach profitability, while Airbnb is a standout among unicorns because it actually made money — at least during certain quarters.
While these “unicorns” represent extreme cases, the underlying premise rings true for any business owner willing to listen: A credible future vision for your business generates more value than historical performance.
Owners typically focus on selling their company’s past performance, instead of helping buyers imagine a believable version of the future that leverages the company’s current potential for growth. Astute sellers need to focus on building a well-grounded strategy for their business that will increase the company’s value today. By understanding these simple rules of marketplace psychology, GovTech firm owners could generate trillions of dollars in new business value.
The Valuation Environment for GovTech Firm Owners
Even just 20 years ago, it was difficult to build any significant business value without an extensive financial history. Only after several years of building your product and getting it to market could you expect to see a substantial return on your investment.
Today, however, the business growth cycle is considerably faster-paced. Time to market is shorter — potentially as short as 2 to 18 months. Early adopters help fuel your go-to-market strategy, and your business valuation can be driven more easily by future projections. In particular, intangible assets such as employees and intellectual property have significant value. Thanks to these developments, savvy business owners can exit in as little as 1.5 to 5 years.
Of course, part of a successful exit strategy is finding the right buyer and the right circumstances. Management consulting firm McKinsey & Company has identified six major reasons for successful M&A deals:
- Improving the buyer’s performance.
- Consolidating to remove excess resource consumption.
- Facilitating access to new markets.
- Acquiring new skills, technologies, or IP.
- Leveraging economies of scale.
- Identifying winning startups early.
Conclusion
GovTech firm owners must be aware of one essential truth: Being able to sell the future prospects of your business is worth far more than its historical performance, which is not guaranteed to continue. This leads to another important question: How can you actually pitch the right vision to potential investors?
In the second article in this series, we’ll offer some key insights on how to achieve the maximum acquisition value for your GovTech or government contracting firm. For greater detail on these topics, you can also download our white paper “Increasing the Value of Your GovTech Firm in the Post-Pandemic Economy.”
