The COVID-19 pandemic has upended economies in the U.S. and around the world. After more than a decade of economic growth between 2009 and 2020, the U.S. finally entered a recession in Q2 2020, with a GDP contraction of 32.9%—the worst ever recorded. In April 2020, total nonfarm employment dropped by 20.7 million jobs, nearly wiping out the gains made since the Great Recession.
Fortunately, there are many signs that the U.S. economy has begun to recover from last year’s devastating downturn. According to the U.S. Bureau of Economic Analysis, the economy saw a growth rate of 6.4% in Q1 2021, with total annual growth projected at 7%.
Although the economy is on the rebound, the “new normal” in the wake of the pandemic will likely look different than what came before. For example, remote work has been one of the most visible and enduring impacts of the COVID-19 pandemic for many employees. According to a May 2021 Gallup poll, 7 in 10 white-collar workers say that they are still telecommuting, with rates above 80% in fields such as the sciences and computing.
Beyond immediate concerns such as working conditions and location, however, GovTech firms also need to consider the impact of the pandemic-induced downturn—and the subsequent recovery—on their business valuations. In this article, we’ll discuss some of the larger macroeconomic issues that can affect your GovTech business valuation, and how you can navigate them in the post-pandemic landscape.
What Does the U.S. Post-Pandemic Economy Look Like?
There are four stages in a traditional economic cycle: early cycle, mid-cycle, late cycle, and recession. In late 2019, immediately before the COVID-19 pandemic, there were a number of signs that the U.S. was in the throes of a so-called “late-cycle economy.” The indicators from 2019 warning of slowing U.S. economic growth included:
- Being in the longest period of economic expansion ever recorded.
- Reaching all-time highs for stock indexes such as Nasdaq, the Dow Jones Industrial Average, and the S&P 500.
- Unemployment rates close to their all-time low since 1969, according to reports from NPR.
For the U.S. economy, the COVID-19 pandemic marked the cyclical transition from a late-cycle economy into a full-blown recession. The impact was painful but quick—erasing millions of jobs, altering consumer spending habits, shuttering small businesses, and damaging the country’s industrial production. The National Bureau of Economic Research has announced that the U.S. recession began in February 2020, but has yet to pinpoint a formal end date for the downturn—although many economic indicators suggest that the recovery is well underway.
However, given the highly unique nature of a pandemic-driven recession, there are also signs that the traditional theory of economic cycles may not be entirely applicable right now. Typically, an early-cycle economy is marked by trends such as rebounding business activity, slowing credit, rapid growth in profits, falling interest rates, and low inflation. Yet inflation is currently at its highest in 13 years, with consumer prices rising by 5% between May 2020 and May 2021. Meanwhile, the U.S. Federal Reserve announced in June that it would raise interest rates sooner than expected—as early as 2023.
GovTech Business Valuations in the Post-Pandemic Economy
If you’re a GovTech business or federal contractor, what effect will the post-pandemic economy have on your valuation?
Before the COVID-19 pandemic, business valuations were at an all-time high—i.e., business owners received comparatively more capital per share of their company’s equity. During economic downturns, however, it’s possible for a company’s valuation to drop, similar to how the entire stock market can decline in value. If federal contracts for small business dry up, for example, this can impact a GovTech firm’s profits and thus its valuation. Recovering from this plunge in valuation can take as long as 2 to 5 years, when the next stage of the economic cycle is in full swing.
Of course, GovTech business owners don’t always have a choice about when to exit their company. Unexpected events such as illnesses, deaths, partner disputes, and loan defaults can all force owners to sell at an inopportune time, resulting in lower valuations and less favorable terms for the seller. Instead, business owners need a strategic exit plan that allows them to sell at the top of the economic cycle or on the timeline of their choosing.
The good news is that the government technology contract business hasn’t been derailed by the pandemic. According to a survey by Deltek Clarity, 70% of government contractors believe that government sales will increase in 2021. What’s more, the “Government Contractor Confidence Index” (GCCI) currently stands at 140.1—nearly unchanged from 143.0 in 2019.
Thus far in 2021, the GovTech space has seen a good deal of healthy activity, including:
- The $2.3 billion acquisition of NIC, a digital government service provider, by Tyler Technologies—the largest M&A deal in GovTech history.
- The acquisition of PrimeGov, which builds software for local government agenda and meeting management processes, by Rock Solid Technology.
- $85 million in Series C funding for RapidSOS, which offers a big data platform for government emergency response services.
- $41 million in Series B funding for Replica, an AI-powered data platform working with New York City to analyze traffic congestion.
The future of the U.S. post-pandemic economy is uncertain but looking up. However, a flurry of recent GovTech M&A activity — including the largest transaction in GovTech history — is a strong indication that the industry is on the rebound, with business valuations increasing from their 2020 lows. In our next installment, we’ll explore valuation, value growth, and monetization for your GovTech firm in greater detail.
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