Overall M&A transaction activity for government contractors has been strong thus far in 2015. Now buoyed by an improving economy, near zero percent interest rates, and the recent Obama Administration’s 2016 budget proposal, requesting nearly $4 trillion, M&A volume seems likely to experience a notable increase. The 2016 budget especially is expected to influence M&A activity in the government contracting industry. First, many larger companies will continue to divest non-core business units and restructure around priority spending areas. Second, with spending likely to increase in information technology, cyber security, big data analytics and cloud initiatives, companies with those capabilities will continue to be sought out. Lastly, with the uptick in government spending, consolidation among mid-tier companies is gaining viability.

For owners with an interest in selling their government contracting businesses, market conditions could not be much better. It looks like we have weathered the worst of sequestration and government spending is again on the increase. Also, between cash balances and available credit, there is plenty of financing available to buyers at low interest rates.

Selling any business is a complex venture that involves planning and many considerations. To maximize your probability of success, don’t skip these essential steps when preparing your government contracting business for sale:

1. Reasons for Sale.  Why are you selling? That’s one of the first questions a potential buyer will ask. Consider your ability to sell your business, its readiness and the timing. Ideally some of the following attributes will make your business more attractive:  increasing profits, especially EBITDA (earnings before interest, taxes, depreciation and amortization), consistent income figures, strong customer relationships, deep pipeline, and no major contracts up for re-compete in the next year.
2. Valuation.  Just because you are ready to sell doesn’t mean your business is in a position to command an attractive price. You will want to determine the worth of your business to make sure that it meets your requirements and that you price it appropriately. Valuations can be obtained from a number of sources, ranging from accounting firms, business appraisers and investment banking firms.
3. Structuring the Sale.  How your deal is structured can make the difference between facing an enormous tax bill upon the sale, or next to none. The key here is that planning must occur well in advance of signing the sale documents. Also, the Anti-Assignment Act prohibits the assignment of government contracts except by operation of law or Government consent (novation). A merger or stock sale does not require a company to go through the novation process.
4. Pre-Sale Due Diligence (i.e., know and address any skeletons in your closet).  You need to assemble all material company information, conduct due diligence and evaluate your company from a potential buyer’s perspective. Overall goals are to resolve as many existing problems as possible, develop a plan for unresolved problems and retain control of superior knowledge of your company. Sellers who can answer detailed questions with facts and data and present any substantive issues in an objective manner, will instill confidence in buyers and make the due diligence process easier.
5. Assemble an Expert Team.  Identify the inside team members who are key to the ongoing business and the sales process. Get an advisory team in place that includes an investment bank, an accountant and an attorney who all have significant M&A experience in the government contracting industry.

Even if you are not planning on selling your business anytime soon, preparing yourself and your business now will increase your odds of a successful sale when the time comes.