Having the Right Mentality: Turning "Me" To "We" in GovCon and M&A

On-market there's a ton of businesses for sale, just go on Loopnet or Bizbuysell and you will find them. However there are far better deals off-market that we come across during our targeted outreach. These preferred deals we only present to buyers that we have buy-side agreements with. They take experience, time, patience and effort to bring to fruition.

Outside of the financial aspect of a purchase, what we found is, that without both parties having the right mindset, often times we have to pass deals or we end up cutting ties with individuals despite our firms ability to bring in the necessary capital, experienced operators and growth strategy to scale the acquisition target.

Overlooked by the wrong buyers and sellers, they fail to see our value extends beyond the transaction, we bring in growth specifically in B2G in which we are providing government contracting opportunities prior to close and supporting growth after the company has been acquired which is a key element to post-acquisition planning and integration.

Having the right mentality and shifting from a "Me" to a "We" mindset is crucial to closing deals in mergers and acquisitions (M&A) and government contracting (GovCon).

Mergers and Acquisitions (M&A):

In M&A transactions, a "me" mentality focuses on individual gains, personal interests, and protecting one's own assets. However, adopting a "we" mentality emphasizes collaboration, shared goals, and building a stronger company through the integration process.

The Toxic Buyers Perspective -

"How can I get the best valuation, inject the least amount of my own money, pay the least amount cash at closing and put most of the risk on the seller or make him or her run the business for the longest time post-closing etc.."

During LOI & Purchase Agreement Negotiations:

There's a ton of "M&A Gurus" marketing that you can buy a business with little to none of your own money.

Yes, this is technically correct. It can be accomplished by raising money from investors, or trying to get the seller to cover the down payment either locking it up for 2 years per SBA new guidelines or having a 3rd party lend money for the deal etc..

Oftentimes this is not the case for someone that is new to buying a business. These are experienced tactics from those that have been working in M&A either serial entrepreneurs, dealmakers or finance professionals that have spent several years perfecting their craft through formal education or self education.

In my opinion, these "teachers" are showing people bad purchase habits.

There is a disconnect either in miscommunication, or set expectations from the buyer that includes a lack of transparency from these mentors. They may have some useful information but there are better ways about going to purchase a business correctly.

Coming into the deal with no money and expecting to walk out with someone's life work, legacy, and network for pennies on the dollar is not going to happen overnight or without trust being established. There has to be a fair exchange of value and clear mutual understanding with reasoning behind the purchase offer in order to close the transaction.

The Buyer's Arsenal of Tools:

Seller Financing: Seller financing, also known as owner financing, occurs when the seller of a business provides financing to the buyer instead of the buyer securing the full purchase price through traditional lending sources. In this arrangement, the buyer makes payments to the seller over time, typically with interest. Seller financing can be an attractive option for buyers who may have difficulty obtaining conventional financing or to bridge the gap between the buyer's available capital and the purchase price.

Earn-out: An earn-out is a contingent payment arrangement in which a portion of the purchase price is tied to the future performance of the acquired business. It involves setting specific performance targets or milestones that, when achieved, result in additional payments to the seller. Earn-outs are commonly used when there is uncertainty about the future performance of the acquired company or when the buyer and seller have differing expectations regarding its value. It aligns the interests of the buyer and seller to ensure the success and growth of the acquired business.

Holdback: A holdback, also known as an escrow, refers to a portion of the purchase price that is withheld by the buyer and deposited into an escrow account for a specified period. The holdback serves as a form of security to protect the buyer against any undisclosed liabilities, potential legal claims, or other risks associated with the acquired business. If any issues arise during the holdback period, funds from the holdback can be used to address those concerns.

Clawback: A clawback provision is a contractual arrangement that allows the buyer to recover a portion of the purchase price from the seller under certain predefined circumstances. It typically applies when specific representations, warranties, or financial targets made by the seller during the transaction are later found to be untrue or not achieved. Clawback provisions are designed to provide the buyer with recourse if the seller's representations are later discovered to be inaccurate or misleading.

These tools are commonly used in business transactions to address various financial and risk considerations, align buyer and seller interests, and provide safeguards to protect both parties. Each tool serves a specific purpose and should be negotiated and structured carefully as part of the overall deal terms.

The Problem with trying to use these in lower middle market transactions.

• Seller sophistication level: Lower market sellers are not sophisticated sellers they don't understand the terms or have a comprehensive legal team that is going to break it down to them. This will require the buyer to be patient and to explain in detail sometimes several phone calls or emails back and forth explaining the terms and how they impact the sale. If the buyer doesn't completely understand them they come off complicated and unclear how they are drafted or agreed upon when going to the next step.
• Broker intervention: Businesses listed on-market sale are listed by business brokers. These brokers have alternative motives some worse than others are looking to get the most for their clients in any way possible. They use tactics that are counter-productive, we find this more often with older brokers that are looking for their "big pay day to retire out." They don't care if the transaction closes and do not want to help support the buyer. They only care if the offer is big enough cash at closing so that they get a sizable commission. Typically they force sellers to stay locked up under them for long periods and will kill the deal if the structure isn't in their favor.
• Disconnect in expectations due to 3rd parties: Sellers usually don't know how much their company is worth so when they go to market they are depending on the opinions of others. They 3rd parties unless they have the proper background and even when they do are misguiding seller expectations. The sellers may overvalue the company or be misled to believe they will get a big pay day with little to no ramifications or contingencies, this is simply not true.

Toxic Seller's Perspective -

"How can I get as much as I can for my business and pay the least amount of broker fees, spend the least amount of time and effort etc.."

Selling a business isn’t easy. In fact, according to the International Business Brokers Association (IBBA), up to 90% of businesses never sell at all.

A CFIB report found, only 9% of business owners have a formal, written succession plan. On the flip side, 46% of owners said they do not have any succession plan, while 45% have an informal, unwritten plan. Business owners are most concerned about ensuring their employees are protected in the event of a sale, the report said, followed by getting the highest price possible for their company.

While the specific reasons for businesses not selling can vary, there are several common factors that contribute to this outcome:

1. Unrealistic Valuation: One of the main reasons businesses fail to sell is that the asking price is not realistic or properly justified. Overvaluing a business can deter potential buyers, while undervaluing it may raise concerns about its worth or quality. Obtaining a professional business valuation and working with experienced advisors can help ensure a realistic and attractive asking price.
2. Poor Financial Performance: Buyers are typically interested in businesses with a strong financial track record and growth potential. If a business has declining revenues, unstable cash flow, or other financial issues, it may struggle to attract buyers. Preparing the business for sale by addressing financial concerns and demonstrating its potential for future success can increase its marketability.
3. Lack of Preparation: A poorly prepared business can deter potential buyers. Inadequate documentation, incomplete financial records, and a lack of organized systems and processes can raise concerns about the business's credibility and potential risks. Thoroughly preparing the business for sale, including gathering necessary documents, organizing financial records, and conducting due diligence, is needed for attracting qualified buyers.
4. Limited Market Appeal: Some businesses may have limited market appeal due to factors such as niche markets, highly specialized operations, or location-specific customer bases. A smaller pool of potential buyers can make it more challenging to find the right match. Expanding the business's market appeal through strategic positioning, diversifying customer bases, or highlighting growth opportunities can increase its attractiveness to potential buyers.
5. Timing and Market Conditions: External factors such as economic conditions, industry trends, or shifts in market demand can influence the sale of businesses. Selling during a downturn or when the industry is experiencing challenges may reduce buyer interest and affect the sale price. Keeping an eye on market conditions and choosing an opportune time to sell can improve the chances of a successful transaction.

While selling a business can be challenging, it's important to note that with the right approach, preparation, and guidance, many businesses do find successful buyers. Engaging experienced professionals such as business brokers, accountants, and lawyers who specialize in mergers and acquisitions can provide valuable assistance throughout the selling process and increase the likelihood of a successful sale.

Framing the Right Mindset Starts with "We"

By fostering synergies, aligning expectations, better understanding perspectives, and establishing a mutually beneficial relationship these essential components can create the foundation for a successful transaction. By capitalizing on shared strengths, understanding and respecting diverse perspectives, and working towards common goals, partnerships and business relationships can thrive and deliver optimal results for all parties involved.

• Synergies: Synergy refers to the combined effect of two or more entities working together that creates a greater outcome than what could be achieved individually. In the context of business relationships, synergies arise when the strengths, resources, expertise, and capabilities of the involved parties are effectively combined and leveraged. Synergies can manifest in various forms, such as cost savings, increased market share, enhanced product offerings, improved operational efficiency, or expanded geographical reach. Identifying and capitalizing on synergies is essential to creating value and achieving success in collaborations.
• Aligned Expectations: For a successful partnership or collaboration, it is important that all parties involved have aligned expectations. This means that there is a shared understanding of the goals, objectives, and desired outcomes of the relationship. Clear and open communication is necessary to establish and align these expectations from the outset. When expectations are aligned, it becomes easier to work towards a common purpose, make joint decisions, and resolve any conflicts or challenges that may arise along the way.
• Understanding Perspectives: In any business relationship, bringing together diverse perspectives can be highly beneficial. Different perspectives can lead to innovative ideas, creative problem-solving, and a broader understanding of the market and customer needs. It is important to foster an environment where all parties feel comfortable sharing their viewpoints and actively listen to and respect the perspectives of others. By embracing diverse perspectives, collaborations can tap into a wider range of knowledge, experiences, and insights, leading to better decision-making and overall success.
• Mutually Beneficial Relationship: A mutually beneficial relationship implies that all parties involved in the collaboration derive value and benefits from the partnership. Each party should have a vested interest in the success of the relationship and work towards creating win-win outcomes. This requires a spirit of fairness, trust, and mutual respect. By ensuring that the relationship is beneficial to all involved, long-term sustainability and growth can be achieved.

The Spoken Art of Communication

In government contracting the sales process is long, business development in comprehensive, tedious, and required to be successful. Those from commercial industry will fail if they do not understand that B2G is completely ran different.

There are no one-night stands with agencies, GovCon is not a get rich fast operation. If you want to scale, consistency is key, development and nurturing relationships, not just in-person or over the phone, but rather over time through past-performance, increasing the company's capabilities, services or product offerings, adding contracting vehicles, improving visibility with the company's image, and building a positive work culture of top talent by taking well care of them. Yes, this means employee benefits and competitive wages.

GovCon requires a deep understanding of the unique dynamics and compliance requirements associated with government procurement. Effective communication is crucial for success in this field, and adopting a "We" mentality can be beneficial.

Two instruments that can facilitate this approach are Joint Ventures and Teaming Arrangements or Agreements:

Joint Ventures:

a. Unpopulated Joint Ventures: An unpopulated joint venture occurs when two or more companies come together to pursue a specific government contract or opportunity. Each company retains its individual identity, but collectively they form a new entity solely for the purpose of pursuing and executing the contract. This arrangement allows the participating companies to leverage their complementary strengths and resources while sharing the risks and rewards of the contract.

b. Populated Joint Ventures: In a populated joint venture, the participating companies not only form a new entity but also contribute their personnel and resources to the joint venture. This allows for a deeper level of collaboration, where the joint venture entity functions as a cohesive team with shared goals and responsibilities. Populated joint ventures can be particularly beneficial when the government contract requires specialized expertise or capabilities that the individual companies may not possess independently.

Joint ventures facilitate a "We" mentality by emphasizing collaboration, shared resources, and collective success. By pooling their strengths and working together, companies can present a more comprehensive and competitive offering to government agencies, increasing their chances of winning contracts.

Teaming Arrangements or Agreements:

Teaming arrangements involve formal agreements between two or more companies to collaborate on government contracts. Unlike joint ventures, the participating companies maintain their individual identities and contractual relationships with the government. Teaming arrangements can take various forms, such as subcontracting, prime-sub relationships, or mentor-protégé partnerships.

Teaming arrangements allow companies to combine their capabilities and resources to pursue larger and more complex government contracts. They enable companies to present a unified front to government agencies, demonstrating a collaborative approach and a broader range of expertise. Effective communication and a shared vision within the teaming arrangement are essential to convey a cohesive message and build trust with government agencies.

Focus on Public Interest

Government contracts typically serve public interests and address societal needs. Adopting a "we" mentality helps contractors align their objectives with the larger public good, ensuring that the services provided contribute to the welfare of the community. New companies that engage in B2G should not be looking to shove a product or service to the government but rather design solutions around the stakeholders.

Knowledge Sharing and Innovation

Embracing a "we" mentality within the government contracting encourages knowledge sharing, collaboration, and the exchange of best practices. This leads to innovation, improved processes, and better solutions for the challenges faced in public projects. This may include transferring company resources to a specific project that the government has majority control in. Such as those developed with grants or through innovation departments within the DoD.

Cultural Integration

Merging two organizations involves blending different cultures, values, and ways of working. A "we" mindset enables the understanding and appreciation of each other's strengths and perspectives, fostering a smoother cultural integration process. Have a clear picture of what the culture should be post-acquisition. Nobody likes going down a dark road without a map or idea of what is on the other side. Don't lead your team blind.

Synergy and Value Creation

M&A transactions aim to create synergies and generate value that surpasses what the individual entities could achieve alone. A "we" mindset encourages identifying and leveraging complementary strengths, combining resources, and focusing on the shared vision of creating a stronger and more successful company or service offering. Work with the seller to bring a solution to them that is a win-win.

In summary, shifting from a "me" to a "we" mentality in M&A and government contracting brings numerous benefits, including smoother cultural integration, increased collaboration, value creation, alignment with public interests, enhanced compliance, and innovation. By embracing a collective mindset, organizations can navigate these domains more effectively and achieve sustainable success including acquiring companies and making the seller or buyer happy.