The Virtual Gut Punch - A Guide to Building Enterprise Value for Government Contractors

In my previous post, I discussed how to successfully exit the SBA’s 8(a) program. One topic that I didn’t cover, however, was business valuation. It’s common to want to improve your financial position as much as possible as you approach the end of your set-aside period, and whether you’re considering a loan, a capital raise, a sale, or another financial imperative, you’ll need a strong sense of your Enterprise Value.  

So today I thought it would be helpful to share how RIVA has approached building our Enterprise Value.  

Exiting 8(a) is a Financial Wake-Up Call 

Our journey began with a wake-up call. As a mid-sized organization in the 8(a) program about to face a much more intense level of competition, we realized that we’d need the financial resources to sustain and scale if we wanted to survive the transition. That meant we needed to establish (and grow) our business valuation, but where exactly should we focus? 

I started with a series of meetings with private equity companies, business brokers, and other investors in order to understand how they would value RIVA. And two years of humbling discussions made me realize something: if we were going to have a chance at raising the capital we needed, we had to make growing Enterprise Value a larger strategic goal for the company. 

Two Steps to Grow Enterprise Value 

We used a two-step process to build our value:  

1. Define your value goals 
2. Structure your organization to work toward those goals 

This looks incredibly simple on paper, but I can promise you it was one of the most significant challenges I’ve faced in my career. Let’s dig in. 

1. Define Your Value Goals 

A high-level Enterprise Value calculation for a privately held company might look something like this: 

Enterprise Value (EV) = (Owner equity + total debt) – cash on-hand and equivalents 

Investors and financers will use your EV figure to compare against other metrics like EBITDA, Revenue, and the percentage of work that is Full and Open. If you’re offering stock, your P/E ratio might be factored in as well. And this formula leaves out another of other less tangible value generators that we’ll address a bit later. A lot of these factors are already baked from a financial perspective, but to really move the needle, you need to focus on Enterprise Value across your whole of your enterprise. 

The important point in these calculations is that it’s hard to improve performance in all of these areas at the same time, so I knew we needed to prioritize based on our business goals. And the prioritization will evolve as your company evolves. 

Our goal wasn’t to sell the company. It was to build a financially sound organization that could sustain itself after the 8(a) exit. And so, we wanted to make sure we were as fiscally healthy as possible in order to do so. A different company looking to build toward acquisition could have chosen to focus purely on improving EBITDA or sales. However, you would be surprised to understand how critical, your workforce and operational functions contribute to a robust build out of Enterprise value. The important part is to know what numbers you want to move. 

2. Structure your organization to meet those goals 

A good strategic plan focuses on improving measurable outcomes. But when you’re planning to improve your EV number, it’s challenging to identify the appropriate tactical valuation metrics and bake that tracking and improvement into your daily operations.  

We followed a three-step process to do so: 

1. Identify the factors that contribute to Enterprise Value across your organization 
2. Establish and track your EV metrics in order to generate a performance baseline 
3. Review the data, hold your team accountable on their metrics, and execute on required improvements 

Let’s take 1 and 2 together. 

1. Identify the factors that contribute to Enterprise Value across your organization 
2. Establish and track your EV metrics in order to generate a performance baseline 

The EV formula I used above was intentionally simplified. It leaves out factors like owned IP, workforce and management team skill and experience, customer relationships, marketplace goodwill, and a host of other data points that are tough to quantify but still contribute to a valuation measurement.  

Your job at this step is to identify (and quantify) every EV contributor. Financial metrics like sales volume, debt and number of new contracts are easy to track and understand. But what about some of the other criteria I just mentioned? 

• Workforce skill could be measured through metrics like numbers of certifications, employee retention and engagement, or even customer testimonials. 
• Marketplace goodwill could be evaluated based on your reputation in the marketplace and with customers, number of partnerships established, earned media value from your PR efforts, and other factors. 

As you gather your data, you’ll need to decide how heavily to weight some of these softer metrics’ contributions toward EV in order to help your organization prioritize its initiatives. At RIVA, we did so by choosing which of the “softer” metrics we wanted to be included in our corporate DNA. That’s one of the reasons you’ll see us focusing so hard on our corporate culture.  

3. Review the data, hold your team accountable on their metrics, and execute on required improvements 

Your goal at this stage is to build the reporting chain that flows measurements of your important actions up to your managers and then to your leadership. In many ways, we’re living in the golden era of metrics and dashboards, so there are a number of tools you can use to put together your scorecards. The key is that your leaders focus on the data and hold their areas and teams responsible for improvements.  

I call this last piece the virtual gut-punch. It’s one thing to track a number, but it’s quite another to look a team in the eye and tell them that they need to improve their performance. Accountability and buy-in is key from your leaders and their subordinates to move metrics in a meaningful way to impact Enterprise Value. 

In practice, improvements might mean that your sales team declines to bid on certain work that would not bring in the required margins, or that you need to change your hiring process in order to bring in a different employee mindset to the team. Change is always challenging, and it takes constant focus and accountability, but the larger enterprise will benefit from your hard work. 

I hope this perspective on how to drive Enterprise Value has been helpful for you. If you tackle the ideas above with a little focus and a whole lot of patience, you’ll find that your EV numbers will line up in all the right places when you need them to. 

If you’re interested in discussing more about Enterprise Value, feel free to leave a comment or shoot me a DM.