Business Valuation Issues for Small Businesses

When you are looking to sell your business, you need to know how much it will be worth to the new owner – that process is called business valuation.

Small businesses in the federal sector are often puzzled when they find out that their business’s valuation is very low. The big issue is when most or all of your revenue is coming from set-aside contracts that are specifically for small businesses.

When a big business buys a small business with set-aside contracts, the contracts get “novated” (changed over to the big business’s name). You keep the contract, but the government agency (your client) no longer gets small business credit for tasks awarded to you.

It’s even more restrictive for 8(a) (minority) small businesses; their contracts can be cancelled by the CO (contracting officer) when a novation is requested. And some multiple award IDIQs have provisions that when novated (transferred to the new ownership), the business’s size is re-certified at its new level (presumably large).

The big business can keep the revenue from these set-aside contracts for the length of the contract, but can’t re-compete for the work because they are too big, unless they can move the contract to another vehicle where their Full and Open status is allowed.

That’s why your small business may not be very appealing for a big business to buy. In the valuation of your business, your set-aside revenue is heavily discounted (by as much as 80%) versus work won full-and-open.

So if you can’t sell, you’ll have to grow. The challenge there is that you might get too big to qualify for small business set-asides. That’s why it’s important to follow the work of the Mid-Tier Advocacy Group at https://www.businessgrowthforall.org/. They’re committed to creating a mid-tier where larger small businesses can compete with each other, instead of being forced into competing with the giants of the industry.


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