Key considerations in valuing a privately held government contractor

With government outlays representing 35.1% of U.S. gross domestic product in 2018 (out of which federal expenditures came to 20%, and the state and local government the rest), government contracting is big business. This has led to robust mergers-and-acquisitions activity in the sector, particularly of privately held, middle market firms. However, doing business with the government—and arriving at correct valuations for privately held acquisition targets—requires deep knowledge and understanding of the risks and opportunities facing government contractors. To understand government contractors’ unique characteristics and how these nuances affect their market value, we’ll take an overview of the sector, analyze how contract waterfall features affect future cash flow streams, the role of the federal government in establishing competition, and current market dynamics and the role of private equity in driving acquisitions and valuations.