Session 2: Uncharted Territory: Planning a Successful M&A Exit: Strategic Choices for Growth
Session II features insights from guest speakers Mehul Sanghani of Octo Consulting Group and Damon Griggs of Dovel Technologies, both of whom are seasoned professionals and subject matter experts on the key challenges of generating corporate value and guiding businesses through common GovCon M&A issues.
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3:13 – As a company that started as a small business, what are some of the factors and thought processes that graduate you out of small business and away from the lifestyle company and into full and open unrestricted market and sort of the mid-market companies you’re at now?
13:30 – How did you use your organic strategy to fuel your inorganic strategy? Both in terms of how you look at how you could acquire someone or how you’re going to get a third party to invest or acquire you.
21:54 – Many founders go down this route of I’m building this company to sell. Why did you decide to go down the recap/private equity investment route and what made the timing right for you?
28:13 – Could you talk to us in the context of when you went through the process as a seller, and what your mindset has been on the buy-side?
35:42 – Words of wisdom: suggestions on how they might approach this thought process on access to capital markets, private capital markets, etc… Ideas of what they should be thinking?
Connect with the guests:
Mehul’s LinkedIn: https://www.linkedin.com/in/mehulsanghani/
Damon’s LinkedIn: https://www.linkedin.com/in/damon-griggs/
Connect with the hosts:
Dan’s LinkedIn: https://www.linkedin.com/in/dandoran/
Dean’s LinkedIn: https://www.linkedin.com/in/deannordlinger/
Dan Doran 0:16
Alright. Hello, everybody. Thank you for joining us this morning. My name is Dan Doran founder with Quantive, an investment banker in the lower middle market space, working mostly in the GovCon technology space. I’m joined here with a few illustrious guests, which my colleague Dean Nordlinger will introduce. And today we’re going to be talking about strategic choices for growth and a successful m&a exit. So, with that said, Dean, you want to kick us off here?
Dean Nordlinger 0:41
Absolutely, Dan. Thanks. Dean Nordlinger, with Blank Rome. We’re a full service law firm serving middle market companies, especially in the GovCon space. Been doing this for 20 years representing companies through their lifecycle start to exit. Spent a lot of time working with clients on buy-side and sell-side M&A, again in the ADG space, and really glad that we are joined today by two individuals, both of whom are highly experienced in the government contracting space. Both of them are also very well embedded in the GovCom ecosystem, in their various roles as founders, owners and executives whose roots are in small business government contracting. They have respectively successfully operated their companies beyond small and traverse the chasm, from small business to full and open territory. And again, glad to have them here today, especially with the way the market has been so robust and dynamic the last couple years. So with that said, Mehul and Damon respectively. Would you guys please take a moment to introduce yourselves?
Mehul Sanghani 1:47
Sure, I’ll start. Mehul Sanghani, CEO and founder of Octo. We are a mid-tier government contractor focus on providing next generation technology modernization solutions to the federal government.
Damon Griggs 2:02
Hi, I’m Damon Griggs, CEO of Dovel Technologies. We’re similar to Mehul. Mid-size, government contractor, high end technology capabilities focused on the federal health and adjacent civilian markets. And we were just acquired by Guidehouse last quarter.
Dan Doran 2:21
Awesome. Thank you, gentlemen. So where I’d like to start with the first question here. Both of your companies started as small business, sort of the typical lifestyle, family-owned business. Mehul, if I understand correctly, you are a 8a graduate. And Damon, the company you run is formerly a woman-owned small business, and both have grown materially since then. So the question I’d like to pose is, what are some of the factors and thought process that went into sort of graduating you out of that small business and away from the lifestyle company into full and open, unrestricted market, and sort of the mid market companies that you’re at now? And Damon, maybe we’ll start with you.
Damon Griggs 3:04
Sure, so I joined Dovel in 2016. So I really want to give full credit to the founders Dov and Elma Levy and my predecessor CEO Paul Leslie for really coming up with the initial strategy and for their commitment to reinvest everything they had into the business. Obviously, there’s there’s different ways you can run small businesses, as you said, as a lifestyle company, or you can really run it as a, you’re putting everything and you’re reinvesting in the company, and you’re building long-term value that will ultimately be recognized later, but theoretically, at a much higher rate of return. And they, they, they took very modest pay, even took some cuts during difficult times, and sequestration, or government shutdowns and other things, and really put the company in a position to be able to make some of these acquisitions early on, and and, you know, off of off of the company’s own balance sheet. So taking on debt to do our first several acquisitions, and get us to the point where we were able to buy by the time I joined in beginning of 2016, Dovel was already over $70 million run rate, and had successfully graduated, still had some legacy small business set-aside work, but we’re shutting it quickly. And we were able to continue to grow exponentially since then, we acquired MSC in 2016. And then in May of 2019, we made the decision to we kind of hit our limit in terms of what we could do internally, we made the decision to take on a private equity partner and that was Macquarie capital. And that really infused us with all sorts of additional capital to not only invest in the next phase of growth in terms of innovation and a leadership team that could was really built to scale for the future, but also do another large acquisition of Ace Info Solutions later in 2019, which ended up being incredibly successful and gave us a lot of additional capabilities, contract vehicles and other key capabilities that we were looking to do.
And from a customer perspective, and as a result, we continue to grow. I think we grew 50% in the two years following Ace Info acquisition, I think we’ve had an average growth rate of about 40% over the last five years. And, and, you know, over half of that was organic, but the other half, which was key is inorganic, and that got us on a run rate of about 450 million this year, which ultimately led to being noticed in the market, which is a very hot market, and, and our eventual sale to Guidehouse at the end of 2021.
Dan Doran 5:51
Awesome. [crosstalk] Mehul, how about you?
Mehul Sanghani 5:55
So sorry, yeah, great. Yeah, no, I, I founded I was fortunate enough to found the company in 2006. And, um, you know, one of the things that, you know, I’m quite proud of, and I think one of the things that really allowed us to have some success in our growth, and our trajectory is that we really focused on differentiating the company around technology. And a lot of the terms or the the jargon in the marketplace, that is commonplace, now: capabilities, like, you know, agile software development and cloud, you know, these were nascent capabilities when I founded the firm back in 2006. But areas that we really wanted to carve out our niche, and our specialization in. And so we were fortunate, I think, in some ways to catch lightning in a bottle, I think those were capabilities that we gravitated to, and then built our niche and our reputation around.
But also, coincidentally, those were areas of significant demand aperture in the marketplace. And so, you know, that’s what really drove the growth of Octo is the fact that we were at the intersection of not just not only specializing in those capabilities, but also having significant demand for those types of modernization capabilities take off from 2006. So I would say, from 2006 to 2015, we really rode, you know, that tidal wave of not just demand aperture, but our focus around that horizontal differentiation and those capabilities, and we were able to navigate what I consider the major inflection points for a small business,. We were able to gravitate towards, you know, that $10 million inflection point which a lot of small businesses, I think, you know, really struggle with in terms of building an identity, then 10 to 25 million, I think, the last inflection point I’ll point out was, you know, from 25, to 50, and, you know, at each inflection point, as a founder, you really have to, you know, do some gut checking, because each inflection point, even those inflection points that I denoted 10, 25, 50, will require substantial reinvestment in the ongoing operations of the business to be successful.
One of the other things that you noted, you know, our roots, you know, in 8a, one of the other things that, you know, I, you know, I think we were deliberate about, but I think, you know, in hindsight was very good for us is that we never really relied on that socio-economic status to be part of our differentiation. We did enter the 8a program, but we voluntarily withdrew within a year, you know, for a number of reasons. I think there’s, you know, significant, you know, reporting requirements. And then, I think at a certain point, we didn’t feel we met, you know, and or before SBA told us, we didn’t meet, you know, some of the the economic disadvantage criteria that that, you know, that program warranted and, and, and just my own personal perspective, I think, in some ways, as we look to partner, as we look to build our brand identity around those capabilities I talked about, it becomes a little bit of an albatross, it becomes a stigma, I think, folks view that your differentiation is tied to your socio-economic status, rather than the real the the capabilities, that we really were striving to be differentiated around. And then, in certain cases, some of the customer intimacy that we were starting to build. And so, you know, that was that 10 year period, but the sort of fast forward the other thing that we did once we kind of hit 50 million is we, you know, I had a conversation with a banker like yourself, and one of the things that he said, really stuck with me. He said, you could you really kind of have two choices in terms of you know, where you’re at, you can continue to run your business, like a lifestyle business and run it like an ATM machine, you know, or you have the intestinal fortitude to take, you know, some of the some or almost all the profits that you’ve made here before, and really significantly reinvest in the business because this last chasm, you know, even at 50 million in size, you really have to have, you’re going straight from being, you know, on your five year look back from being a $50 million business competing directly with multibillion dollar enterprises. And so, you know, that takes not only infrastructure that takes capability that takes a lot of things. And you have to make that decision because there’s nothing I think there’s I think a lot of folks look to sell their business, but there’s nothing wrong with having a lifestyle business, it can be very lucrative, in many cases more lucrative, depending on how you’re positioned, then, you know, really trying to double down. But, you know, we we looked to double down and I was fortunate enough to hire a gentleman named Bob McCord, as my president and COO and, you know, Bob not only brought maturity, you know, and experience, but certainly the discipline. He had, he had navigated that chasm before. So he brought a level of process discipline and infrastructure discipline, and a business development discipline, that certainly, you know, in some, you know, in pockets we had, but certainly weren’t congealed enough to be able to make that leap and cross that chasm. And so, you know, I was fortunate to have him, you know, by my side for four years prior to our partnership with Arlington, at which point he decided to take some time off.
But, you know, that four year period where we really significantly reinvested in building our infrastructure, you know, building out more capabilities allowed us to cross that chasm from 50, to, you know, you know, around 130-140 million in size, and that was where we also crossed the chasm in changing our overall contract mix. You know, we were a company that was predominantly 100% small business set aside, you know, around that 215 timeframe, to the time that we transacted, we were a company that was predominant, almost all of our work was was unrestricted. And you know, that takes a you know, a lot of wins. In order to do if you’re a company of a certain size, you know, for example, if you’re 50 million in size, if you want to be a company that’s 70%, full and open, I don’t think folks appreciate the amount of full and open work that you actually have to win, to get to that level of, of contract mix, you have to win, you know, several 100 million dollars worth of awards just to get there. And so, we were fortunate enough to do that. And I think fortunate to have, you know, Bob’s wisdom, advice help helping guide us along the way, but, you know, I’ll pause there, but those are some of the key things that we looked at as we as we made that leap.
Dean Nordlinger 12:05
So, okay, very, that’s very insightful, and detailed, I like that. So I want to stay on the topic of, we all know that companies grow two ways you touched on it, you can grow inorganically, or you can grow organically. And thinking back, I just want to back the truck up, like going back to when you were smaller. And you were going to go along the spectrum I want to talk about, ask that. We’ll have Damon first and then back to you Mehul. Talk about how you use your organic strategy to fuel your inorganic strategy, both in terms of, primarily in terms of how you then looked at pays or somebody we could acquire and, or how we’re going to get a third party interested to believe they should invest in or acquire us.
Damon Griggs 12:58
So, so the organic I mean, and I said this, in the prior session, organic growth is, is by far the most cost-effective way to grow. And, and certainly the, you know, builds the best, the most long-term value, but there’s a time and a place for inorganic and and and especially when you want to enter a new market, rapidly develop, you know, acquire new technology quickly, things like that. And so I think Dovel really started off focusing on the organic side, and had had several years of strong organic growth, to get it to, you know, it’s sort of that that nascent stage where it could do a couple smaller acquisitions on its own balance sheet, as I mentioned earlier, and, and then that kind of fueled a lot of the future growth, we did the MSC acquisition, like I said, in 2016, that that got us into the real, you know, we were well over 100 million at that point closing in on 200 million. And that’s when we attracted interest from private equity. And really, that’s when we sort of hit our limit in terms of what we could we could do on our own balance sheet.
So that that next phase is really where where we were able to, to kind of accelerate even more once we got the infusion from Macquarie Capital to do all the the investments. That’s the, that’s the nice thing about kind of hitting that mid-tier size is you can we still look and feel and I always talk about Dovel, and Mehul may feel the same way with Octo, it really was, in a lot of ways the best of both worlds because we still look and felt like a small company where it mattered in terms of customer focus, agility, responsiveness, that entrepreneurial culture, but we actually now had scale and we had a much broader set of capabilities, and we also had enough investment to make to make more than one bed at a time. And when you’re small you really can’t, you got to place your bets very selectively. You’re lucky ifyou can make one investment at a time and you hope it pays off, we were able to make multiple investments, we invested a lot in innovation. We invested a lot in our leadership team. And we also did the the Ace Info acquisition. So we were able to really pursue a multi prong strategy to grow on all on all fronts, and really build true enterprise value. And, and even when I talk about innovation, we developed several patents, we had proprietary tools that we embedded into our solutions for our customers that really helped us, you know, become stickier with our customers and winning recompetes. So it all kind of starts to really build on itself when you when you when you hit a certain size, where you can really invest across multiple facets of the business.
Dean Nordlinger 15:49
Mehul Sanghani 15:50
Yeah, so I’ll try and pick up a little bit where I left off. You know, I talked about, you know, a key inflection point for us being that time period between 2015 and 19. And being able to cross that chasm, you know, into full and open. And so what really allowed us to be able to do that I noted, you know, the fact that you we needed to win a significant amount of full and open business, was the fact that, you know, from a strategic perspective, we had built, you know, a brand identity. We had built, you know, reputational credit rebuilt reputational credibility around, you know, these areas of modernization capability: agile software development, cloud engineering, user experience, and design cyber, some of these areas that were core to two major modernization efforts. And so one of the things that we looked at is if we’re going to be punching up in weight class, and we are going to, you know, have to compete for full and open work, where are we going to be the most successful? And for us, you know, as Damon pointed out, you can’t at that size, certainly you can’t place bets everywhere. But a core tenet of our strategy was taking advantage, you know, of our reputational credibility and looking at opportunities that were major modernization efforts, regardless of agency. And so, you know, again, I think a lot of small businesses that have had, you know, significant growth trajectories have done so with intimacy and a focus on a specific market. We’ve done, we did so, and we had our growth and our success with horizontal differentiation, identifying opportunities, be they be there at HHS, or in the intelligence community or in, you know, some of our defense combatant combatant commands, where folks were demanding a, you know, a provider that not only had, you know, next generation capability, but brought something that the larger players didn’t, you know, whether it be IP, you know, or specific expertise and doing cloud native development, you know, taking things that were complex, mission-centric applications, and then moving them across multiple security postures, which we did, in some areas of the intel community, you know, we we looked at, and we not only were able to get in on the front-end of those opportunities, and sell them on our, you know, credibility, but we were able to talk to them at length about what our solutions and value propositions would be long before, you know, the RFP is released.
So nothing I’m talking about here is, you know, a silver bullet. These are things capture discipline, that are commonplace in other conversations. But I think it’s that discipline combined with our focus on horizontal differentiation and picking selectively the right opportunities for folks were desiring that allowed us to have the degree of success winning, beating out larger competitors for full and open opportunities, being an insurgent bidder, where folks were looking to modernize, and their approach from what they had from just keeping the lights on to really, you know, modernizing what they were doing in the next iteration and solicitation, identifying those opportunities was key to our organic growth and success. So, you know, fast forward to 2019, we had an opportunity to exit completely had a number of different strategic, you know, publicly traded suitors that were interested in acquiring us. But we instead, we really believed in our strategy. And we felt that our painting was no, it was not really finished. And so we decided to partner with Arlington. And with Arlington, we not only were able to take advantage of, you know, that organic strategy and sort of that differentiation, but we’re really able to double down on that, you know, we were able to look at inorganic acquisitions that brought additional capabilities that we felt were going to be tip of the spear for demand aperture going forward. Artificial intelligence, machine learning, open source software development, common data fabric, you know, these are things that we were able to attack, not just with our own internal R&D investment, but also attacked selectively with M&A catalysts to add to our differentiation and story. And so you know, that’s that’s really where you see the intersection of, you know not just some of the things that we laid the groundwork for organically, but also where we were able to selectively look at m&a catalysts to continue to position the firm as a differentiated asset.
Dean Nordlinger 20:14
Dan Doran 20:16
So.. great, great segue, I kind of wanted to talk about where you’re going with this Mehul. Many founders go down this this route of, you know, building a company eventually to sell especially in the federal space, sort of the Built-to-Sell mentality. Both companies here today went through a private equity recapitalization prior to a full transaction, at least in Damon’s example here. But one of the things that I see a lot is founders are reluctant to give up an element of control. And oftentimes, they view this as an all-or-nothing, I want to sell completely to a strategic, or I want to maintain, you know, complete ownership in this company. I’d be interested in hearing the thought process of why you decided to go down the recap, private equity investment route, and what made the timing right for you. So maybe, Mehul let’s start with you. And then we’ll flip this back over to Damon, and talk a little bit further about the experience at Dovel.
Mehul Sanghani 21:14
Yeah, no. And, you know, I’m glad you brought this up, I think these sorts of decisions, as you might expect, certainly, for a founder like myself that, you know, founded the company on its own, on my own, you know, these are deeply personal decisions. These are, you know, not only you get emotionally invested these things, I mean, I think the cliche is to refer to it as your baby. But, you know, really, they’re obviously, you know, obviously, a lot of parallels. And, you know, each decision that a founder takes is deeply personal, there’s no wrong decision, you know, when it comes to, you know, an enterprise that that you’ve built and cultivated in that regard, and it was no different for me.
I think, you know, as I noted, I think, you know, we, you know, around the 2019 inflection point that I talked about, we started to receive, you know, significant interest from, you know, strategic acquirers. And I think, I think, like many others, I think we were purposeful, and looking at.. we weren’t necessarily built-to-sell, we were very methodical in thinking about how we might get there. And whether that was the right decision for us, whether it was the ATM or being built-to-sell, then we did that. And I think we were at a point where we were, we could we could have achieved that. But in many ways, I think we all felt that we weren’t, as I noted, we weren’t really done. You know, if it was Michelangelo, we weren’t really done with our painting here. And there were significant upside still left in the business. And, you know, I viewed I really viewed you know, our trajectory in terms of inflection points, I talked about it going from 10 to 25, to 50. And I thought the last sort of tranche for us would be around that 130 million dollar size, because I think at that point, you really have to look at, I think, M&A to be successful. And as I noted, before, I think to be credible from an M&A perspective, even you have the deck capacity, you have to have done that before. And I think as we went into those conversations with strategics, you know, certainly there is an element of okay, was I really ready to let go. But there was also an element of, hey, you know, there’s upside left in the business. And Arlington did a great job of really articulating the value proposition of hitting that next inflection point that 500 million to the $1 billion trajectory, and doing so selectively with M&A and, and really by doubling down on some of the things that had been successful for us. So that was, you know, a key element, I think they really sold us on that. But it also fit for myself in the leadership team. I think demographically, spiritually, we were we were not ready to sort of hang up the cleats in that regard. And I think that’s an important element there too. So it’s not, but the last thing I’ll say is that it’s not just about being spiritually aligned, as you noted, there is for a founder, you know, you have to be ready to be a true partner with someone else. I think in many cases, especially cases like mine, where you have a single founder, there is a cult of personality. And I think this element of, you know, in many cases, an autocratic leadership style and when you’re part of a shared governance environment, especially a shared governance environment, where you ceded majority control, like I have, you really and there’s there’s certainly don’t, don’t get it twisted, there’s certainly an element of that vetting that goes on by the PE as well. But I do have the personality that can, you know, be part of a shared governance structure, a shared level of accountability, you know, working with a board working within that discipline, where you’re not necessarily the only stakeholder and not necessarily making every major strategic decision autonomously involving the firm. And so I think that’s a gut check. You know, for any founder if they do consider the, you know, the private equity route, it’s that in and of itself is also not a panacea. You have to have a self awareness to know and understand whether you can truly operate in a shared governance model. And, and many founders cannot just because they’ve operated autonomously for such a long period of time.
Dan Doran 25:11
Awesome. Thank you, Mehul. Damon, thoughts, thoughts from you?
Damon Griggs 25:15
Yeah. So again, full credit for this decision to Dov and Elma Levy and the co founders and Paul Lesley, that the CEO at the time for, for really making, believing in our strategy and believing in the path that we saw to get to the 500 million to a billion range within the next several years, just pursuing and executing on the strategy that we had laid out. So far of it was was that we really believed in the runway that we had, we just needed additional capital, from outside to get there.
Part of it, too, was belief in our leadership team. And that, you know, we really wanted to keep that team together, a lot of the key folks and then one of the other big components, and this is again, a tribute to to the founders, and really the culture that we have at Dovel, how customer focused it is, is we were really worried about letting our customers down, we the customers have really appreciated what we were offering for them, how much control they had, how they could go right to the top of our company, whenever they had an issue and how responsive we were and we didn’t want to risk that going the strategic route. And and again, you know, at least at that time, and these days, valuations are getting closer and closer and PE’s are even paying up above strategics. But at that point strategics were still paying, you know, typically paying a little bit more of a premium than PE so they left some money on the table to really, you know, let things continue to roll to execute on our strategy. And, and it definitely did pay off later. For everyone at that, that that next bite, or maybe it was a whole nother Apple depending on how you define it.
Dan Doran 27:01
Awesome. Thank you.
Dean Nordlinger 27:02
So, so. So taking, taking all that into account. And given that, again, we’re talking with the both of you were successful in taking firms with small business routes and transcending. And and so you were you weren’t you’ve been on the sell-side, and you’ve also been on the buy-side. So we talk about exiting, right, I feel like there’s always three questions that come up, you know. How saleable is the company? And what are the target company’s value drivers? And as a buyer, within all that, how are you viewing and valuing any small business set-aside legacy type work that’s there? So I would like to hear from both of you. And again, we all know, through this dialogue that you did you were able to hit a high note on all three of those as sellers. But could you talk to us in the context of when you went through the process of the seller? And how what your mindset has been on the buy side? I’ll start with you Mehul.
Mehul Sanghani 28:00
Yeah, sure. And so I think, you know, Damon hass talked about sort of the the five C’s that you look at. I think one obviously, you know, we look at, you know, those foundational elements, you know, from a, you know, a buyer perspective as well, you know, what are, you know, the key customers, you know, what are the contract vehicles? And then what are the capabilities, you know, that a prospective, you know, seller is going to be able to bring to the table and add to the mix. And so, you know, we have, you know, again, you know, when we look at how we position ourselves, we position ourselves, you know, in much the same way, I think, you know, every company has different approaches to how they they’ve differentiated. As I’ve noted, I think we’ve differentiated, you know, based upon, you know, being trying to be a pure play modernization provider and bringing, you know, some of those capabilities to bear. And so, in looking at M&A, we’ve looked at things that grow and enhance, you know, those sorts of things. But, you know, separately, we’ve looked at things that bring insular customers. You know, if you look at both the Connexa and the Volant deals that we’ve done, they not only brought unique open-source capabilities. In the case of Connexa the Common Data Fabric, you know, open-source capabilities in the form of Volant. And, but they also brought insular customers. Connexa brought, you know, and doubled down on our presence at the NGA and Volant really doubled down our presence in a couple of select Intel communities at DIA and NRO. So insular customers are a part of it.
Here more recently, we were fortunate to complete you know, the B3 acquisition, they not only brought differentiated capability and sort of low code, no code platform as a service type capabilities, things that our customers are demanding now in SalesForce and ServiceNow really differentiated capability that is difficult to build organically, difficult to attract a critical mass of talent and build that capability organically. But separate from the capabilities, they also brought a vehicle in the form of T4NG and brought, you know. And so, And also a customer in the form of the VA. And then previously with SevenTech, we, you know, really saw a company that looked much like us, you know, from a capability and differentiation perspective, but they, they really brought an elusive customer for us and a significant franchise position, you know, at DHS, which is, which was an elusive market for us and really allowed us to establish, you know, not just a beach head, but, you know, as I noted, a franchise position there. So, you know, capabilities, you know, customer intimacy, and then contract vehicles are some of the dimensions that not only, you know, we built our firm around, but separately, the same lens that we look at when we look at, you know, potential acquisition targets.
Dean Nordlinger 30:57
Got it. Appreciate that. Damon?
Damon Griggs 31:00
Yeah, and drilling down a little bit more specifically into the small business risk side of the question, because I think Mehul handled the rest of those the same way I would have. I feel like, you know, maybe a few years ago, buyers were very risk averse around any small business, they would immediately shy away from or heavily discount. As you know, this last year, especially the markets gotten hotter, buyers have to be willing to take on more risks, really look at that small business profile and and dig a little deeper to see what what’s in it, and how convertible some of it may be to full and open down the road. And so we did that as well. And Ace Info actually had some small business set aside risks but but what we, what made us feel more comfortable about it when we did that deal. And and this was the same was true with the Dovel. So we were actually able to convert a lot of our legacy small business work into full and open is these are long term customer relationships, that there were small business contracts that started off relatively small, but had grown exponentially over time, not just in terms of size, but also in terms of complexity. And if you see programs like that, that the odds of it, you know, you being able to convert it to full and open are a lot higher, because that the switching costs are really big to a customer that if you’ve long term, if you’ve proven yourself to that customer long term, you’ve grown with them, it’s it’s it’s complex work that you’re performing, it’s it’s hard to just award that to someone else and assume you can just kind of flip some of the team and still deliver at that same level. And we saw some of that.
So if you have small business, or if you’re looking at a potential target that has very diversified a bunch of a bunch of different small business contracts that are all very small, that’s risky. If you have a couple relatively concentrated, larger, small business contracts that have grown over time, that are still classified as small business, that’s less risky to me. And and the potential of converting that is a lot higher. And we’ve lived that on the Dovel side. And that’s what created a lot of value in our process. And we’ve seen that the same now. But another factor you also need to consider is is political factors as well. So what administration? How small business friendly or not, are they? Maybe the likelihood of converting work from small business to full and open a couple years ago is different than it is today. Even if all the other factors are the same, just give a new administration, new priorities and focus on on small business set aside work and hitting those those goals. So, so all that has to come into play, as you’re as you’re factoring in, in addition to the 5 C’s that we both talked about in the prior session.
Dean Nordlinger 34:02
Got it. Thank you. [Crosstalk] Really Insightful.
Mehul Sanghani 34:05
I mean, just just to piggyback on that real quick, because I didn’t address it, but like I echo all the Damon’s sentiments, but quickly, I mean, I think you also have to be able to handicap, you know, with each individual target their ability to really make that transition. You know, certainly as Damon noted the market type, there’s certainly you have to take on more risk, and there’s more receptivity in general, for small business transition risks. But I think really digging into the details and understanding, you know, whether there there is the ability to transition those contracts. And oftentimes what we rely on is precedent. You know, is there precedent, as you know, Damon pointed out just, you know, at a macro level within the administration, is there precedent within the agency, or is there precedent, certainly within the firm that you’re looking at as the target? Have they demonstrated the ability to transition other contracts? And, you know, I think using that as a little bit of a litmus test to foreshadow whether those contracts that are that remain in small business programs can transition
Dan Doran 34:59
Great, awesome. So final final question. To wrap this up and put a bow on it, we’ll stick with Damon first here, and then flip it back to Mehul. Words of wisdom. So if you are a founder working through this this growth curve, like, like we’ve been talking through today, suggestions on how they might approach this thought process on access to capital markets, private capital markets, or, you know, full exit. Ideas on what they should be thinking. Damon, you first?
Damon Griggs 35:32
Yeah, it’s a broad question. I think, first and foremost, what… if they’re considering selling to certainly get their house in order. You want to be prepared for all the diligence, the process, the types of questions you’re going to get. You also really want to think about what your role is, you know, depending on as Mehul said, do you want to still maintain some type of control? Do you want to maintain full control and maybe have more of a growth equity type investment? Do you want to bring in a controlling interest? Do you want to sell to a strategic and completely, you know, hand over the reins. There, there’s many different factors at play. And each, it’s personal preference, it some of it may depend on where you are in your stage in your career, but all that has to has to come into play.
And, and really, I think just focusing on building true value drivers, to maximize the outcome, whatever result you want, whether it’s, you know, minority control, majority or full sail, you want to maximize whatever that exit value is, and, and a lot of that depends on, you know, not just, you know, having the most attractive customer base contract vehicles, it’s it’s, they’re gonna they’re gonna want to look at your some of the intangibles, how engaged are your employees? What are you know, things like Glassdoor ratings look like or other things that that you might not think really matter when it comes down to it. But but in a competitive process, those will, those will factor in. Making sure that you’re taking opportunities to invest in innovation and, and additional proprietary tools that you can maybe embed into your solutions for your customers to make sure you’re winning that next re-compete and making you stickier with your with your customers. And because because buyers are going to come in and look at your re-compete win rates and a lot of what Mehul said they’re going to look at, is there a track record there converting small business to full and open? And how deep and far back do your customer relationships go? What are your seat bars look like? All those things, you got to start thinking ahead now and be prepared to have for a full inspection? And if you don’t like what they’re gonna find, then maybe you’re not ready.
Dan Doran 37:53
Awesome. Mehul, thoughts from you?
Mehul Sanghani 37:55
No, I definitely, I think, you know, Damon did a great job of explaining some of the tactical elements that you know, and I’ll speak certainly from a founder perspective, but you know, you as an owner, as a founder, as multiple founders really have to be prepared for, you know, prior to an exit. And I think there are no shortage of good advisors in our market, ones that specialize and know and understand the nuances of our market. And so I really recommend, you know, or foot stomp some of the things that Damon talked about, which is, you know, getting your internal house in order, but also, you know, aligning with the right partnership, so that you can get good, no BS advice about where you really stand. And, you know, I think, you know, oftentimes I think, folks, you know, as founders or owners want to time the market, obviously, you know, we’ve alluded to the fact that the market’s hot, but do you really have, you know, a saleable asset? How will the market react to the asset that you’re putting out there, you know, a hot market sometimes also means it’s a crowded market, there are other competing assets that are out there, and, you know, valuation expectations, you know, certainly have gone up. And so, how does the asset you have, what is the true market value, you know, for an asset like yours against other assets that might be available at the same time, you know.
So all of these things, you know, really are predicated on getting the right sound advice, both legal, investment banking, and then internally, you know, having, you know, I think having if you don’t have folks within your firm that have gone through, you know, a process or a transaction before, you know, certainly there are no shortage of folks that are semi-retired that will serve as advisors to really help you navigate that. I think there’s also an underestimation on the tax that it places on your internal back office as well. You know, whether it be HR or finance and so, you know, that tax along with you know, the fact that in many cases founders take for granted, you know that Maslow and you know how they might be feeling about what happens on the other end of the transaction can lead to a lot of choppiness throughout the course of a transaction or process. So there’s a number of really complicated elements of blocking and tackling that I think people can certainly take for granted, going to exit.
But lastly, I think some of the other things that I talked about were spiritual, you really have to, as a founder, a set of founders really have to have a spiritual understanding of what you want. And I think, what do you want out of an acquisition? Are you really ready to cede control? You know, what are you looking for and acquire what you know, in terms of the resources that you’ve invested, you know, time and energy and cultivating this legacy? With shoulder to shoulder? What do you want for them? How do you want to communicate and articulate what’s happening to them. And so if you don’t go into it, with, you know, sort of that spiritual Zen or being at peace with exactly what you’re looking for out of the other end of the transaction, what you’re willing to do. I noted, you know, going into it with a PE requires, you know, a level of ceding control and having the self awareness that you’re capable of doing that. These are all things that really have to heavily factor to factor in spiritually, in addition to all the things that go into it tactically, too,
You know, that’s great that I think, you know, as Dan and I listen to you guys drop wisdom here, I sort of, you know, inescapably come to the conclusion in terms of takeaway that you are unavoidably the product and the outcome of the decisions you make along the way. As you said, Mehul, all of which are personal. And it feels to me like, Hey, listen, there’s no shame. And there’s, there’s some great lifestyle companies. But to be truly saleable, part of the decision making only way is the choices you make and the things you do. What’s going to be the end product of that, how are you gonna be perceived by the potential buyer pool? Like not yourself? How do you how great Do you think it is? More importantly, how does that How do those third party how are they going to see you? How are they going to find you? And obviously, in both both your cases, you did it up, you did it up well, you did it up correctly, and you had successful exits. So I really appreciate you guys making the time taking the time to talk through all this with us very relevant, very timely, as you guys know that the market is dynamic that is robust. I don’t think there’s any reason to think that in 2022 and the M&A cadence and rhythm is going to be much different than what it’s been the last couple of years. And so we… a lot of thinking a lot of people in the audience who are thinking about this, and I think that there’s you’ve given them a lot to leverage and take for another task. And thank you for that.
Dan Doran 42:26
Awesome, thank you, gentlemen. Appreciate your time today.
Mehul Sanghani 42:29
Damon Griggs 42:30