A small business owned by a socially or economically disadvantaged individual (aka an 8a firm) has outgrown several of its NAICS codes and is soon expecting to have to transition to competing for full and open, government wide acquisition contracts (GWAC). It has determined that there will be larger profit margins and opportunities if it broadens its service offerings, but it needs an infusion of capital to establish these capabilities and to service larger and more complex contracts.
Does this scenario sound familiar? While the challenge sounds straightforward enough, the fact is that many businesses fail to make this transition successfully, despite having healthy prior earnings. There’s a reason it’s called the “8a cliff.”
If you’re looking over this precipice, I know from experience that a successful transition is possible. But it requires a cold, hard-headed look at your business and comprehensive planning. (And, many of the issues that need to be addressed to transition apply equally to selling a business.)
Graduating from 8a status is a big step — it will be a culture shock — and without a plan you’ll be flying blind. You need a solid strategic plan for a full & open future that defines your goals and establishes a roadmap. Otherwise, your management team may become frustrated by conflicting or unclear goals and decide to exit rather than to risk an uncertain future (leaving you unable to service and retain existing customers).
When to start planning for a post 8a existence?
The life cycles of 8a businesses typically unfold in the following way: They launch and get a contract or three under their belts as part of the privileges that come with 8a status. Then, for the next several years, they are so busy chasing and servicing 8a contracts that they don’t take the time to prepare for graduation out of that status.
Too late, it dawns on the CEOs that they need to transition. This is the “ah-ha” moment.
At this point, they start to wonder, “Do I sell the business or try to sell my contracts?” or “Do I try to hold on and transition through?”
Selling may not be the easier option. The value of 8a contracts are much less than full and open contracts. 8a businesses are rarely as secure as their balance sheets suggest and past performance is even less of a guide to the future. Nearly 80% of the time, buyers take a pass at buying them.
If you expect to transition to full and open, the answer to the question, “When should I begin planning a transition from 8a status?” should be obvious: the sooner you start planning to graduate, the more successful your transition is likely to be.
Management and capability
Perhaps the most painful area of self-examination for the CEOs I advise is assessing the strength of their management teams. Do they have the experience and capability to pursue and win full and open contracts? Do they have deep penetration and customer intimacy at the account level? Are they familiar with managing a large sub-contractor or a number of subcontractors? Do they have the depth of connections across the sector and industry necessary to wade into a much bigger pool of competitors? If you need to diversify your product offering, does your senior team have the experience to operate in a new product market?
Often management teams grow up in their businesses and the sad truth is that the businesses can outgrow individuals and positions. One of the reasons I advise starting with a strategic plan is that it helps to define what experience you need going forward, and whether your current team can get you from point A to point B.
Back office and infrastructure
As you contemplate growing, it’s also necessary to ask yourself questions like, do I have the right systems and tools in place for more complex financial controls and budgeting? Do I have the right task order management systems for contracts and business development resources?
If you are looking to move into new markets, then you will need to have the right contracting team and knowledge to create the right pricing structure. Similarly, if you are looking to diversify your product offering, do you have all the right certifications in place?
These are just a few of the issues that you will need to assess and that will determine the success of your transition.
Understand your financials and lenders
In the scenario outlined above, our 8a business realized they needed to raise capital to diversify their product offering and to ramp up to win and service contracts in the full and open market.
There is more to raising capital than just a strategic plan. You first need the right lender in place, someone who understands your business and marketplace. And, you have to prove to the lender that you have the right team, financial acumen and discipline to manage larger contracts with more responsibility and a greater demand for capital.
You will need to show that you understand your profit margins, capital expenditure, timeframes, sales cycles, and resource requirements in the new markets you propose to operate in. Likewise, you will need to defend the relative strengths and weaknesses of your contract backlog and their types, the diversity of your contracts and customers, and your capabilities.
Develop a strategic plan
Taking the time to develop your strategic plan will help ensure you’re making the right investment decisions, based on your existing work backlog and sales pipeline and your ability to retain your base of business while scaling to meet future opportunities.
Graduating from 8a status is not for the faint-hearted; it can be more fraught with more risk than the initial start-up. Among the keys to success are plenty of time for planning and implementation, a comprehensive assessment of capabilities (preferably done by an impartial third party) and a management team with members who have experience competing in the full and open market.
Tom Springer is a founding partner in Springer Lawson & Associates, a consultancy of former C-level executives who help mid-market companies maximize enterprise value in advance of, during, and following major business transactions or disruptions.