M&A Series
Is Your Valuation Expectation Too High? A GovCon Case Study
Realistic Approaches to Business Valuation for Government Contractors
Introduction
Valuation is often a misunderstood element in M&A; it is very truly a mix of subjective and objective facts and data. It’s a delicate balance between numbers, narrative, and market perception. Nowhere is this truer than in the world of government contracting (GovCon), where mergers and acquisitions (M&A) require careful calibration of expectations. I’m a firm believer that deal price is not the sole factor in a successful deal. Terms, relationships, timing, organizational health, etc. all play a large role. However, initial valuation expectations can have an impact right at the very beginning. A misstep in valuation can kill a deal before it begins, leaving business owners frustrated and opportunities lost.
I want to dive into why valuation expectations often stray too high. I’ll use a brief GovCon case study, which I’ve experienced numerous times as an example of valuation impact. And I’ll give some tips as to how sellers can maximize their company’s worth while keeping their goals realistic. Whether you are a small business owner, a broker, or an investor, understanding the nuances of GovCon valuation is essential to closing successful deals.
The Pitfall of Unrealistic Valuation Expectations
I’ve seen this multiple times in my career. A business owner who, spurred by hearsay—perhaps a conversation at a Rotary Club meeting (I’m not kidding, this has happened multiple times)—sets their sights on a lofty price. They’ve heard whispers of high multiples paid for similar companies and believe their business deserves the same. However, reality and expectations don’t always intersect. For Verus Datum, the mission isn’t to set prices or negotiate deals. Instead, it acts as a trusted connector, matching sellers with experienced brokers and buyers, and equipping them with the knowledge to succeed.
Valuation missteps—especially inflated expectations—are a contributing factor of failed M&A deals. When a seller’s price is 20–30% above market, buyers may walk away rather than waste time on a negotiation that feels destined to fail.
A GovCon Case Study: Company A
Let’s explore the underlying mechanics through a fable. Company A is a small-to-mid-sized defense contractor. The owners, inspired by industry chatter, sought a 9x – 10x EBITDA multiple for their sale. On paper, the business looked fine: steady revenue from program management, administrative services, and even some “cyber” support. Beneath the surface, buyers identified several factors that caused pause:
· No Proprietary IP: Company A lacked unique technology or patents, providing no defensible edge against competition or market disruption.
· Subcontractor-Heavy Revenue: 70% of revenue came from subcontractor roles rather than prime contracts, raising concerns about dependency and risk if partnerships shifted.
· No Sharp Niche: The company’s “cyber” focus was broad and blurred into general services. Unlike competitors specializing in AI-driven threat detection for example, Company A had no clear specialization.
Buyers calculated that Company A’s asking price was about 25% too high. In GovCon’s service-based sector, typical valuation multiples for small-to-mid-sized firms fall between 4x and 7x EBITDA. Premium multiples—those above 7x—are reserved for companies with strong intellectual property, prime contracts, or dominant niches. Company A didn’t meet these criteria, making its 9x ask unrealistic. This doesn’t mean they won’t get it. A savvy buyer might stay away. An inexperienced buyer may pay the premium…does that mean the deal will be successful for both parties?
How Unrealistic Valuations Harm the M&A Process
Breakdown of Trust Between Buyer and Seller
· If a seller insists on an inflated multiple without supporting fundamentals, buyers immediately question credibility.
· Trust erosion early in negotiations makes it harder to bridge gaps later (LOI stage, diligence, closing terms).
Deal Fatigue and Wasted Resources
· Both sides invest time and money in diligence, legal work, and financial modeling. If valuations are unrealistic, deals collapse sooner or later.
· The seller may also lose leverage with other bidders once word spreads that they were “unreasonable.”
Lost Window of Opportunity
· Markets move fast — buyers have other targets. If a deal falls apart due to valuation disputes, the seller may miss a cycle of consolidation or favorable industry trends.
· By the time they return with a “realistic” ask, buyers may have reallocated capital elsewhere.
How Unrealistic Valuations Harm the M&A Industry More Broadly
Market Distortion & Inflated Multiples
· When sellers (or advisors) consistently push inflated numbers, it creates “anchoring” that makes rational deals harder to close.
· This distorts comps and makes buyers less willing to engage broadly, slowing industry-wide deal flow.
Erosion of Buyer Confidence
· Strategic acquirers and private equity firms rely on efficient sourcing. If too many deals are overpriced, they disengage from the market.
· Over time, this reduces competitive tension for sellers and drags valuations down across the board.
Reputation Damage for Intermediaries & Sellers
· Brokers and bankers who consistently overvalue businesses lose credibility with buyer networks.
· On the sell-side, business owners who are known for “chasing unicorn valuations” may get blacklisted or ignored in future cycles.
How to Maximize Your Valuation—Realistically
Avoiding the pitfalls of Company A requires a grounded approach. Sellers must align with market norms and use targeted strategies to genuinely boost their company’s worth.
Typical GovCon Valuation Multiples
For most GovCon firms under $50 million in revenue, the prevailing multiples are as follows:
· Service-Based GovCon Companies: 4x–7x EBITDA
· Product/Tech-Driven Companies with Proprietary IP: 7x–10x EBITDA, sometimes higher for true category leaders
Premium multiples are not the norm—they must be earned. So, what can business owners do to reach the upper end of the range?
Three Common Strategies to Boost Small/Mid-Size Private Company Valuation
Revenue Growth & Recurring Contracts
· Buyers place a premium on consistent, predictable revenue.
· Long-term contracts (especially with government agencies) increase value.
· Demonstrating consistent year-over-year growth signals strength and future potential.
Margin Expansion & Operational Efficiency
· Improving gross and EBITDA margins reflects disciplined management.
· Streamlining operations, automating processes, and renegotiating supplier agreements all help expand profitability.
· Lean, scalable operations are more attractive to buyers.
Diversified Customer Base
· Reducing customer concentration risk is critical. If 30–40% or more of revenue comes from one client, buyers will discount valuation due to perceived instability.
· A portfolio spread across industries and geographies signals stability and resilience.
Three Less Common (But Effective) Strategies to Boost Valuation
Building Intellectual Property (IP) or Proprietary Differentiators
· Even modest patents or unique processes give buyers confidence in defensibility.
· A proprietary tool or methodology—even if not fully monetized—can differentiate you from commodity competitors.
Strengthening Middle Management & Succession Planning
· Private companies are often overly dependent on founders.
· A strong, autonomous leadership team reduces key-person risk and improves buyer confidence.
· Documented processes and succession plans can add 0.5–1.0x to EBITDA multiples.
Strategic Partnerships & Ecosystem Positioning
· Collaborating with larger industry players (through joint ventures, channel partnerships, or ecosystem integration) increases perceived market reach.
· Even non-binding agreements (MOUs, distribution partnerships) create a narrative of scalability and future growth.
· Buyers value optionality and market positioning.
Practical Steps for Sellers
So, how can business owners ensure their valuation expectations are both ambitious and attainable?
· Engage Industry-Specific Brokers: Work with professionals who know the GovCon landscape. They will provide informed guidance and benchmark your business against actual market data.
· Do Your Homework: Research recent deals, prevailing multiples, and what drives premiums in your segment.
· Prepare for Diligence: Organize financials, contracts, and operational data for transparency. Address weaknesses before going to market.
· Stay Flexible: Be open to feedback from buyers and brokers. Sometimes a modest adjustment in price leads to a much higher chance of closing.
· Prepare Financials: Organize your financials, obtain audits or financial review by CPA firm, manage debt position of the company – buyers value verifiable finances and healthy debt positions.
Verus Datum’s Role
At Verus Datum, they are building a platform to connect sellers with the right brokers—experts who can set realistic expectations and maximize business value. The approach is to empower sellers with actionable insights, guide them through the nuances of M&A, and help close deals where both sides win.
Verus believes success is measured not just by the highest price, but by the right fit, a smooth process, and a lasting legacy. A valuation gap need not derail your exit; with the right preparation and mindset, you can achieve the outcome you deserve.
Conclusion
There is often a misalignment in reality in valuations. That doesn’t have to be the case. For many business owners, the best outcomes stem from clear-eyed expectations, strategic preparations, and expert guidance. Avoid the trap of inflated multiples—look beyond hearsay to real market fundamentals. Use proven strategies to enhance your company’s value, and work with advisors who understand your industry’s unique challenges.
In an M&A landscape rife with opportunity and risk, realism and readiness are your most powerful tools. Don’t let valuation missteps stand between you and your vision for the future.
The Working Capital Trap: A Surprise Deal Killer in Private-Side M&A
By Josh Herren
Private-side M&A deals, while less costly than large public transactions, still carry significant expenses. I always advise my team and newcomers to M&A to factor deal costs—legal fees, accounting advisors, appraisals, due diligence, and labor—into the total purchase price and project ROI. These costs typically range from 4% to 10% of the deal value, a substantial figure that varies by transaction but cannot be ignored.
Throughout my career, I’ve worked to avoid “deal heat”—the urge to close a deal at the expense of overlooking critical issues. As a corporate strategic buyer, succumbing to deal heat risks eroding the transaction’s value. At times, maybe I have taken that too far, once walking away from a deal where the gap to close was small relative to the total value. In hindsight, I regret that decision. However, there are times when walking away is essential, even at the eleventh hour. One recurring issue that has forced me to abandon deals—sometimes just days before closing—is working capital manipulation. This post explores this often-overlooked deal killer.
The Importance of Working Capital
When I first engage with a seller, I emphasize sorting out working capital (WC) immediately: “Let’s define working capital in the Letter of Intent (LOI) and carry it into the Purchase and Sale Agreement (PSA).” My goal is to establish clarity when trust is highest. Sellers are often surprised that something they consider trivial in the deal context could derail months of hard work. While working capital is critical to operations, its significance in M&A is frequently underestimated—until it collapses a deal.
I’ve had two promising acquisitions fall apart in nearly identical fashion, both days from closing, due to working capital disputes. Recently, I discussed this with my friend Neil Gunn, a top advisor in the broker space. He emphasized his efforts to warn sellers against manipulating working capital to inflate the sale price, a tactic that often backfires.
What Is Working Capital?
In M&A, working capital represents a company’s short-term liquidity—cash, receivables, and inventory needed for daily operations, minus short-term obligations like payables and accrued expenses. The formula is straightforward:
Working Capital = Current Assets – Current Liabilities
(excluding cash, debt, and certain non-operating items)
Working capital ensures the business can operate post-closing without a cash infusion. For buyers, it’s a safeguard; for sellers, it’s a negotiation point. If not clearly defined, it becomes a common source of post-closing disputes and deal failures.
Two Cautionary Tales
Here are two examples of how working capital disputes derailed promising deals.
Deal One: An $800,000 Misstep
This deal was exhausting. We spent months on due diligence, ensuring a smooth post-closing integration. We devoted hours to employee benefits, addressing the seller’s concerns with creative solutions and incurring significant legal and consulting fees. Unlike many buyers who impose standard benefits, we went above and beyond to accommodate the seller’s requests for a seamless cultural and operational transition.
Early on, I urged our finance team and the seller’s CFO/COO to agree on a working capital target. I warned that WC could become a deal killer if mishandled. The seller proposed a target that seemed low compared to their historical operations. Our finance lead shared my concerns, suspecting the business required more working capital than claimed. Lacking full data early on, we trusted the seller’s figure—a mistake I take responsibility for, despite my finance team’s efforts.
As closing approached, we noticed concerning behavior: discussions about working capital were deflected in favor of 401(k) plans, bonuses, or benefits. We also suspected a key player on the sell-side lacked the same incentive to close as the owner. Ultimately, the actual working capital at closing was significantly higher than the agreed target—almost exactly where our finance lead had predicted. Per the PSA, this entitled the seller to an additional $800,000. They demanded payment; we refused. The deal collapsed.
While I could have paid the $800,000, the erosion of trust made post-closing collaboration untenable. Our relationship with the seller remains strained, and I can’t envision working with them again. The loss of time, money, and trust was entirely avoidable.
Deal Two: A $2 Million Surprise
In this case, the seller also pushed for a lower working capital target, citing “operational changes” that supposedly reduced WC needs. We challenged this but compromised to maintain momentum. As due diligence progressed, we noticed balance sheet inconsistencies but struggled to get clear answers. While we didn’t obsess over benefits as in the first deal, we still invested hundreds of thousands in due diligence and PSA preparation.
Working capital targets are typically set early, with updates closer to closing and a post-closing true-up. As we neared the finish line, the actual working capital aligned with our initial predictions, revealing a $2 million gap. The seller demanded the additional payment; we declined. Another deal fell apart at the last moment.
Why This Happens
Working capital disputes are among the most common deal killers in private-side M&A, particularly in late stages. Sellers view WC as a price adjustment mechanism, where a lower target increases the likelihood of a post-closing payment. Some attempt to game the system, undermining the true purpose of working capital: ensuring the business has enough liquidity to operate post-closing, like buying a car with a full tank of gas.
I value sell-side brokers, having completed many deals without them but recognizing their role in maintaining realistic WC targets. Brokers like Paul Wiltse and Neil Gunn at Venture North help prevent sellers from manipulating WC to inflate closing values.
Sellers may manipulate working capital in several ways:
1. Cherry-Picking Periods: Selecting a low-WC month or seasonal dip instead of a historical average.
2. Aggressive Payables/Receivables Management: Delaying vendor payments or accelerating collections to distort WC.
3. Inventory Reduction: Cutting purchases before closing to temporarily lower WC needs.
4. Reclassifying Items: Shifting liabilities or excluding assets from WC calculations.
5. Point-in-Time Measurement: Using non-representative dates, like year-end, for WC snapshots.
6. Projected Efficiencies: Claiming future process improvements will reduce WC needs.
How Buyers Can Protect Themselves
After these near-misses, I’ve adopted stricter practices:
• Use a 12-Month Rolling Average: Neutralize seasonal swings or outliers by averaging WC over a year.
• Define WC in the LOI: Establish the formula and intent early, not in the PSA. Clarify that WC ensures operational liquidity, as some sellers genuinely misunderstand its purpose.
• Require Consistent Accounting: Ensure pre- and post-closing accounting aligns, especially for unaudited companies.
• Monitor WC During Confirmatory Diligence: Track changes to catch last-minute manipulation.
• Include Abnormal Event Adjustments: Build contract provisions to address unexpected WC fluctuations.
The Lesson
Trust is vital in M&A, but working capital is not the place for blind faith. Define targets early, back them with data, and recognize that every dollar conceded in the WC target may increase the purchase price at closing. Neither buyers nor sellers should let WC derail a deal.
Buyers: Never agree to a WC target without running the numbers yourself, even if it slows the process. Sellers: Understand that credibility in WC negotiations can make or break your transaction. Both sides: Do the right thing.
The Psychology of Selling a Business
Navigating the Emotional Side of M&A
When people talk about M&A, they usually talk about numbers — EBITDA multiples, term sheets, valuations.
But here’s the truth:
Most deals don’t fall apart because of math. They fall apart because of emotion.
Selling Is Personal—Not Just Financial
For many business owners, the company isn’t just a financial asset. It’s a part of their identity. I’ve seen it firsthand:
One seller couldn’t bring himself to attend the closing.
Another had to take a walk halfway through signing.
Some sellers had brokers. Others were on their own.
These moments, and many more, have shaped my approach to empathy in deal making. Some may say that is naive. Or wrong. However, the returns I've seen through my career far exceed industry expectations and predictions for success in M&A.
Regardless of the structure, the emotional weight is real:
Am I doing the right thing?
What happens to my team?
Is this the legacy I wanted?
My Role as a Strategic Buyer
I’ve spent my career on the buy side of M&A. Not as a private equity investor or banker—but as a strategic buyer or strategic buyer representative. I’m certified in M&A (CMAP) and valuation (NACVA), with experience negotiating, managing, and integrating deals from start to finish. But the most underrated skill? Empathy. Because when a seller doesn’t have an advisor—or has one that’s not helpful — the emotional side of the deal often lands on the buyer’s shoulders.
Empathy Makes Better Deals
As a buyer, I have a duty to my stakeholders to get the best deal possible. But that doesn’t mean being cutthroat. It means being strategic. And part of the strategy is understanding:
What really matters to the seller?
What are they worried about?
How do we create a deal that actually works for both sides?
I’ve learned to listen before negotiating, and to treat emotional concerns with respect—even when they’re not in the spreadsheet.
If It’s Not Synergistic, It’s Not a Win
I don’t believe in “winning” a deal if it isn’t right for both sides. I’ve seen what happens when deals close with tension or mistrust:
Integration fails.
Employees leave.
Value disappears.
As a strategic buyer, I don’t just want to close—I want the deal to work long-term. That means trust, alignment, and a plan that benefits both sides.
For Business Owners Considering a Sale
If you're thinking about selling, here’s the truth: It’s okay to feel unsure. This is more than just a transaction—it’s a transition. The right buyer isn’t just looking at your numbers. They’re looking at your story, your team, your culture. They’ll want to understand what matters to you. They’ll aim to keep what you built alive and thriving.
Final Thought
M&A isn’t just about multiples. It’s about people.
The best deals happen when buyers and sellers step into each other’s shoes — not just to close, but to build something that lasts. Let’s do deals that feel right—not just at signing,
but six months… even six years down the line.
The Hidden Risk in GovCon M&A: When Set-Aside Contracts Limit Your Buyer Pool
Many government contracting businesses rely on set-aside contracts (SDVOSB, 8(a), WOSB, HUBZone). While great for winning work, they can severely limit buyers when selling. If the new owner doesn’t qualify, those contracts can disappear, putting the deal at risk. I’ve seen this scenario play out many times—companies built around their 8(a)-designation scrambling to sell as their status nears expiration. If your business relies solely on its set-aside status rather than its product, capabilities, or value proposition, you may face a lower valuation and a severely limited buyer pool. Here’s how buyers and sellers can navigate this challenge:
1. Assess Set-Aside Risk Early
Sellers: If 50%+ of revenue comes from set-aside contracts, your buyer pool is limited. I recommend that no one portion of your revenue base is more than 30% of your base, and you spread out the contract set aside types.
Buyers: Ask for a contract breakdown upfront to avoid surprises. Be sure you are buying for past performance and capability as much as you are for current contracts. And identify a future pipeline.
2. Plan for a Transition Strategy
Some contracts allow for temporary transition periods, but others don’t.
Explore mentorships, JVs, or keeping the seller involved during rebid cycles.
3. Structure the Deal to Share Risk
Use earnouts, seller financing, or escrow to offset lost contracts.
Tie part of the purchase price to contract retention success.
4. Reduce Set-Aside Dependency Before Selling
Sellers: Start pursuing unrestricted contracts 1-2 years before selling.
Buyers: If you don’t qualify, look at partnering with a certified firm.
5. Get GovCon-Specific M&A Advice
Standard M&A strategies don’t always work in GovCon.
Work with GovCon attorneys to review novation risks, contract eligibility, and DCAA compliance.
Final Thought:
Ignoring set-aside risks can tank a deal. Buyers must understand contract restrictions, and sellers should prepare early to expand their buyer pool. A well-planned exit ensures higher valuation and a smoother sale.
Quick Tips for Selling a Business
Selling a business isn’t just a transaction; it’s a strategic journey that can transform your hard work into lasting value. Whether you’re considering an M&A exit in the near future or a few years down the road, planning ahead is key to securing the best outcome for you, your employees, and your legacy.
🔑 Here are some key steps to get started:
1️⃣ Valuation - Know your business’s worth and understand what drives its value.
2️⃣ Streamline Operations - Efficiency and profitability attract buyers.
3️⃣ Financial Clean-Up - Accurate records and financial clarity build trust.
4️⃣ Succession Planning - Ensure a smooth transition to retain value.
5️⃣ Engage with Verus Datum at launch - We will help you connect with M&A experts that can navigate complex negotiations for the best terms.
💡 Remember: Exit planning isn’t about leaving, it’s about preparing for your business’s future. Start now to make the process smooth, maximize value, and leave on your terms! #ExitStrategy #BusinessSale #MergerAndAcquisition #MABusiness #BusinessExit #SmallBusinessOwner #EntrepreneurLife #FuturePlanning #BusinessGrowth #MaximizeValue
An Example of Why Many M&A Deals Fail
If you research M&A, you’ll find a common statistic: more than half of deals fail. But what does that really mean? It means they fail to meet expectations.
I believe a big part of the problem is that deals aren’t managed well from the start. Brokers focus on EBITDA multiples. Buyers treat acquisitions as project exercises—a checklist of due diligence tasks with the sole goal of getting to closing. But are we looking deep enough?
Let me share a real-world story of a deal I did NOT close on the buy side.
A $32M Disaster Waiting to Happen
Company A had $40M in revenue, with 80% ($32M) tied to a single NASA contract expiring in 18 months. They had $4M in EBITDA, and the brokers were pushing for an 8x multiple—$32M.
Now, let’s put that into perspective:
The deal would take about six months to close.
That would leave the buyer only 12 months of guaranteed revenue.
If the contract wasn’t renewed, $32M in revenue would drop to $8M overnight.
I made an offer: $6M with an earn-out based on contract renewal. If we won the follow-on, the sellers would get more. The advisor called my offer offensive. My response?
"Without us, your client is out of business in two years."
Who was right? Well, let’s just say that company is no longer in business.
Why M&A Deals Fail
Buying that company for $32M would have been insane. The broker didn’t understand how to properly value the business or educate their client, and as a result, the deal collapsed—not just with us, but with everyone.
This is why so many deals fail.
Sellers are ill-advised and ill-prepared for the realities of their business value.
Buyers don’t look beyond the numbers to assess risk and long-term viability.
Brokers push multiples based on anecdotal conversations and blue-sky forecasting, rather than what actually makes sense.
M&A is More Than Just EBITDA Multiples
If you’re looking to sell or buy a business, avoid advisors who focus only on multiples. Valuation is a piece of the equation—but not the only piece.
Successful deals happen when:
✅ The right expectations are set.
✅ Due diligence is used as an integration tool, not just a checklist.
✅ Long-term relationships are built between buyer and seller.
If the only thing a dealmaker cares about is EBITDA, expectations won’t be met—and the deal will fail.
Final Thought
M&A isn’t just about getting to the closing table—it’s about making the right deal. If sellers don’t properly prepare and buyers don’t look beyond the surface, the numbers won’t matter. The deal will fail—just like Company A.