Interview transcript:
Terry Gerton You work with a lot of startups, maybe folks who’ve been in government, got out of government, but want to keep serving government and think about starting up businesses and becoming government suppliers. What are the most important pieces of advice you’d have for them as they get started?
Tripp Kelly As you get started, I think it’s just really important to make sure you’re working with a group of attorneys, advisors, accountants that are familiar with serving the government client because of all the complexity that comes with compliance and auditing of serving the government customer appropriately. Making sure you are running a quality business.
Terry Gerton And so one of the things when you get started, you have this idea and it’s you and your computer in your basement, maybe. How do companies like this set up growth plans and how do they build so that they can manage scale?
Tripp Kelly I’ve seen it go from folks that I’ve worked with that just have, ‘I don’t want to have a boss and I just want to do some work with some contracts on a small vehicle that I could do better on my own for the government customer.’ And then it flourishes into something far more sophisticated based on just some organic flow. And I’ve seen folks come in from retiring from the military and ‘I want to continue to serve the Army the way I served when I was active in service,’ and that doesn’t always have like a formal business plan to it. It just kind of comes through an entrepreneurial spirit that is part of just being a good American, I think. So I think it varies widely how it comes together.
Terry Gerton What are some of the challenges that folks who have this entrepreneurial mindset and a real motivation to give back might not be thinking about as they want to start their own business?
Tripp Kelly Some of the challenges are access to capital and access to liquidity. A lot of times it’s a bootstrap to get things off the ground and coming up with how am I going to hire my first person? A lot of times when I win a contract, the government doesn’t pay me for 90 days and how am I going to pay this person until the government does start paying me on a service-based contract? And a lot of times that comes from leveraging their own personal financial situation, whatever limited or complexes that might’ve been before they started this venture. And so I think that’s a big challenge – how do I come up with the capital to get this thing going? And then once I start to hit momentum and hit a growth phase, those challenges persist and just finding the right trusted people to help get to next levels in business as your company continues to scale.
Terry Gerton So navigating that boundary between business finances and personal finance, it sounds like it could be pretty challenging.
Tripp Kelly Very challenging and money doesn’t come with instructions. It’s a super complex financial world out there and a lot of times, I see folks, they operate with their finances in different silos. I have retirement accounts. I have a savings account. I have money set aside for my kids and none of those buckets really talk to each other and that’s why I’ve spent a lot of my time helping folks make sense of how these different silos can talk together to help support a business-minded goal and growth mission.
Terry Gerton And so if someone is leveraging their personal finances to get started as a small government contractor, and as you mentioned, those payments, they may not win for a while even, and then if they do, it’s going to be a while longer before those payments start to come in. How do they manage the leverage portion of that and how do they keep that balance correct?
Tripp Kelly I’m a fan of people using lines of credit, depending on where they may or may not be able to get them secured. And it depends on people’s risk appetite as well. But lines of credit, sometimes, secured by a house or an investment account or different assets that a client may or may not have simple interest, and it’s a smaller cost of borrowing from a cost standpoint. And then once cash flows start to come through, immediately go back to first trying to pay back that lower-cost borrowing costs and then look to pay myself after that risk has been taken and we’ve been paid back from that.
Terry Gerton I’m speaking with Tripp Kelly. He’s a partner at Socium Advisors. So that conversation is about a startup, persons taking their savings and completely deployed it into starting up a new business. But along the way, let’s say they’re successful and they grow and now they have a pretty significant business. There’s some new rules coming into play at the SBA that they might want to think about in terms of finance, correct?
Tripp Kelly That’s correct. Earlier this year, there was a flurry of activity. If you were an established small to midsize government contractor, the SBA came out with a rule that takes effect on January 17th. It says that if there is a purchase of the small business by a large business, the contracts have to be immediately recertified, whereas it used to be that those contracts could be taken to their end and then rebid at that time. And so a lot of the value of some of these small business contracts totally went away if I’m a large business looking to buy a smaller business. And that doesn’t necessarily make it bad, but it just totally shifts the options of how someone who took risk to scale a business can exit out of that business.
Terry Gerton Tell me more about that exit strategy.
Tripp Kelly Well, I think another problem that I just see in this industry and one of the challenges that any business interfaces, they get in passionate about serving, and in this case, the government client. And they get in, they start having success. But they don’t necessarily have an exit plan of how they can get out of the business. And there’s a problem with the more we just plan on being on the treadmill of grinding the business and not having a personal financial strategy, the less options we’re going to have to exit that business at the end. Because I might need to get more out of it because I didn’t set enough aside for myself to be able to retire with dignity, educate my kids, whatever the financial goals might be. So with some of this rule change that just happened, some of the exit strategies that folks did have last year and up until the end of this year, they’re going to go away. But they can now plan knowing that I need to just be more smart with setting my cash flow and my profit aside that I do make from serving my government customer and making sure that I’m aligning a certain amount of profit for myself because I’m not going to have an option to sell.
Terry Gerton And is that small business rule then accelerating mergers and acquisitions contracts?
Tripp Kelly It’s gone. If you didn’t find someone to marry up earlier this year, most of your M&A experts are full of people trying to exit before the end of the year and you’re going to have a really hard time finding an exit strategy before the year with a quality advisor.
Terry Gerton So what does that mean these owners of small and midsized government contracting businesses should be thinking about as we go into October?
Tripp Kelly As we go into October, I think another thing that I’m seeing is there’s a lot of people that are continuing to focus on just solely small business contracts. And those contracts, you don’t have as many options of what you can do with them now with this new rule. So it’s always harder for smaller companies to go after prime and full and open opportunities. But those opportunities are going to be the more valuable opportunities for themselves, their company and their employees moving forward. So I think it’s important for people to understand that it’s good to get outside your comfort zone and try to maybe go after some of these large, full and open opportunities that are out there. And also, make sure that you’re focusing on, what is my personal plan? I call it the wealth gap. What’s the difference between what I have set aside right now and what I need to secure my financial situation, and how do I close that gap with what I have right now on the books of my business?
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