Avatara VP, Kraig Kubicek, recently interviewed Rick Zimmerman, who sold his aerospace manufacturing company (KEMCO), along with Trevor Bohn, the investment banker who brokered the deal (KAL Capital Markets).
Following are some key highlights from the conversation surrounding the role that CMMC compliance played in the deal.
Click here to watch the webinar.
A: (Bohn) I’ve been a dedicated investment banking person to the aerospace defense industry my entire career. For the last 25 years, I’ve done nothing but advise aerospace and defense companies on how to grow, how to access capital, how to think strategically. Now, in our playbook, in terms of advising a company on how to get ready to engage with upside capital, we’ve had to pull compliance all the way up to the front. I’m not talking about filling out some forms and some auditing; this is a fundamental change in the way that the DoD is saying your business needs to operate from an IT compliant standpoint. This is everything from mobile devices, this is desktops, this is CNC equipment, this is all the way throughout the shop…video cameras and surveillance, etc. There’s a procedure that’s in place for every single one of these things. When we’ve worked with companies that had really high marks in these areas, it has resulted in them getting another five or ten million dollars evaluation on their company.
The reality is that CMMC can drive the overall value of your business. Any good business that’s going to scale, that wants to win multi-year awards from their customers, that wants to build 50 or 100 million dollars in backlog in the DoD space has recognized now that it’s not just about having your accounting and your tax and your insurance really on point. They’ve now realized that IT has gone from, I’d say, number five on the priority list, to number one or number two. Because if you are not in compliance in this area, it could really shut the entire business down.
The reality is that CMMC can drive the overall value of your business.
When we’ve worked with companies that had really high marks in these areas, it has resulted in them getting another five or ten million dollars evaluation on their company.
A: (Zimmerman) Because our entire I.T. infrastructure was built and managed by Avatara, it wasn’t a hard sell. Avatara had been working towards getting all of their DIB customers ready for CMMC since the day it was announced, so the infrastructure was already in place. More importantly, I am a financially driven business owner, so I did the cost comparison multiple times. I was certain that there was not a more cost-effective solution. With Avatara, we were able to avoid the capital expenditure while completely rebuilding our IT infrastructure and ensuring DoD compliance.
I knew that if you’re not at the top of the food chain in your machine technology and your IT technology, you’re just going to be a commodity. So, with Avatara’s help, we were able to significantly improve margins by surpassing what our competitors were doing in all those areas. It just gave us a competitive advantage that was obvious to the buyer.
A: (Bohn) For someone who might be late to start the CMMC compliance process, you’ll have to get proficient quickly. And there’s no way you could do that unless you outsource it. Then, I think you got a shot at staying in the mix.
People who believe that they’re critically important and that these deadlines aren’t going to really stick, so they are lagging, probably won’t see an immediate impact in their business this year, or perhaps next. But what they probably won’t know is that they’re getting second sourced with people who are compliant and that crossover is going to be brutal. In 2024-2025, when the crossover really happens, it’ll be too late. You won’t be able to catch up.
I don’t think these deadlines are going to bring the supply chain to a screeching halt but I do think this is where people are going to raise their hand and say, ‘yes I’m a long-term player, I’m going to embrace this and really make it a fundamental pillar of my business.’ I think people have time to make that decision for the next year or so. Beyond that, it’s going to be pretty clear which businesses want to have staying power and those that really won’t and will continue to be subscale businesses.
Questions about Avatara’s streamlined approach to CMMC to drive business valuations and support M&A?