By Tess Oxenstierna, Group Head, Aerospace, Defense, Government & Security, Capstone Partners, Mike Lettig, Group Head - Native American Financial Services, Huntington Commercial Bank, and Alex Wesaw, Ph.D., Director and Relationship Manager, Huntington Commercial Bank
Economic and revenue stream diversification has been an increasing priority for Tribal leaders. These diversification initiatives seek to bolster financial security, stability, and resilience. Acquiring businesses can be a particularly advantageous strategy, as it can provide Tribes with immediate access to new revenue streams, operational capabilities, and expertise.
Pursuing these opportunities through Tribal 8(a) and other government programs has proven to be a successful option for economic diversification, though Tribal Nations can face numerous challenges and strict requirements in doing so. The benefits and difficulties underscore the importance of taking a strategic approach to business acquisition and market expansion, as well as leveraging financial experts to support these initiatives.
Economic landscape and market conditions
While gaming remains a top industry for Tribal Nations in terms of revenue, federal contracting has grown more quickly: The annualized revenue growth rate from 1988 to 2021 in federal contracting was 41.6% compared with 16.8% growth rate in gaming over the same period. Throughout this time, 50.5% of Tribes were involved in contracting†. This growth has increased total revenue and increased revenue diversification for Tribes awarded contracts.
Certain sectors like IT services, aerospace and defense, energy, and telecommunications offer Tribal prioritization, which can be a significant advantage. Federal spending on IT services contracts increased by 6.3% year-over-year in the first half of 2023‡, a trend that will likely continue throughout 2024 as the government prioritizes modernizing systems. Government programs to support broadband infrastructure and service contracts in Indian country also offer new avenues for growth.
The energy sector has similarly seen an increase in M&A activity as companies look to reposition themselves for the future§. In this space, Tribal entities’ access to natural resources crucial for renewable energy production could offer an advantage over non-Tribal competitors.
The special considerations afforded to Tribal organizations through the 8(a) program offer a strategic advantage in securing contracts and acquiring businesses. Tribal entities can leverage federal contracting opportunities through sole source contracting or joint ventures to enter new markets through acquisitions, which in turn can enhance their economic resilience and foster self-sufficiency.
Understanding the acquisition challenges and requirements
Entering a new market is rarely easy, but the requirements for the 8(a) program and government contracting can make the process even more difficult for Tribal leaders. Here are some of those considerations.
- Identifying Potential Opportunities: The first step toward economic diversification involves recognizing viable business acquisition opportunities. This requires a deep understanding of market trends, assessing potential for growth, and alignment with Tribal values.
- Analyzing Risk: Evaluating the financial health and sustainability of potential acquisitions is critical. This includes thorough due diligence processes examining the financial statements, legal standing, and operational efficiencies of targeted businesses. Understanding the historical performance and assessing the long-term viability of these ventures are crucial steps to mitigate risks associated with business acquisitions.
- Strategic Planning: Developing a robust business acquisition strategy is essential for sustained success. This involves setting clear objectives, understanding the competitive landscape, and crafting a detailed plan that outlines the steps to achieve desired outcomes.
- Understanding Regulatory Environments: Economic diversification through acquisition requires knowledge of the regulatory environments that govern business operations both on and off Tribal lands.
- Capital Access and Financing Solutions: While Tribal Nations often have financial capacity to support acquisitions, navigating access to capital and funding sources with various criteria and limitations can be a complicated process.
- Workforce Development and Training: Ensuring the availability of a skilled workforce to manage and grow new ventures is another critical aspect of economic empowerment. Consider prioritizing workforce development initiatives, such as offering resources for training and skill building.
The value of strategic partnership
Developing a strategic business acquisition approach and navigating the federal contracting landscape can be challenging for many Tribal communities. Those who have historically relied on gaming and natural resources as sole revenue generators, as well as Tribal entities that have experienced a recent injection of funds, particularly struggle with knowing when to start.
Collaborating with financial partners who have a deep understanding of the unique landscapes of Tribal economies and full transaction lifecycle capabilities can help guide the path. These offerings can support your community every step of the way during an acquisition, including:
- M&A advisory
- Market assessment
- Due diligence and closing
- Financing and capital solutions
- Succession planning
To learn more about how Huntington and Capstone Partners work together to support your Tribal community’s economic diversification initiatives, contact the Huntington Native American Financial Services team.
