Public government contractor market and valuations: Recent market challenges have changed the way many acquirers look at acquisition targets.

1. Successful Liquidity & Exit Strategies for
Government Contractors
October 13, 2014

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Public Government
Contractor Market &
Valuations

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• Recent market challenges have changed the way many acquirers look
at acquisition targets
•The buyers have become more risk averse and are looking for:
• high margin work
• highly differentiated capabilities
• Technology/IP
• Key contracts/IDIQ vehicles
• Prime contracts
• Synergetic growth opportunities
Evolving Federal Contracting Market
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• Although M&A has increased in the last couple of years, a couple of
sectors are highly valued and tend to drive higher valuations:
Federal Market Outlook
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Cybersecurity, Intelligence, C4ISR
• Defense CAGR:5.4%, 2013 ($4.4B),
2018 ($5.7B)
• Civilian CAGR: 5.5%, 2013 ($2.5B),
2018 ($3.2B)
• Intel CAGR: 5.2% , 2013 ($1.9B), 2018
($2.5B)
Big Data
• 2013 - $5,220 B
• 2018 - $5,770 B
Health IT
• VA CAGR 5.6%
• DoD CAGR 5.8%
• HHS CAGR 11.5%
Cloud Computing
• 2013 - $2,320 M
• 2016 - $3,070 M
• 2018 - $6,150 M
CAGR 18%
* Source: INPUT

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Public Company Valuations
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• Mid Tier Government Services firms trade at a median valuation 7.7x TTM EBITDA
• Tier 1 A&D Firms trade at a median valuation of 8.7x TTM EBITDA
• In 2014, public companies are focused on aggressive and targeted acquisition
strategies focused on high-value industry sectors
Source: Aronson Capital

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Government Services Transaction by Buyer Type
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11%
49%
40%
2011
Private Public PE
21%
38%
41%
2012
Private Public PE
36%
36%
28%
2014
Private Public PE
Source: S&P Capital IQ June 2014
• After an 18 month lull, buyer activity and confidence has improved
• M&A Activity up from 2013
• Public buyers are back from cutting costs and organic growth in 2013,
focused on M&A

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• 2013 was a down year for M&A activity
• Transaction activity was down 20% from 2012 with buyers focusing more on return on capital
through dividends and share repurchases rather than deployment of capital through M&A
• With uncertain environment, Tier 1, Mid Tier and Private contractors were more hesitant in
closing transactions
• 2007 there were 93 M&A deals, 2013 only 65 deals
• Buyers are back.. But are highly focused
• Buyers are actively seeking acquisition opportunities to reposition their capabilities to
complement organic growth and deal with the LPTA environment
• 80% of the prospective buyer universe is pursuing the same 20% of the acquisition targets in
(Big data, health IT, cyber, cloud computing, software, C4ISR, and data visualization)
- More precise acquisition criteria of available targets that “check all of the boxes”
- Contractors without differentiated services have a tough time
• Valuations are deal specific
• Value depends on a company’s capabilities, customers, and contracts
• Perception of downward pressure on valuation
• Structured transactions with contingent payment
Current Market Observations
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Valuation Trends
8Source: Aronson Capital Partners
0
2
4
6
8
10
12
Health IT C4ISR Cyber SETA/Non IC IT
Services/Con
sulting
Valuation Multiple 10.7 10.5 10.2 6.3 5.5
10.7 10.5
10.2
6.3
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M&A Valuation by Industry Sector

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Value Drivers in Government Services M&A
 Revenues under $15M
 Lower end skill sets
 Backlog task order
dependent or mostly
subcontract work
 Growth flat or declining
 Weak B&P capability and/or
selling shareholder(s) key
to organization
 Customer concentration
Bottom Third
3x – 4x Forward EBITDA
Middle Third
4x – 6x Forward EBITDA
 Revenue $15-$40M
 Blended skill sets; mid tier
bill rates
 Deeper customer base
and/or capability set
 Balanced prime vs.
subcontractor mix
 Employee credentials
 Proprietary technology
Top Third
6x – 9x+ Forward EBITDA
 Priority markets/skills:
intelligence, homeland
security, cloud computing,
cyber security, healthcare IT
 Strong contract backlog
 Strong IP
 Strong opportunity pipeline
 Business not dependent
upon selling shareholder(s)
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Other Factors Affecting Valuation
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Business Fundamentals
• Backlog & Pipeline
• Contract Win Rates
• Set-aside Status
Financial Performance
• Revenue and EBITDA trends
• Quality of Earnings
• Margins
Operational Issues
• Management Depth
• Business Systems and Reporting
• Stability, Predictability, Sustainability

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Avenues to Liquidity

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Typically, the owner of a private company
• Has invested much of his or her life’s work in building a business
AND
• Created real value as a result.
BUT
• A considerable amount of that value is tied up in the business.
• The owner has limited/no liquidity in that portion of his or her net worth.
• There is to concentration risk with so much net worth in one investment.
• Potential tax burdens on sale or death can destroy a life’s work.
Company Owner’s Dilemma
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 Recapitalization (Recap)
 Employee Stock Ownership Plans
(ESOPs)
 Allows employees to become shareholders
and provide liquidity event for the owners
 Outright Sale (100% Sale)
 Create an auction process for the entire
Company to be sold
Avenues to Liquidity
• A sale of an ownership position (generally control) in
the company or securing debt to fund a distribution to
the owner(s)
• Provides opportunity to stay involved in the business;
potential for “2nd bite at the apple”
• Sale of minority or majority stake (or 100%)
• Favorable tax treatments
• Ability to remain in operational control
• Provides employee incentives and retention
• Owners can “take some chips off the table” but
management can stay in place
• Sale of the company to a third party
• Strategic or financial buyer
• Generally loss of control and no/limited future upside

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Benefits
• Monetize a significant portion of net worth
• Access to future financing for growth
• Second bite at the apple
• Access to seasoned industry veterans
• Potential to be a platform company
• Continued role in the operations
• Generally a faster process than outright sale
• Orderly transition
Considerations
• Ownership percentage post transaction
• Control issues
• Management roles
• Strategy
• Tax implications
• Due diligence process
• Need for lawyers, accountants and tax advisors
• Impact on the day to day operations of the
business
Recapitalization
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ESOP
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Benefits
 Monetize significant portion of
net worth
 Favorable tax treatment
 A market for privately held stock
 Second/multiple bites at the
apple
 Retention of operational control
 Incentivizing employees
 Employee retention
Considerations
 Independent valuation of stock
 Voting rights
 Future redemption costs
 Accounting
 Need for trustee and administrator
 Need for lawyer, accountants and
tax advisors

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Requirements:
• ESOP must own at least 30% of the company’s stock
• Company establishing the ESOP must be a C Corp at closing
• S Corp can convert to C Corp on the eve of closing; can convert back to C corp after 5 years
• The selling shareholder, family members and 25%+ Shareholders cannot participate as
beneficiaries in the ESOP
• Selling shareholder must have held the stock for at least three years
• Selling shareholder must reinvest the proceeds in Qualified Replacement Property (QRP) within 15
months of the transaction
• QRP gets stepped-up basis at death of the selling shareholder
• Stocks and bonds of U.S. operating corporations; NOT mutual funds or Government issued securities,
so NOT Treasuries or Municipal Bonds
• Subsequent sale of QRP triggers taxable gain
ESOPs
ESOP Tax Benefits for Selling Shareholder
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Section 1042 allows selling shareholder to defer capital gains tax on sale

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Benefits
• Monetize significant portion of net worth
• Provides exit strategy for owner
• May allow for limited continued role
• Sale to interested party may ensure near term
business continuity
• An active auction process can yield maximum
immediate value for the owner(s).
• Cross-selling and growth opportunities
• Established infrastructure
Considerations
• Potential for earn out which will be impacted by future
performance
• Change of control can be disruptive to operations
• New owner’s strategy / management style
• Tax implications
• Timing of process, timing for maximum valuation.
• Due diligence needs of buyers
• Need for lawyers, accountants and tax advisors
• Potential negative impact if process becomes public
Outright Sale
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Strategic Sale of Company
 Sale Process Variations:
• Limited Process – Focused on pre-determined strategic and financial interested
parties
• Full Process – Marketing to an existing pool of strategic and financial parties
• No Process – Self directed sales (no competition, buyer has negotiating leverage and
often drags out the process to less than optimal results).
 A Typical Process Includes:
• Preparation of marketing materials and secure diligence data room
• Identification and proactive marketing of potential acquirers
• Staged disclosure and competitive step by step negotiations
• Multiple buyer candidates insure success & best valuation/terms

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Enhancing Value In the Process
 Key Requirements for a successful Process
• Understand the universe of potential investors/ acquirers
• Position your Company
• Focus on the niches where the company is a leader
• Effectively communicate Company’s growth plan
• Prepare for due diligence
• Manage a competitive process
• To maximize the possibilities available to owners in all stages
• Timing is a critical variable
• This is where advisors can add significant value

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Successful Liquidity & Exit Planning
 Plan Ahead
• Determine your goals and what you’d like to achieve as the business owner
• Work with key advisors to determine which of the 3 liquidity option are more attractive
to you
• Use a comprehensive due diligence checklist for internal review and preparations (in
advance of any buyers or lenders doing this)
• Governing documents, corporate records and ownership records
• A good business owners agreement in place
• Management
• Assets
• Financial (financial statements, debt, liens, security interests)
• Contracts
• IP
• Labor/employment (employee benefit plans)
• Taxes (federal and state tax returns, disputes)
• Insurance
• Litigation
• Regulatory (licenses, permits)
• Develop strong management team and key employees.

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• More than 25 years successfully advising middle market companies
•Engagements handled by senior professionals
•Operational, financial and transactional experience
• Superior Knowledge of Industry and Market Dynamics
•Broad reach
• Strategic industry players
• Financial sources
• Board of Advisors
•Contacts leveraged across the organization
• Understanding of investment criteria
• Ability to pursue a full range of strategic options
• Capital Access
• Senior lenders
•Mezzanine lenders
•Private equity firms
•Public and private companies
About National Capital
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Advisory
Services
• Market
Assessment
• Valuation
• Restructuring
Full-Service Investment Banking & Financial Capabilities
National Capital
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Capital Formation
• Senior & Mezz
Debt
• Equity
• ESOP Financing
Project Finance
• Project
Management
• Financing
M&A
• Sell Side
• Buy Side
Private Equity
• Direct Investments
• Syndicate
Partners

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Our Team’s Operating Experience
National Capital
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Select Engagements
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Select Engagements
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About the Presenters
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Kevin Lancaster
CEO – The Winvale Group
202-296-5505
Klancaster@winvale.com
Kevin Lancaster leads Winvale’s corporate growth strategies in
both the commercial and government markets. He develops and
drives solutions to meet Winvale’s business goals while enabling
an operating model to help staff identify and respond to
emerging trends that affect both Winvale and the clients it
serves. He is integrally involved in all aspects of managing the
firm’s operations and workforce, leading efforts to improve
productivity, profitability, and customer satisfaction.

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About the Presenters
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Sarah Djamshidi
National Capital Companies, LLC
Ms. Djamshidi brings more than a decade of capital formation, business challenge assessment, go-to-market strategies, growth and exit
planning and advisory service for emerging tech companies to National Capital (NCC).
She has advised high-profile, technology-based firms and early-stage tech companies in the intel, cyber security, cloud computing, big data
& analytics, clean tech markets on going to market strategies, organic/inorganic growth and capital formation. She has led public-private-
partnership organizations (Chesapeake Innovation Center, Maryland Business Incubation Association, Technology Advancement Program at
UMD) with great success.
Jay Wright has over twenty years of experience in finance and public markets. As the Chairman, Chief Executive
Officer or Chief Financial Officer of three public companies over the past eleven years, he has structured numerous
private and public financing transactions. He also served as Chief Financial Officer for TAMSCO, a privately held
government contractor, which he helped sell for $83.5 million in 2003, and was a founding shareholder of Chesapeake
Government Technologies, which was acquired by Widepoint Corporation (Amex: WYY) in 2004. He has expertise in all
aspects of structuring private placements and in creating exits via mergers and acquisitions and open market sales.
Previously, Mr. Wright worked as an investment banker with Merrill Lynch in New York and a mergers and acquisitions
lawyer with Foley & Lardner in Chicago and Skadden, Arps in New York. Mr. Wright received his law degree from the
University of Chicago Law School and his Bachelor’s degree in Business Administration from Georgetown University,
summa cum laude, where he also serves as an adjunct finance professor. Mr. Wright is a member of the Illinois state
bar and is Series 7, 24 and Series 66 qualified. Mr. Wright is the co-author of Finance and Accounting for Nonfinancial
Managers, Sixth Edition (Perseus Books, 2010).
Jay Wright
National Capital Companies, LLC

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Contact Us
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Sarah Djamshidi
Managing Director
Innovative M&A ∞ Valued Capital ∞ Trusted Advisor
National Capital Companies, LLC
7910 Woodmont Ave, Suite 910 Bethesda, MD 20814
240.460.3470 direct, sdjamshidi@nationalcapital.com
www.nationalcapital.com