National HubZone ConferenceWednesday, September 4th, 2019

Preparing Your

BUSINESS FOR GROWTH

BUY ANOTHER COMPANY

FOR GROWTH?

SELL AS AN EXIT?

CONTINUE TO GROW

ORGANICALLY?

SHOULD I:

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SHOULD I BUY ANOTHER COMPANY FOR GROWTH?

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Past performance is key to

winning work and incumbents

win the majority of the work

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According to Grant Thornton study,

73% of incumbents win re-compete

Awards go to the incumbent nearly:

80% of the time at SBA

90% of the time at USDA

94% of the time at HHS

Keys to Successful Growth

The data from this slide are referencing information provided in the Grant Thornton

Government Contractors Survey 2016 https://www.grantthornton.com/library/survey-

reports/public-sector/2017/2016-government-contractors-survey.aspx

On average 73% of work goes to the incumbent so leveraging existing

cash to build your contract backlog through acquisition allows you to:

Access to new

agencies

Decrease the amount

of money and time

you spend on

business development

and acquire a strong

team

Access ongoing and

existing revenues

and cash you can

use to grow

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Acquisition Leads to Expansion

All sources for the data on this slide are from the public databases SAM and FPDS.

The System for Award Management (SAM) is a Federal Government owned and operated free web site that consolidates the capabilities in Central Contractor Registration

(CCR)/FedReg, Online Representations and Certifications Applications (ORCA) and the Excluded Parties List System (EPLS) https://www.sam.gov/SAM/

Federal Procurement Data System (FPDS) is a single source for US government-wide procurement data https://www.fpds.gov/ 6

Companies that picked up 1 additional agency from 2016-2017

saw roughly $0.5MM+ increase in obligated dollars on average.

Diversification Matters

All sources for the data on this slide are from the public databases SAM and FPDS.

The System for Award Management (SAM) is a Federal Government owned and operated free web site that consolidates the capabilities in Central Contractor

Registration (CCR)/FedReg, Online Representations and Certifications Applications (ORCA) and the Excluded Parties List System (EPLS) https://www.sam.gov/SAM/

Federal Procurement Data System (FPDS) is a single source for US government-wide procurement data https://www.fpds.gov/ 7

How Do I Finance An Acquisition

Considerations for potential borrowers include:

• Credit score(s)

• Cash flow minimums

• Growth Strategy

• Ownership/Management experience

• Personal equity/assets - $150K+

• Personal debt service

Loan Structures and Options:

• SBA 7(a) loan allows for 10 year terms and 5-10% down compared to conventional loans at 6-7 year terms and 25% cash down

• Some transactions include a 7(a) loan and a conventional loan together

• Review all options, understand what the seller wants out of the transaction and then determine what structure will make the most sense

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Cash should be used for

GROWTH – think

strategically about when to

borrower money and when

to use your existing cash

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SHOULD I SELL AS AN EXIT?

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• Determine your timing for an exit and a price range you would be happy with

• Identify a wealth manager and talk through tax implications, retirement, etc

• Identify a sell side advisor and an attorney

When is the Best Time to Sell?• When the questions above are answered

• When you just won contracts or a new vehicle

• When anyone can buy your company or there is a good understanding that

there will be multiple buyers

Should I Sell My Company?

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• Valuation will be determined based on your EBITDA as well as other

factors.

• What is EBITDA?

• EBITDA – or earnings before interest, tax, depreciation and

amortization – is an indicator commonly used by prospective buyers

or investors to measure a company’s financial performance.

• In its simplest form, EBITDA is calculated by adding the non-cash

expenses of depreciation and amortization back to a company’s

operating income. Below is the basic formula:

• Identify add backs that the company has such as officer comp, etc

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EBITDA = Operating Profit (EBIT) + Depreciation (D) + Amortization (A)

How Can I Estimate Valuation?

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2x – 4x Multiple 4x – 6x Multiple 6x+ Multiple

• Small business set

aside work

• Lower end 8(a) work

• Not much cleared

work and focus on

civilian agencies

• One or two capabilities

• Subcontract work

• 2+ capabilities

• Cleared work and

mostly prime work

• BIC vehicles

• Strong pipeline and 5

years left on contracts

• Higher margins and

NAICs with high SB

limits

• Strong margins

• Full and open

contracts

• Large prime awards

and long-term

contracts

• Cleared work

SMALL BUSINESSES

What Multiple Might I Expect?

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SHOULD I GROW ORGANICALLY AND PREPARE FOR FULL AND OPEN COMPETITION?

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How do you finance past performance, capacity and the ability to leverage set asides?

•Awarded multiple contracts in a short period

•Inadequate capital to fund related contract expenses

•Will not realize payments from the government until 60-120 days after contract award

Contract Mobilization

• Trade credit required

• W/o trade credit suppliers require up to 90%

COG

• Will not realize payments from the

government until 90-120 days after contract

award

Purchase Order

Financing

• Winning awards is labor-intensive, costly and inefficient

• Unable to win new contracts

• Sunsetting of certifications (e.g. 8(a)) limits new growth prospects

Acquisition Financing

CAPACITY/

SET ASIDES

PAST

PERFORMANCE

AND CAPACITY

CAPACITY/

SET ASIDES

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Am I Leveraging Debt in the Best Way to Grow Organically?

Ensure you have the capacity to win new work

• Mobilization would provide for enough financing to go after multiple awards at

once and would replace your existing factoring facility

• If small business wins another award at $20-40M, the cash required to

mobilize could become more of a challenge

• You should be able to go after all the work you can win.

• The cash you do have should be used for investment growth.

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Pre-approval for acquisition financing

Required documents to get a proposal letter:

• Past three years business tax returns

• Past three years personal tax returns

• 2016 profit and loss statement and

balance sheet

• Business debt schedule

• Contract Backlog excel file

• Detailed A/R Aging report

• Resume

• Authorization to pull credit

• SBA form 1919

• SBA Personal Financial Statement

• Mobilization template

Considerations for potential borrowers

include:

• Credit score(s)

• Cash flow minimums

• Growth Strategy

• Ownership/Management experience

• Personal equity/assets

• Personal debt service

Advisory Services

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True growth demands rigorous analysis, engaged leadership, and investment in the right set of capabilities.

We perform an assessment of current growth efforts and identify gaps

We evaluate the current priorities of your firm and pinpoint growth

strategies

We assess the current marketplace and your competitors to best

position your firm for growth

We create successful growth plans by combining industry expertise and

data analytics to leverage growth strategies within proven frameworks

Teaming

• Similarly Situated Subcontractors

• Joint Ventures

• Mentor-Protégé

• Contractor Team Arrangements

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Exemption from LOS and NMR

• The performance requirements (limitations on subcontracting) and

the nonmanufacturer rule do not apply to small business set-aside

acquisitions with an estimated value less than the SAT ($250,000).

• 13 CFR 121.406(d)

• Inapplicability of limitations on subcontracting: The limitations on

subcontracting do not apply to: (1) small business set-aside

contracts with a value less than the SAT ($150,000), or (2)

subcontracts (except where a prime is relying on a similarly situated

entity to meet the applicable limitations on subcontracting).

• 13 CFR 125.6(f)

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HUBZone Nonmanufacturers

• A qualified HUBZone SBC may submit an offer on a HUBZone contract for supplies

as a nonmanufacturer if it meets the requirements of the nonmanufacturer rule set

forth at § 121.406 of this chapter.

• 13 CFR 126.601(f)

• FAR has not been amended

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Mentor Protégé Programs SBA vs DoD

Other Mentor Protégé Programs (CRS Report 1/07/19)

• DOD – subcontracting, mentor reimbursed for costs, credit for unreimbursed costs

toward plan goals, advance payments, progress payments, own up to 10%, loans,

management, engineering, technical assistance, protégé may only have 1 mentor,

mentors may have multiple proteges

• FAA - Evaluation factor, subcontract count toward plan goals, costs incurred counted

in determining indirect rates for reimbursement, set asides for participants

• DOE - award fees, subcontracts count toward plan goals

• NASA – development costs count toward subcontract plan, costs incurred

considered in determining indirect rates for reimbursement, award fees for SBIR

Phase II developmental assistance

• DHS – evaluation factor, costs incurred count toward plan goals

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Contractor Team Arrangement

• A GSA Schedule Contractor Team Arrangement (CTA) is an arrangement in which two

or more GSA Schedule contractors team together to provide a total solution to meet a

customer's needs. Under Schedule CTAs, contractors complement each other and it

allows teams to compete for orders for which they may not qualify independently. GSA

encourages the use of CTAs to meet buyer’s requirements.

• NOTE: FAR 9.6, Contractor Team Arrangements, does not apply to GSA Schedules

teaming. Under GSA Schedules, Teaming allows contractors to use their individual

GSA Schedules to develop a solution for the government.

• The Schedules CTA does not create a separate legal entity, but allows Schedule

contractors to meet buyer’s requirements by combining the supplies and/or services

from each team member’s separate Schedule contract in response to a buyer’s

Request for Quote.

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Contractor Team Arrangement

CTAs and Small Business Set-Asides:

• When forming a Team in response to a small business set-aside, all team members

must meet the socioeconomic status for the set-aside and the limitations on

subcontracting (FAR 52.219-14) apply. i.e. the small business team members must

perform at least 50% of the value of the work to be completed.

• Buyers are responsible for accurately achieving and reporting on their small business

goals, including accurate reporting to the Federal Procurement Data System (FPDS).

Under CTAs, each contractor has privity of contract with the buying activity. When a

GSA Schedules order is awarded with a CTA, small business achievement in

contractual terms is based upon the dollar amount of the work the small business

contractors perform under the order. FPDS currently will only accept information

relating to one contractor per order. The buyer must determine which CTA member is

realizing the preponderance of the revenue on an order and report that contractor's

information to FPDS.

• The shortcut to this page is gsa.gov/cta

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IntroducingLive Oak Bank

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What is Live Oak Bank?

FDIC insured

North Carolina State Chartered Bank

$8B since inception (2008)

#1 SBA lender in the U.S.

$2B in new originations in 2018

Live Oak Bank has

government contracting

domain experts

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Government Experience Necessary to Finance Your True Needs

Patrick KelleyGeneral Manager

• Former SES Deputy

Chief of Staff

• Deputy Associate

Administrator for

Capital Access at SBA

• Special Advisor to the

Undersecretary for the

U.S. Patent and Trade

Office

Erin AndrewManaging Director

• Former SES Associate

Administrator at SBA

• Director of Cluster

Initiatives and Senior

Advisor at SBA

• Senior Consultant Booz

Allen and PMP

Eric RabinovichDirector

• Former Contract

Specialist at FDA

• PwC Senior

Consultant and

Project Management

Professional (PMP)

Jackie Robinson-BurnetteDomain Expert

• Former SES Deputy

Associate

Administrator of

SBA’s Government

Contracting & head

of 8(a) Program

• Head of Army and

Corp of Engineers

Small Business

Programs

and CO

Ken DoddsDomain Expert

• Former SES at SBA

in charge of legal

gov con issues

• Wrote parts of the

FAR and gov con

regs

Steve SmitsChief Credit Officer

• Former SES

Associate

Administrator for

Capital Access at SBA

• 27 years of lending to

government

contractors

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Disclaimer

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