Small Business Committee

1. Small Business Committee August 14, 2019

2. Agenda • Welcome and Introductions • Long-Term M&A Planning for Small Businesses • Speakers: • Cameron Hamilton, The McLean Group • Elizabeth Jochum, Smith Pachter McWhorter PLC • Jonathan Wolcott, Holland & Knight LLP • Coalition Update • GSA’s Commercial Platform Initiative • 2019 EIP Awards Nominations Open • GSA FAST 2020 Conference • 7th Annual Joe Caggiano Memorial Golf Tournament

3. Long-Term M&A Planning for Small Businesses Presentation for the Coalition for Government Procurement Small Business Committee Cameron Hamilton, The McLean Group Elizabeth Jochum, Smith Pachter McWhorter PLC Jonathan Wolcott, Holland & Knight LLP August 14, 2019

4. Market Trends – Federal Spending Trends THE RUN UP REJUVENATION THE RESET • Budget reductions enacted, including sequestration, that caused federal spending to decrease year-over year from 2010 through 2015 • Prior to enactment of sequestration, funding uncertainty made planning for new programs very difficult for federal agencies and the companies that supported them • Budget passed, providing funding clarity for government and industry • Sequestration caps removed • Defense spending increasing by over 10% from 2016 to 2018 • From 2000 to 2008, federal discretionary spending more than doubled • Over that period, defense spending grew by 132% Estimate

5. M&A Participants Commentary Transactions by Buyer Classification Large Companies • Large companies M&A appetite has remained relatively stable over the past 10 years • In recent years, large companies have been focusing their attention on the “Mega-Deals” Mid Tier Companies • Acquisitions in the large company domain are forcing Mid-Tier companies to explore M&A to stay competitive • Mid-Tier companies with substantial size become extremely attractive assets to larger strategics and private equity firms • There has been significantly more M&A activity from the Mid-Tier firms in the past 5 years – many backed by private equity Private Equity Firms • Private Equity firms have become extremely interested in the ADG space and now represent the most active buyers in the industry

6. Key Value Drivers QUANTITATIVE FACTORS QUALITATIVE FACTORS

7. Legal Considerations • Be proactive • Planning for exit cannot begin too early – “begin with the end in mind” • Costs at least 2X and takes at least 2X longer to fix a problem with a buyer looking over your shoulder • Corporate clean up, tax, other legal activities can be done efficiently and cost-effectively on a regular basis (“doctor check up”) • Government contracts compliance = potential deal killer • Assembling a team of experienced M&A advisors early bears fruit later

8. Legal Considerations, cont. • Entity structure • Regularly check entity structure and accounting choices with tax advisors to ensure fit not only with current goals and strategy, but exit strategy • Tax and accounting issues (S Corp non-compliance, cash to accrual, built-in-gains, etc. issues) can be deal roadblocks

9. Legal Considerations, cont. • Employee incentives • Carefully consider how to share the wealth, both currently and toward an exit • Numerous structures to incentive key employees both for growth and exit success • Although cash is typically king, phantom/synthetic equity and substantial deal bonus structures prove to be successful • Consider “richness” of employee incentive programs and how a buyer may view them (retention)

10. Legal Considerations, cont. • Avoiding the Small Business/Set-Aside “Death Valley” • Need to plan for graduation years in advance • Consideration of size certification (3 vs. 5 year lookback) • Consider capital and operational needs to enable F&O competition • Technology development • Business Development (including hiring) • Contract acquisition

11. Legal Considerations, cont. • Avoiding the Small Business/Set-Aside “Death Valley”, cont. • Contract vehicle acquisition vs. full company purchase • Sources of capital: • Debt • Minority equity (small business affiliation considerations)

12. GovCon legal issues that can hold up your deal or affect valuation • Small business issues • Transactions often mean the end of the seller’s small business status • A small business will be deemed affiliated with its majority owners, and affiliate revenue and employees are included when determining a company’s size status • Loss of SB status could mean immediate termination of some contracts, but more often means that the seller won’t be eligible to compete for follow-on contracts.

13. GovCon legal issues that can hold up your deal or affect valuation • Audits and Investigations • Audit reports, correspondence with auditor and investigators and mandatory disclosures are tools buyers use to evaluate regulatory compliance and liability risk • Document, document document! Communications with auditors and investigators, responses to adverse audit findings, mandatory disclosures, compliance processes and other organizational changes made in response.

14. GovCon legal issues that can hold up your deal or affect valuation • Compliance Risks • A failure to put in place strong compliance programs and processes can affect the value of your company, and compliance breaches can definitely tank a deal • Common compliance areas of concern to buyers – Most Favored Customer clauses and domestic preference programs • Ensure front-end contract clarity on the scope and applicability of these clauses, then document, document, document compliance processes

15. GovCon legal issues that can hold up your deal or affect valuation • Organizational Conflicts of Interest • Buyers are looking to determine if they will have restrictions on future work and how those restrictions might affect the value of the company • They’ll confirm compliance with mitigation plans • Review RFPs carefully to determine if work scope could create an OCI and, if so, weigh that against any impact on future transactions

16. GovCon legal issues that can hold up your deal or affect valuation • Novations • Process by which a government contract can be legally transferred from one entity to another • Contracting officer determines if novation is “in the best interest of the government” • Not typically required in a stock purchase as long as the seller remains in control of its assets and continues to perform • Required in an asset purchase and sometimes in a merger, depending on the agency

17. GovCon legal issues that can hold up your deal or affect valuation • Notice and Consent Provisions • Provisions in subcontracts (where the seller is the subcontractor) can require that the seller give notice or even get consent from the prime contract before a change of control, merger or other transaction. • To the extent you can negotiate out consent provisions in favor of notice provisions, that can keep prime contractors from delaying your deal.

18. For any follow-up: Jonathan Wolcott Holland & Knight LLP Tel: (703) 720-8073 jonathan.wolcott@hklaw.com Cameron Hamilton The McLean Group Tel: (703) 827-0200, ext. 102 chamilton@mcleanllc.com Elizabeth Jochum SmithPachter McWhorter PLC Tel: (703) 839-8135 ejochum@smithpachter.com

19. Member Update • GSA’s Commercial Platform Initiative • 2019 Excellence in Partnership Award Nominations Open • GSA FAST 2020 Conference (April 14-16) • Atlanta, GA • 7th Annual Joe Caggiano Memorial Golf Tournament (Aug 21, 2019) • Whiskey Creek Golf Club • Ijamsville, MD

20. Thank you