Federal sector CEOs contemplating sale of their company - now or in several years - can do themselves a big favor: Think like a buyer!

Company CEOs can take immediate steps that will position their company smartly before culturally and strategically aligned acquirers.

This thinking demands an honest self-assessment of your company, yourself and your management team. Focus on the core fundamentals that a buyer can reasonably view as value-enhancing assets.

In the federal government sector, sellers need to adapt their firm's strategy to the ever-changing competitive landscape. Consider these 'pre-acquisition' action items in planning growth and liquidity.

• Be the biggest frog in the pond, or, Diversify, but only in a relatively few customer sets. Buyers usually mark down in value those companies reliant on just a few major contracts. Yet, as a smaller company, your added value comes from an entrenched position at a select number of customers, offering a true business partnership that buyers respect. One Minuteman Ventures' client performs 60% of its work for a single DoD RDT&E lab though no single company contract constitutes more than 20% of annual revenue.

  Focus on growing entrenched positions at your lead customers, then strive for contract diversity within them.

• Make your customers successful, it is the best reputation you can have, or, Enable Your Customers to Win the 'Business Case.' The new emphasis on 'business cases' to justify OMB approval of agency IT projects offers opportunities. By showing a track record of helping your customers build winning business propositions before OMB, your company reinforces its sustaining value to current customers.
• Sell when you're on top, or, Time your 'contract cycle.' Potential sellers, particularly those capturing contracts as a certified small business, should consider an exit plan at the point in time when multiple contracts are won (or expected to be won). This gives the non-small business buyers the confidence that they will be able to transition these contracts to unrestricted status before the subsequent follow-on award.
• Make your company 'buyable,' or, Transitioning Minority Business Contracts. How will contracts won under the 8(a) program and Small and Disadvantaged Business (SDB) designation continue without interruption or limitation, yet take full advantage of the seller's client relationship. Buyers will need to know this.

  Start well in advance of a contemplated sale to explore a 'contract-transition' strategy.

  Such strategies could include moving the work to an IDIQ contract or GWAC vehicle, or convincing the customer that the contract should be re-competed as full and open. Or identify other acquiring firms in the 8 (a) program that could absorb these contracts and continue their current status under minority ownership.

Selected Defense/Government Technology M&A Transactions
Closing or Announcement Date	Buyer	Seller	Purchase Price	Seller Revenue	Enterprise Value/Revenue
May 27, 2003	SAIC	Planning Consultants, Inc. (PCI)	N/D	$33m
May 15, 2003	Lockheed Martin	Orincon Corp.	N/D	250 employees
May 8, 2003	ACS	Excel Alternatives	N/D	$12m
April 25, 2003	Sysorex Consulting, Inc.	Information Systems Consortium	N/D
April 24, 2003	Anteon	Information Spectrum, Inc.	$90.7m	$130.5m	69.5%
April 24, 2003	CACI	Premier Technology Group	N/D	$43.4m	Ê
April 21, 2003	SAIC	Predictive Systems (Security Intelligence)	N/D	$1.4m
April 21, 2003	CIBER	AlphaNet	$8m	$22m	36%
April 16, 2003	Access Systems	OASAS Learning Solutions	N/D	$7m
April 16, 2003	SAIC	Computer Systems Technology	N/D	$90m
April 10, 2003	Arlington Capital Partners	ITS Services	N/D	$70m

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CEOs who operate in the federal sector have many options for maximizing their business development functions. Almost always, one option is to augment internal personnel with business development consultants. Those who can help you win new business come in a wide variety of types and sizes, each with their own set of strengths and limitations. They include:

• Regulatory Experts who advise on government rules, procedures and regulations
• Training Professionals that run classroom- based programs to teach staff how to write persuasive proposals
• Proposal Writers that take rough drafts and turn then into effective proposal text
• "Door Openers" who have connections that facilitate identifying and getting into the offices of key leaders and decision makers
• Lobbyists who track and influence congressional activities
• Strategic Business Development Consultants are advisors who help plan and execute successful business development initiatives.

If you answer 'no' on two or more of these, you should develop and implement a strategy to improve your business develop effectiveness. Retaining a strategic business development consultant can help you focus your efforts and upgrade your capability.

Click here for more information on Gary Dunbar, Gary A. Dunbar, Inc. »

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Why have private equity groups (PEGs) actively invested in the federal IT sector in the past several years?

PS: PEGs had to overcome perceptions about the federal sector that kept many from investing. The government market comes with its own set of peculiarities, such as a different procurement process unique to federal agencies, different accounting and revenue issues and the possibility of legislative and budget impacts on revenue stability. There has been a perception that investment in this sector was the domain only of people inside the Beltway, that 'government veterans' were willing only to work with only former government veterans. While most PEGs still will not consider federal investments, those of us who have invested in this sector have come to understand the inherent value inside this type of firm. When Anteon successfully went public (the culmination of a successful PEG investment), PEG investors took particular note of this sector.

While it varies by company, generally these firms are stable businesses. Especially in a slower economy, properly managed federal services firms have growth dynamics that offer very reasonable returns for PEGs that are not subject to the risks of some commercial ventures. There are other risks, but it is possible to become familiar with these and understand how to differentiate among companies. Like any sector that attracts PEG capital, this is a segmented industry that lends itself to add-on acquisitions to the original platform investments. Given a particular company's stability and that of the industry, this can give PEGs a predictable result within a range of returns.

What types of companies does CM Equity Partners seek for investment in this sector?

PS: We value companies that have a distributed contract base, those not overly-concentrated in one agency and one contract. We also like firms that have good visibility into future revenues and profit.

Since the founder/owner(s) and/or senior management tend to stay in a PEG portfolio company, we look for leaders with experience in this industry, willing to hold an equity stake in the company going forward. They need to be able to demonstrate that their firm can achieve the growth that they project.

With respect to the market, we seek firms mainly in program management, infrastructure and other outsourced technology services, which are segments that tend to have recurring revenue opportunities and are less subject to cancellation.

Specifically, our criteria for platform investments include companies in the $30 to $100 million revenue range, with operating margins between 4% and 8%. We are neutral as to agency or as to the Civil agency/Defense mix.

While we prefer the higher margins that T&M contracts typically bring, we also value those companies that have cost-plus contracts. They provide good overhead cost absorption, albeit at lower margins, and, if the acquisition is fairly priced, can generate the same types of returns for the PEG and the management shareholder group as the higher margin, more profitable companies.

What makes a successful PEG investment in the federal sector?

PS: Several factors need to be in place or put in place for success:

• Widespread distribution of equity among managers (CM Equity Partners targets 30 or more managers to become option or stock holders)
• Sense of partnership between retained management and the PEG investors
• An honest assessment and representation of the overhead included in the indirect rate structure. If the company has underinvested in infrastructure and business development and must restructure its indirect rates to sustain or propel growth, this gives us pause on pricing and we question our confidence in the earnings of the company.

On the whole we continue to believe this is a good area for investment.

For more on CM Equity Partners, click here »

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John Moore, Executive Vice President, CFO and Treasurer of Mantech International (NASD:MANT) spoke recently at the Association for Corporate Growth (ACG) National Chapter's 'M&A and Capital Forum' in McLean, Va. Minuteman Ventures' President Paul Serotkin was there. (See www.acg.org.) Following is a summary:

An active buyer over many years in the federal technology sector, Mantech has accelerated its acquisition pace since going public last year.

The company follows an 11-step process that helps to add order and certainty to a highly dynamic process. The steps unfold from conceptual planning through closing and maximizing/integrating the acquired company.

• Acquisition strategy
• Closing
• Deal flow
• Deal communications
• Candidate sorting
• Managing the acquired company
• Target approach
• Target integration
• Valuation range
• (Combined) new organization
• Due diligence

Tire kicker, heal thyself. Moore knows how tempting it is to review many of the M&A opportunities. But it is incumbent on buyers such as Mantech to screen adequately before even taking the review process to the next level on a given candidate.

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Minuteman Ventures does two things. We help small and mid-sized company owners sell their businesses, and we help corporate and private equity buyers acquire strategically aligned companies.

We specialize in companies that sell services and products to federal government agencies and the Department of Defense.

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