2 Advertising Supplement WASHINGTON BUSINESS JOURNALminutemanventures.com/news/pdf/2005_05_05_not_for_sale-WBJ.pdf · 2 Advertising Supplement WASHINGTON BUSINESS JOURNAL Association

2 A d v e r t i s i n g S u p p l e m e n t W A S H I N G T O N B U S I N E S S J O U R N A L A s s o c i a t i o n f o r C o r p o r a t e G r o w t h

Welcome to the annual Corporate Growth

supplement sponsored by the National

Capital Chapter of the Association for

Corporate Growth (ACG). ACG is the premier forum for

business executives managing the many opportunities and

challenges of corporate growth. We hope that when you read

this supplement you will find it informative, interesting and

useful. Our primary emphasis in this year’s supplement is to

provide viewpoints and expertise on the varied challenges of

organic corporate growth.

Our regional ACG chapter continues to grow and improve

its programs to better serve the needs of our members. Our

total membership exceeds 325 and has been growing in excess

of 35% annually for several years. We represent CEOs, CFOs

and other corporate officers who find ACG a valuable place to

share their experience and knowledge with each other. Each

month we offer several informative programs designed to pro-

vide education and networking opportunities. Our programs

feature industry representatives and leaders from our region’s

fastest growing corporations who lead discussions on corporate

growth topics such as raising all forms of growth capital, mar-

ket conditions for growth, management of corporate growth,

and mergers and acquisitions. We also offer broad regional

platforms for networking and building professional relation-

ships such as our M&A Conference, Corporate Growth Awards

Gala, Golf Outing, International Growth Symposium, and

private member receptions.

As a final note in this welcome, we invite you to learn

more about our organization and to join us at one of our many

programs. You can find us at www.acgcapital.org. We also

extend our utmost appreciation to this year’s supplement

committee co-chaired by Mr. Jeffrey Berger and Mr. Enrique

Brito. Thanks for your efforts in making this corporate

growth supplement possible.

Rod Buck

President

National Capital Chapter

The theme for the third annual ACG

National Capital Chapter’s

Supplement is organic growth. In

this issue you will find thirteen insightful arti-

cles that provide a diverse overview of issues,

opportunities, and challenges faced by compa-

nies pursuing organic growth strategies. This

compilation of articles represents an excellent

showcase of the broad and deep expertise of our

membership and the organizations for which

they work.

Organic growth involves organizational

expansion based on internal business

structures. It allows companies to unleash skills

and capabilities that are sometimes overlooked,

and enables them to deliver high-quality service

and increased value. In today’s environment,

however, where the pace of technology advances

is quickening and product-development cycles

are shrinking, organic growth is a challenge

even for companies with vast resources.

Relying on their vast hands-on experience,

our authors explore the opportunities and chal-

lenges experienced by companies whose focus is

on organic growth. They present wide-ranging

advice from growing a business within its exist-

ing organization and implementing strategic

alliances and outsourcing strategies, to the

human resources dimension and its pivotal role

in value creation. Our authors also analyze

important issues in the implementation of

growth strategies such as the role of private

equity, the importance of branding and the

impact of recent changes in employment law.

The 2005 ACG Supplement Committee

editors want to give special recognition to Katie

Newland of ACG, whose combined skills in

organization, editing, and patience were critical

to helping us bring this project to fruition. We

encourage you to join ACG and to provide feed-

back to our authors and us on the issues dis-

cussed in the articles presented.

Editors’ Overview

President’s Welcome

CO-CHAIRJEFFREY BERGERTHE BERGER LAW FIRM, PC

JOE ESTABROOKELLIN & TUCKER, CH.

JOANNE KINYONMARSH, INC

ROD BUCK

ERIC PIETRASCOMMERCE BANK, N.A.

CO-CHAIRENRIQUE BRITOTHE MCLEAN GROUP, LLC

ALEXEI J. COWETTGREENBERG TRAURIG LLP

A s s o c i a t i o n f o r C o r p o r a t e G r o w t h W A S H I N G T O N B U S I N E S S J O U R N A L A d v e r t i s i n g S u p p l e m e n t 3


The ride up for company founders eventu-ally hits the “entrepreneur’s glass ceil-ing.” Many elevate their enterprise to $5-

10 million in sales, positive cash flow and evenprofits, but few break through to sales of $50 or$100 million or more. That’s because they’vereached the point where their money, compe-

tence, energy andvision aren’t enough.

Over the courseof a business’ build-ing phase, foundersare the most indis-pensable employees.But their control onalmost all facets ofthe business caninhibit growthbecause foundersoften are unable toprovide all the skillsnecessary for theadded complexitiesthat accompanyexpansion.

Entrepreneursthink, dream, envi-sion, create, inspire,and do. Theseimportant “launch”skills must be aug-mented by the dif-ferent skills andmindset required togrow and manage alarger organization.

Founders often resist decentralizing managementresponsibilities and find it difficult to delegatereal authority or share decision making.Accordingly, they are often the type of personleast suited by skill and temperament to leadand manage to the next level.

Although some founders “get it,” most donot. To create an organization that achieves largescale success requires a transformation in structure,discipline, attitude, culture and organization. Such

transformation requires the skills of a classic busi-ness manager because that next level of success isabout how employees and managers are led.

W H Y I N A C T I O N I S N O T T H E A N S W E R –T H E C O S T O F FA U LT Y M A N A G E M E N T

Most small companies are plagued by man-agement and “people” problems, many of whichremain unattended. While the costs of faultymanagement are significant, the costs are some-times indirect or not easily measurable.Nonetheless, they exist, impacting profitabilityand success. Fortunately, the symptoms are easilyrecognizable:• Low morale and excessive turnover• Low productivity • Poor customer service• Employment related legal actions

The impact goes to the bottom line affect-ing the company’s ability to profitably delivertop quality products and services to its cus-tomers.

W H E R E T O S TA R T ?Founders need to assess and compare their

organization to the recognized hallmarks of asuccessful enterprise and to benchmarks in theirindustry such as:• Organization and individual performance

excellence• Peerless customer service • High employee morale and low turnover• Strong, credible management team• Clearly communicated mission, values and cor-

porate strategy• Well-defined and executed human capital poli-

cies and processesEntrepreneurs must look at the enterprise

management, the “health” of the managementsystem and its style. Some of the critical ques-tions that should be asked include: • Does the company often resort to external

recruiting rather than promote from within?• Does its employee evaluation system accurately

measure leadership and management skills?• Are management deficiencies overlooked in the

assessment, reward and promotion of talentedtechnical professionals?

• Is excellence in management a competencethat is respected and reinforced in the organi-zation?

If you and a trusted business advisor havetaken a thorough and honest examination of yourcompany and its human capital managementpractices, a diagnosis will become clear.

T H E N E X T S T E P SNow it’s time for the prescription. First and

most challenging, founders must develop a tal-ented and effective management team to executethe business plan. Some critical specific actionsinclude:

Create a defined role for the founder.Identify strengths and create a role that utilizesthe founder’s talents to best benefit the firm.And most importantly, the founder must staywithin the parameters of the position description.

Bring in a professional. A time will comewhen the founder faces what is a most importantdecision; if and when to hire a Chief OperatingOfficer. To be effective, the COO must becharged with executing the plan and must be apartner and business soul mate of the founder.

Build a workable succession plan.Succession planning begins with an honest lookat the organization’s growth plans and strategies.They should:• Create the organization chart for the future.• Assess the present staff and management team

for promotion potential. • Identify “high potential” employees. • Earmark key “fast track promotion” positions.• Create a management development program. • Ensure that there is a well functioning

employee assessment plan in place.• Create a mid- to long-term staffing plan for

key positions.Delegate. An empowered management

team is an essential element. The founder mustshare real power, authority, and control.

Investment in all aspects of human capi-tal management. Elevate the priority of human

capital management into the corporate strategy,planning, and execution.

Create a culture that results in highmorale.

Improve managers’ skills. Provide basicmanagement skills training to all new supervi-sors and create programs, including coachingand mentoring, for managers and executives atall levels.

Foster a career advancement mindsetamong employees. Create a career developmentprogram that includes position descriptions andaccountabilities, annual individual performancegoals and plans, defined promotion criteria, for-mal written evaluations and ongoing perform-ance feedback.

Practice employment legal risk manage-ment. Be aware of employment related legal andregulatory risks, including IRS contractor statusrules, overtime eligibility, sexual harassment pol-icy, legally sound employment interviewing andappropriate process for terminations.

C O N C L U S I O NLong-term growth and success of an entre-

preneurial venture will depend on the qualityand effectiveness of its management team, corpo-rate processes and employees. That effectivenessis determined by the commitment, energy, andresources the founder applies to transiting thecompany from start-up to growth. The foundershould realize that a failure to cede control usu-ally results in organizational inaction.

Founders would do well to remember thatpreventative medicine can prevent many corpo-rate illnesses. Amidst the glamour and thrill ofentrepreneurial ascension, investing in healthyhuman capital may seem like eating your vegeta-bles. But it’s better than being in the corporatehospital on life support at the hands of an inex-perienced and ill-trained team.

Ted Bruccoleri - Human Capital Advisors [email protected]

Tony Cancelosi - INDUS Corporation [email protected]

Attention CEO: Success Is Not Just About YOU

TONY CANCELOSI

TED BRUCCOLERI


As many of us know, owning and runninga small business, has significant chal-lenges. One of the most significant, but

least talked about, is that of Perception – in par-ticular negative perception that often brings anunfair bias towards small businesses. Such nega-tive perceptions include the point of view that

potential clients per-ceive small business-es as lacking depth(the inability to pro-vide qualityresources), areunable to satisfymore than one criti-cal project simulta-neously, and/or lackthe internal infra-structure (executivemanagement team,contracting expertsor financial support)to handle multiple

orders. Often larger companies are selected fortheir clout in the industry and name recognitionalone. Many customers would rather “play itsafe” by hiring a large, well-recognized firm,rather than run the risk of assuming a smallcompany, even when the small company has anexcellent reputation for delivering quality prod-ucts/services.

There are general negative perceptions thatmany customers have of both large and smallcompanies, and they are justifiable in some cases.Perceptions such as “all vendors are the same”,they only care about the “bottom line”, or theypull “bait and switch” tactics – wherein the pol-ished, seasoned, experts, are brought in to winthe customer over and are then replaced by inex-perienced personnel. However, small businessesface even more negative perception. Customers

tend to view small businesses as not having theability to quickly staff a project. There is still athought process that larger companies haveresources “standing in the wings.” In reality,large companies can no longer hold ontoemployees when a contract ends. They simplycannot afford the overhead in our competitiveglobal market. Yet, the perception remains thatlarge companies have resources to spare – readyto step in with little or no notice. Both large andsmall companies face the same staffing chal-lenges; and, both reach for the same personnelresources, recruitment experts, and internet jobbanks for solutions. The real issue is the compet-itive marketplace and transient employee naturethat exists in the Washington, D.C. region.

Another negative perception is that smallcompanies are unable to handle complex and/ordemanding projects simultaneously. Customersperceive small companies as dedicating “theirall” to a project in order to gain a positive repu-tation in the industry while potentially forsakingother customers’ needs. From a personal stand-point, I have experienced the “you are alreadyworking on X, how can you take on Y?” Theanswer is, I can take on Y the same way a largecompany would, or better yet, the same way anygood company would. Success factors for everyproject include: strategic planning, creativity,quick yet sound-decision making, a dash of luck,and perseverance.

In the same vein, some customers perceivesmall companies as lacking the internal infra-structure to manage their own business, such asa lack of experience and financial solvency. Intruth, starting a company is like an expectantmother about to give birth – months of expecta-tion, anxiety, pain and hope until the blessed daythe doctor says, “It’s a company!” Some compa-nies take years to be born, some as little as a fewmonths, and some just never fully develop. But

like creation, it takes time and learning fromexperience to flourish. This is true for both largeand small companies. Large companies don’tautomatically know what to do, they learn frommistakes and make adjustments to survive andalong with it, gain knowledge and expertise.From a financial perspective, any (smart) smallcompany has financial backing. The small busi-ness owner must take time and nurture a bank-ing relationship. Often, this relationship growsto be strong and personal, where the businessowner can speak with the bank’s Vice Presidentdirectly, and instantly increase a line of credit. Inlarge companies, there may be several layers ofapprovals required to execute a funding require-ment. The bottom line is that a well-run smallcompany has already figured out how to managetheir finances, otherwise, they wouldn’t run therisk of taking on a new customer and potentiallydamaging their newborn reputation.

So given all of this, what is the reality?Small companies have the same challenges andconcerns as large companies, these include: Stateand Federal regulations, economic uncertainty,keeping up with technology, adequate capital,and recruitment. It is also true that small com-panies tend to be more flexible and build closer,more trusted relationships with customers thanlarge companies. They can respond more quicklywhen time-to-market is critical. So, in the end,size really doesn’t matter. What matters iswhether or not you are running a companywhere quality, service and ethics are at the fore-front of your business model. So then, how canyou change a customer’s negative perception?

There are a few ways that may help over-come the perception problem. One is the educa-tion of your staff. A business owner needs toclearly articulate what employees can or cannotdiscuss with a client. For example, chatting witha customer about how the company once operat-

ed their intranet from the owner’s basement,does nothing but contribute to the negative per-ception problem. The intranet story may become“cute” over time, just as the story of Bill Gates’startup is now considered charming. But, at onetime, it may have been a deal breaker. The resultof loose lips can be damaging; particularly, if thecustomer has little knowledge or experience ofwhat it takes to run a company. Another tactic isto take the time to educate your clientele. Youwill need to be more forthright than a largecompany regarding your company strengths.Customers will admire your confidence andrespect the accountability that you possess.Another tactic is web marketing. The power ofyour company branding and clarity of yourstrengths is an invaluable “Perception Buster”. Ifpossible, take advantage of marketing your serv-ices via white papers which can be downloaded.Be sure to include testimonials on your websitefrom satisfied customers. And of course, a satis-fied customer can become one of your bestPerception Busters. Don’t be shy about askingyour customers to contact potential clients andrecommend your services.

Overcoming negative perception from a sizestandpoint is clearly an issue for small companiesand an issue that large companies never contendwith. From a performance perspective, size isirrelevant to running a great company.

Cheryl Amyx ([email protected]) is president & CEOof Amyx, Inc. Amyx provides innovative managementand technical solutions for government and commer-cial customers. The company is adept at programand process management, design and implementa-tion of knowledge management solutions and enter-prise transformation www.amyx.com.

Small Business Challenges – The Perception ProblemSize Doesn’t Matter

CHERYL AMYX


BY GREGORY M. GIAMMITTORIO

Joint ventures occur frequently in many sec-tors, including the biotech, telecommunica-tions, software, semiconductor, computer,

media, satellite, chemical, automotive and med-ical device industries. They are a useful tool forbusinesses looking to accelerate growth, butwhich either do not have the wherewithal orinclination to bear this risk alone.

While there are many types of joint ventures,this article will focus on transactions where two ormore companies decide to form a new businessentity to pursue a common business objective.Joint ventures of this type customarily involve acontribution of technology, cash, employees, regu-latory licenses, marketing and distribution capa-bilities, and/or manufacturing capacity by the par-ticipants. The parties’ obligations relating to the

joint venture are evidenced in most cases by acomprehensive agreement or set of agreementscovering topics such as the type of entity to beformed, the contributions of cash or other assets,the scope of activity of the enterprise, governanceprovisions, the structure for management, actionsrequiring special approvals, how disputes will beresolved, and how a party or parties may exit orcause the termination of the venture.

Any company planning to use joint venturingshould proceed with caution since there are poten-tial traps for the uninitiated. One of the most com-mon pitfalls for parties undertaking a joint ventureis a failure to plan properly for the eventual exit ofone of the business partners, whether there is adeadlock in decision-making or for other reasons.

In most cases, it is advisable to includedetailed provisions describing the obligations ofthe parties under various exit scenarios. Of course,

the parties will be freeto decide on a differ-ent approach whenthe time comes forthem to terminatetheir relationship.Having equitable andwell developed provi-sions as a backdropwill help ensure thatany future negotia-tions are balanced.Simply stated, thegoal upfront is to

minimize the prospects that one party will have acoercive advantage over the other.

One common mechanism used to addressexit concerns is a “buy/sell” provision. There are anumber of different approaches that can be used.

The most fundamental issue is pricing, whichmay be determined in a number of ways, such as:

• a stated price (which generally will need updat-ing frequently and so may not be a practicalchoice) or a formula price (e.g., 7 times EBIT-DA);

• by one of the parties setting the price and theother deciding to buy or sell at that price; or

• appraisal by one or more experts.

The provisions most often will address adeadlock situation where the parties simply can-not agree on a critical decision relating to theoperations of the joint venture. The provisionsmay also address a default situation. In thedefault situation, the non-defaulting party issometimes given the choice of being, at itsoption, the buyer or the seller (and, if the buyer,at a discount to the valuation that would other-wise be used in the non-default situation).

In the deadlock scenario, where none of theparties are in default, one buy/sell arrangement thatis frequently used provides that once certain definedtriggering events indicating a deadlock haveoccurred, the parties must go through a dispute res-olution process. The dispute resolution process caninclude escalation to senior management of the jointventure parties for a period of time. If this does notresolve the deadlock, a mediation process may alsobe used. In any event, if efforts at dispute resolutionhave not resolved the deadlock for a stated period oftime, either party is free to institute the buy/sell bystating a price and offering to buy the other party’sinterest or to sell its own at that price. The uncer-tainty about who will buy and who will sell oftenencourages the parties to reach a negotiated solu-tion. If they do not, the provision will in manycases still produce a fair result – similar to the situa-tion where one person divides the last piece of pieand the other gets to choose the piece. However, ifone party has a large advantage in terms of access tocapital, this type of provision may become onerousto the less well financed entity.

One variation on this approach may give theparties more predictability and provide some pro-tection to a party with substantially fewer resources.It has the following key distinguishing features.

• an appraisal method sets a floor price on thebuy/sell;

• both parties are given the chance to bewhichever they prefer – the buyer or the seller;

• if both wish to sell, they need to continue towork out the dispute (neither is so distressedwith the deadlock that they are willing to stepup and buy the other party out);

• if one party wishes to buy and the other wishesto sell, a good result is obtained because theyeach get what they want; and

• if both parties wish to buy, an auction processis commenced and the one who wants it themost (and is willing to pay for it) will get it.

In a situation with parties of disproportion-ate financial strength, the smaller company isprovided some protection by having the floorprice set by the appraisal process. The smallercompany may also want to require a period oftime prior to any auction commencing that willprovide it with the best chance to obtain outsidefinancing. In addition, to alleviate the financingrequirement, the smaller party may wish to nego-tiate the ability to use a note with pre-definedterms for a portion of the purchase price.

In summary, joint ventures can be extreme-ly useful business tools for companies to achieveobjectives they could not achieve alone, creatingopportunities for accelerating growth. However,to do them correctly takes a lot of thought, timeand effort. To be successful, joint venturesrequire a high level of cooperation. If that coop-eration breaks down, it is important to have anefficient way to end the relationship in a mannerthat protects any value created in the enterpriseto the maximum extent possible.

Mr. Giammittorio ([email protected]), a part-ner in the law firm Morrison & Foerster LLP, has over17 years of experience representing investors and com-panies at all stages of growth, from start-up to Fortune500. His practice focuses on mergers and acquisitions,

Using Joint Ventures To Grow: Exit Provisions Help Protect The Value Created

GREGORY M. GIAMMITTORIO


BY JEFFREY L. BERGER, ESQ.

W hile the following scenarios are fictional,they are a composite of issues common togrowth companies in our dynamic region.

The Start-Up Phase. After years with amajor IT services company, two engineers starttheir own consulting firm, InfoSys-IT, with afriend who will run the business-side as CFO.They contribute capital, rent space, and bring onexperienced subordinates and a few customers.

Two year later, thefifteen employeescelebrate their suc-cessful anniversary atthe Tyson’s Palm. Asthe founders givebonuses to the entireInfo-Sys “family,”they discuss expan-sion into the home-land security sector.With shared corpo-rate vision, culture,and success, no oneat InfoSys is think-ing about employ-

ment law or policies. The Growth Phase. After InfoSys lands a

DHS subcontract, its key commercial customeropens several out-of-state facilities, requiringexpanded personnel from InfoSys. Its foundersbegin to recruit, set up satellite offices to servetheir customer, and quickly promote and hirenew managers based on technical expertise. Theoriginal employees are so busy they rarely inter-act, and few of the forty new staff shares the cor-porate vision. The CFO, who reluctantly handledstart-up personnel matters, has no HR expertise.Nonetheless, she learns that with more staff,InfoSys must comply with federal employmentlaws. The new managers, without specific guide-lines, each adopt practices from prior employersfor interviewing, hiring, and resolving HR issuesfor an expanding staff, which includes women,employees born outside the U.S., and recent col-

lege grads, whose collective presence createsunresolved social/cultural issues that begin toaffect productivity. Overtime and work hourrequirements are applied inconsistently, andemployees are uncomfortable with the stormyromance between a female analyst and her man-ager. At the close of year three, employees aregrumbling about overwork, sexual harassment,overtime violations, and discrimination. Thethree founders (without executive employmentagreements) argue over the expansion, and thefounder tied to the key commercial client threat-ens to start his own company, while the othertwo consider their options.

The New Professional Services Model.In contrast to the old manufacturing industryapproach, where the machines were critical andemployees fungible, our region’s private econo-my is driven by professional services companieswhose most valuable assets are employee knowl-edge and experience. In this environment, thefrequent lament of business owners is that thingswould be easy if they did not need staff.However, just as successful entrepreneursapproach new ventures with a business plan inte-grating finance, production, distribution, andmarketing, the same principle applies toemployee management. In major metropolitanareas, there is a convergence of federal, state, andlocal laws that affect most aspects of the employ-er/employee relationship, including between cor-porations and their executives. Affected subjectsrange from the payment of bonuses to the wear-ing of nose rings, and even include an employee’sright to discuss these matters by email messag-ing. Most recently, Sarbanes-Oxley has expandedwhistleblower protection to employees who com-plain about certain financial improprieties; andhighly-paid employees have become sophisticat-ed in using employment laws to promote theirown agendas.

Strategic Personal Management System.Employers, particularly those seeking rapid corpo-rate growth, need a platform for personnel growthand management aligned with strategic business

goals and employment laws. The process beginswith recruitment and hiring, and ends with pro-tection of the company’s confidential informationand customer base when an employee leaves.Without policies and procedures, managers, whoare often promoted due to their technical ratherthan management expertise, waste time attempt-ing to resolve personnel issues by instinct ratherthan through processes designed to promote thecompany’s business and protect it from liability.Among the most disruptive forces on employeemorale, and a major impetus for discriminationclaims, are personnel issues that are resolvedinconsistently or not at all.

An effective antidote to the ad-hocapproach is a centralized personnel managementframework, whereby one manager or humanresources department is responsible for guidingall HR/employment law decisions. Whether thisauthority resides in a COO, HR director, orCFO, having a centralized authority responsiblefor company-wide employment issues fostersmultiple benefits of streamlining the resolutionprocess, creating company-owned expertise,aligning HR management with business goals,and preventing internal inconsistencies that leadto employment lawsuits. The company must alsoadopt a uniform set of policies and procedures,distributed and well-communicated to eachemployee, such that common issues never reach asupervisor or become a source of conflict. Due torecent legal developments, there are “must have”provisions to protect employers, e.g., employ-ment-at-will, EEO, harassment, electronic com-munications, family and medical leave, andwhistleblower rights (Sarb-Ox), on which thecompany should also provide employee and man-agement training. Likewise, as much of a servic-es company’s value is in its employees and cus-tomer relationships, there should be restrictivecovenants agreements prohibiting employeeswho leave from using confidential information,soliciting customers and company employees,and, in some cases, competing with the compa-ny. With critical issues covered, the employer is

free to establish policies on performance andsalary reviews, bonuses, promotions, leave, bene-fits, and employee responsibilities, to promotesits business goals.

Of equal importance, especially for compa-nies with multiple facilities or in rapid growth,is to empower supervisory staff with manage-ment HR and legal guidelines and procedures tominimize time and liability on such commonfunctions as applicant selection, performancereviews, discipline, discharge, overtime, discrim-ination, and harassment. Similarly, companiesshould incentivize supervisors to succeed byincluding employee management as a componentin compensation reviews. A key element in the“management system” is that personnel decisionleading to liability be made in consultation withHR management personnel, who in turn havethe discretion to consult employment law coun-sel for a preventive “reality check.” Particularlyfor a company in a growth mode, employee dis-putes can be costly distractions for managementand staff, and can adversely impact the ability toattract outside investment. Perhaps the mostcost effective advice employment law counsel canprovide is the quick review of significant person-nel decisions to determine, for example, whetherto discharge an employee or first place him on aperformance improvement plan to protect thecompany.

In the employment context, change can bethe driver for success, but can also create disrup-tion and liability. Thus, while all companies inthe midst of growth should implement HR andemployment law polices, companies can be moreefficiently served with less risk by managingstaff growth based on an existing personnel man-agement system that is integrated into the over-all business expansion plan.

Mr. Berger represents employers and executives inemployment and business law, and litigation, withThe Berger Law Firm, www.bergerlaborlaw.com;Board Member – National Capital Association forCorporate Growth.

When Corporate Growth is Personnel – The Critical Role of Employment Law and Policies

JEFFREY L. BERGER


ENRIQUE C. BRITO, CFA, AVA, CM&A

I N T R O D U C T I O N

For most business owners, their businessrepresents the largest portion of their networth, generally from 65% to 85% accord-

ing to recent surveys. Hence, it is criticallyimportant that entrepreneurs focus as early aspossible on designing and implementing a planthat will create sustainable business value as theventure grows and matures. Likewise, for themost part an entrepreneur’s departure objectiveshould not be based on working until a particu-lar date in the future, but on achieving a valua-tion level that will provide them with financialsecurity once they exit the business. This finan-cial security, in the form of an after-tax incomeadjusted for inflation, should be high enough toenable the business owner to maintain a chosenlifestyle for years to come.

The critical issue is how to go about design-ing a strategy to ensure the creation of business

value in a sustainable manner right from thestart. The answer is found in being able to alignthree crucial elements in operating a business:vision, strategy and execution. This will signifi-cantly increase the odds that the business ownerwill be able to achieve his or her long-term goals.

T H E E S S E N C E O F B U S I N E S S VA L U EBefore describing how to design a plan that

ensures that the business owners’ vision, strategyand execution are aligned to create sustainablebusiness value, it is important to define whatbusiness value means, how it is quantified andwhich forces drive it.

The term “value” has many definitionsdepending on the purpose for which it is used andthe interests of those defining it. However, value isbest defined when it can be applied almost univer-sally. When value is defined as a risk-adjusted ben-efit (Value = Benefit / Risk), it becomes clear thatvalue is created by increasing benefits (increasingthe numerator), decreasing the risks associated

with obtaining those benefits (decreasing thedenominator), or a combination of both.

In the world of investments, benefits takethe form of cashflows while risk isquantified throughthe investor’s expect-ed rate of return. Infact, the higher therisk associated withobtaining future cashflows, the higher theexpected return onthe part of theinvestor. From thisperspective, the valueassociated with aninvestment is influ-enced by both the

potential for creating future sustainable earningsand the perceived level of risk associated withthe realization of those earnings.

In terms of a business enterprise, the bene-fits (i.e. the projected net cash flows to the capi-tal providers) are driven by the expected growthin revenues, profits, and capital base of the busi-ness. Risk, on the other hand, is quantified bythe so called “weighted average cost of capital”or “WACC” which is just the average returnexpected by the providers of both equity capitaland debt capital to the business. As such, theweighted average cost of capital is a function ofboth the cost of equity (return on equity) drivenby investors’ requirements, as well as the cost ofdebt (after-tax interest rate) driven by the exter-nal environment and the internal capabilities ofthe business.

S T R AT E G I E S F O R VA L U E C R E AT I O NAs previously stated, the entrepreneur’s

vision, strategy and execution must be aligned atthe operational level in order to realize his or herlong-term goals. In practical terms, if value isdefined as a risk-adjusted benefit, aligning abusiness’ vision, strategy and execution trans-lates into identifying those strategies that effec-tively increase the future cash flows of the busi-ness and/or reduce the risks associated with therealization of those cash flows.

At its core, value creation is a function of acompany’s growth potential as determined bythe business’ capability to increase its revenues,profits and capital base, as well as its ability toearn returns above and beyond its cost of capital.In essence, in order for a company to increase itsvalue it must increase its net cash flows and/orreduce its cost of capital.

Net cash flows are determined by severalcrucial elements including: sales volume, operat-ing margins, tax rates, and investment require-ments for working capital and fixed assets. Thecost of capital, on the other hand, is determinednot only by external market conditions affectingthe level of interest rates, but also by the inter-nal capabilities of the business based on its realor perceived operational strengths and weakness-es, market opportunities, and competitivethreats.

D R I V E R S O F VA L U E A N D R I S KIn the final analysis, every company regard-

less of the products or services it offers, theindustry in which it operates, or the markets itserves, is in the same business—producing cashflows. And, as previously stated, what ultimatelydrive business value are cash flows and the likeli-hood of their realization.

Although some value drivers and risk driv-ers are very specific to certain industries andeven companies, there are some universal factorsthat have a definite impact on value creation.Some examples of these factors include:

Value drivers: quality of revenues, consis-tency of profits, quality of assets (tangible andintangible), management team’s depth andbreadth, proprietary rights, growth potential forthe business/market and favorable economic andindustry conditions.

Risk drivers: lack of customer diversifica-tion, potential contingent liabilities, inexperi-enced management team, poorly maintainedassets, high operating costs, frequent contractrenewals (bidding), high employee turnover andfinancing costs.

C O N C L U S I O NCreating sustainable business value is a goal

within the reach of most entrepreneurs. It beginswith a clear definition of what value is. Thisfacilitates the identification of factors most influ-ential in increasing the benefits and decreasingthe risks associated with operating the particularbusiness. When these factors are made the focusof the business’ strategy, this makes possible thealignment of the owner’s vision, strategy, andexecution, which enhances the likely maximiza-tion of the business’ potential, and the ultimateattainment of owner’s long-term goals and finan-cial security.

About the Author: Enrique C. Brito, MBA, CFA, AVA,CM&A is a managing director of The Mclean Group,a private investment bank providing merger andacquisition, valuation and private equity financingservices. He has over 17 years of corporate financeand investment banking experience and lecturesnationally on the subjects of business valuation andM&A. He can be reached via e-mail at

Creating Sustainable Business Value

ENRIQUE C. BRITOCFA, AVA, CM&A


All the smoke now being blown aroundthe concept of “branding” is cloudingthe realities of what it is in authentic

practice.In the pioneering days of Madison Avenue

consumer marketing, message and image —without accountability for behavior — wasacceptable. At that time, we were in the era ofthe Marlboro man (who, in reality, died yearslater of smoking-induced cancer).

Branding is now well established in thebusiness-to-business realm. It has also taken holdin our politics, government, religion and culture.Even human resource experts tout the need forapplicants to become their own “personal brand”to compete in the job market. Brand equity isnow an essential organization asset on par withfinancial resources, real estate, inventory, andhuman capital.

In today’s competitive environment, a sus-tainable corporate brand — one that effectivelysupports organic growth — must successfullymeld core characteristics, values, competitivedifferentials and the sales proposition into asingle, compelling embodiment. It mustbecome ingrained as a values phenomenonthroughout an organization’s anatomy, and thenbe consistently applied in behavior at everytouch point in the growth strategy: from newproduct or service innovation, alliance-collabo-ration building and human resources practices,to senior executive thought leadership, channelpartnering, intellectual property management,technology transferring and outsourcing strate-gies.

When a brand is built on fundamental, sus-tained behavior, it will have widespread impacton the success of any growth plan, from reducingcost and improving productivity to creatinginternal community to support it publicly. Goodbrand behavior will also help ensure a more fluidexecution of the business strategy and a

strengthened culture of loyalty that will supportsmoother organization transformation duringchange. Credible brand behavior also creates aplatform upon which competitive encroachmentsmay be more effectively combated, and fosterstruthful communication that helps instillintegrity in management and business practices(i.e., financial accountability, leadership sustain-ability).

Examples abound of how the right brandbehavior contributesto sustainablegrowth and market-place durability dur-ing times of greatopportunity as wellas great stress. Justconsider the actionsof three of America’smost respected com-panies.

GeneralElectric is known forsetting high stan-dards, not the leastbeing in humanresource practices

espoused during the reign of former ChairmanJack Welch. The core values in attracting andmanaging world-class employees have dissemi-nated to every touch point in the GE brandexperience. GE’s leadership has been particularlyapparent with the new corporate governance andaccountability requirements of Sarbanes-Oxley,proving there is no cost too high for a brand’scredible leadership during a crisis in public con-fidence.

Health care giant Johnson & Johnson hasfacilitated growth almost single handedly fromits reputation as one of the most trusted compa-nies in the world. As a result, they have success-fully sustained and grown trademark brands over

generations, launched new product innovationsthat have redefined their categories, and attract-ed strategic alliances to build some of the mostfruitful partnerships in American business. J&J’squick and high-risk response to the Tylenol poi-soning crisis during the 1980s is revered as ashining example of corporate integrity, sealingits destiny as one of the most durable Americanbrand names. J&J remains recognized for anunusual commitment to the values of quality,dependability, and customer safety (doing theright thing).

Beginning with former Chairman JackBogle, investment management leader TheVanguard Group defined competence andintegrity in its industry, which has enabled thefirm to successfully grow its product portfolio bymere extension of its core values of competitiveperformance, customer-focused product choice,trust, and expert client service.

If behavior is key to building a durablebrand for competitive growth, then corporateleaders must correlate any brand promise withthe scope and character of the organization’sactions. Try this test:

Do you adequately fund the resources need-ed for responding to customer problems withcorrect quality?

Do you cut costs by using inferior compo-nents, or by taking shortcuts in your manufac-turing process, that result in product obsoles-cence for the customer?

Is your idea of community involvement towrite a check, promote it, and forget it — ratherthan direct those funds into a flextime programto reward employee volunteerism, or partnerwith philanthropic organizations for trainingprograms that empower employee activism?

Do you assign resources to the continualtweaking of first-generation product releases tomaintain mass appeal and short-term returns,with no set aside for R&D that would evolve

products responsive to customer aspirations longterm?

Do you re-engage lapsed customers by seek-ing out their feedback on why they left, and doyou have an active restitution process to restoretheir good will?

Have you developed a “trust zone” forshared intelligence and non-threatening collabo-ration with competitors that benefits your indus-try and customers at large?

Do you support fair employment practiceswith progressive pro-diversity and non-discrimi-nation policies?

Do you comply with industry regulationsonly in a reactionary mode, rather than proac-tively supporting new standards by setting yourown example?

Do you “put people first” by offering daycare for employee parents and flextime ortelecommuting options for employees jugglingthe demands of family?

Do you advance a customer centric businessmodel by training front line employees and sup-porting them with proper supervision so thatthey may be informative facilitators in meetingevolving customer needs?

These questions test your legacy behavior— a core component of brand equity. As weenter a new era of corporate growth that is notsolely premised on mergers and acquisitions, butequally driven by a variety of organic initiatives,particularly innovation and transformation, goodbrand behavior will pave the way for dependablepublic and private consensus at the time youneed it the most: when you’re ready for growth!

Art Stewart, President of Stewart Strategies Group,LLC ([email protected]), consults on market-place leadership, brand integrity, external behavioralalignment, mission advocacy, reputation defense,and crisis preparedness.

Myth and Mystique:Growth Brands Are All About Marketplace Behavior

ART STEWARTPRESIDENT OF STEWARTSTRATEGIES GROUP, LLC

1 0 A d v e r t i s i n g S u p p l e m e n t W A S H I N G T O N B U S I N E S S J O U R N A L A s s o c i a t i o n f o r C o r p o r a t e G r o w t h

BY ROBERT N. RUBIN

Acontrol sale to a private equity sponsorpresents an attractive option for businessowners who are optimistic about the

future growth prospects of their businesses butwant to achieve substantial liquidity. In a con-trol sale, the selling shareholders reinvest a por-tion (10%-20%) of the sale proceeds in therecapitalized entity. After the change of control,the seller usually remains involved in the opera-tional management. In addition to liquidity, a

control transactionprovides otherattractive resourcesto a seller.

In these trans-actions, future capi-tal requirements tosupport sales andprofit expansion areidentified and pro-vided through acombination of thepurchaser’s commit-ted investment andvarious sources of

debt financing. By taking the lead in fund rais-ing activities a private equity sponsor allowsmanagement to concentrate its efforts onexpanding revenues and profitability. Further,their financial experience and relationships usu-ally result in better pricing and terms as manyof the principals are former senior executiveswith specialized industry experience.

Ready access to this resource base is some-thing unique and difficult to quantify. The abili-ty of these business partners to open doors withcustomers, prospects, suppliers, and industryexperts can offer an attractive competitive advan-tage. Moreover, private equity investors are anactive business partner, whose intent is on exer-

cising control, providing structure and closelyexamining results to ensure that investmentexpectations are achieved. While this increasedlevel of oversight may appear demanding, Boardinput and direction can prove invaluable inaddressing sales, profitability and other opera-tional issues and improvements.

In this type of transactions, acquisitionsusually play a major role in enhancing growthand profitability. Private equity firms have expe-rience in all areas of M&A which can be lever-aged to source and execute transactions, and pro-vide valuable assistance in a smooth post closingintegration process.

In the Washington DC area, we have seenan increased level of private equity activity inthe government services and defense industries.The underlying investment fundamentals,including double digit organic growth rates dueto increased spending in areas such as intelli-gence and homeland security and continuingindustry consolidation, are attractive toinvestors. In addition, the balance sheet andoperational characteristics of the typical profes-sional services provider are ideal for these trans-actions due to the significant level of leverageinvolved. Government receivables, significantcontract backlogs, and predictable cash flowscoupled with a low interest rate environmentenable private equity sponsors to obtain debtfinancing at very favorable terms. Notable localprivate equity success stories include Anteon,Veridian, Digital Net, and SI International.

To see how a private equity control transac-tion works let’s consider a hypothetical companywith $100 million of annual revenues and 10%EBITDA margins which projects organicgrowth at a compound annual rate of 15% overthe next five years. Prior to the transaction, ithas $20 million of debt and ownership is con-centrated in a small group. Management has

never completed an acquisition, but in order toreach their goal of growing the business to over$300 million in annual revenues over the nextfive-years, they realize that acquisitions are animportant element in achieving this objective.And, although substantial debt capacity is avail-able, the sellers are uncomfortable with takingon the level of financial risk required to com-plete a significant amount of acquisitions. Withlimited transactional experience, they are alsoconcerned that management time will be divert-ed from operations to complete and integrate atransaction.

After several rounds of negotiations, thesellers accept an $80 million cash offer (8x trail-ing twelve month EBITDA) from a privateequity sponsor for 100% of the outstandingstock which, after repayment of outstandingdebt, produces pre-tax sale proceeds of $60 mil-lion. The sellers are also required to purchase20% of the equity in the recapitalized entity.Finally, the buyer has offered key members ofthe management team who are not stockholderswith an upside equity interest of 5%-10%earned through performance-based stockoptions. Though this structure results in thesellers receiving less cash at closing, it offers allstakeholders compelling benefits. From thebuyer’s viewpoint, it requires less investmentand provides strong incentives for the manage-ment team to continue to build the value of thebusiness.

Both parties believe they bring skills andresources that will further enhance the value ofthe business beyond its current capabilities andhave made serious financial commitments toachieve this goal. With the additional capitaland transactional skills provided by the buyer, aplan to reach the $300 million revenue objectivethrough a combination of organic growth andacquisitions is put in motion. The plan includes

completing acquisitions which will contribute$75 million in incremental revenues, most ofwhich will be funded through additional debt. Ifsuccessfully executed, this plan would result in acompany with revenues of $320 million andEBITDA of $32 million.

Assuming a sale in five years at an enter-prise multiple of 10x–12x EBITDA (reflecting apremium valuation for a significantly largerentity) both parties will realize significantreturns on their equity investment. Althoughthe sellers initially accepted less for their owner-ship interest, by continuing to build value in thecompany, and acquiring the financial stabilityand transactional acumen which was constrain-ing their growth, the sellers can benefit from a“second bite at the apple” and a substantialincrease in their overall return. Completion ofthis transaction has provided the sellers with sig-nificant personal liquidity and a partner with thekey resources they were lacking to achieve theirgoals for the company.

Private equity control transactions can bevery attractive, but are not for everyone. In con-templating this form of transaction one shouldbe aware that investors want to start with a plat-form company that has sufficient size to build onand support the critical mass necessary toachieve a higher valuation. In addition, the rateof growth, the size and quality of the customerbase, and how they are perceived by otherinvestors are important factors to consider.Finally, the capabilities of the management teamand its commitment to execution of a planwhich will enhance the growth of the firm areother important considerations.

Aronson Capital Partners LLC provides corporatefinance advisory services to government contractingand technology companies. Robert Rubin is a senioradvisor in ACP’s M&A practice. [email protected]; 301.231.6219.

Private Equity Control TransactionsProvide More than Money

ROBERT N. RUBIN

BY TIMOTHY HALL

Mid-market companies well-positionedfor growth will not lack for opportuni-ties in 2005 to make aggressive

moves. With more lenders sparring for deals,including new entrants such as hedge funds,credit has loosened considerably. Today, valua-tions and debt multiples are at their highest lev-

els since the late1990s. As long asthe economy holdssteady and nothingcataclysmic occurs,companies duringthe next 12-18months are likely tohave plentiful,attractive financingoptions for leveragedbuyouts, acquisitionsand recapitalizations.

This promisingoutlook, however,

must be tempered by certain realities. The“frothiness” of the current lending environmentshould give pause for concern, as should the factthat six-month LIBOR rates rose from 1.1595%in March 2004 to 3.1495% by February 2005.Moreover, leverage is a double-edged sword, sincehighly leveraged balanced sheets increase compa-nies’ vulnerability to adverse developments suchas further upticks in interest rates or suddenpullbacks in consumer or commercial spending.

What is the upshot of these mixed messagesemanating from the marketplace? Middle-marketfinancing opportunities will continue to exist forselect, under-capitalized companies with solidfundamentals, a seasoned management team anda viable business strategy. At the same time, bor-rowers should guard against becoming over-lever-aged and take into account all the risk factors

when considering their financing options.HigherValuations, More Financing Alternatives

While opinions may differ as to the impli-cations of conflicting marketplace data, onething is certain: at least for the short term, com-panies will benefit from higher valuations andmore financing options offering greater leveragethan at any time since 1997. According toStandard & Poor’s Leveraged Commentary &Data (LCD), purchase price/EBITDA multiplesfor deals under $250 million rose to 6.86 in thefirst half of 2004 – a sharp increase from the 4to 5 times multiples range in 2002.

Average debt multiples of highly leveragedloans likewise have steadily climbed. Today, seniordebt in the middle market is available at 3 to3.25 times EBITDA – up almost a full point from2002 levels. Mezzanine lenders are willing to lendup to between 4.25 and 5.0 times EBITDA,depending on the size of the business. Borrowersalso have taken advantage of a strong market forjunior secured loans, which are often used to fillthe gap between senior and mezzanine debt.

Clearly, the impetus for these rising multipleshas been a private equity community flush withcash and eager to put money to work. And, aslenders became equally aggressive, the spigot forleveraged buyouts (LBOs) was turned wide open.In 2004, total LBO transaction volume approached$94 billion, which was more than four times theLBO volumes in 2001 and 2002 and far above therecent high of $57 billion in 1998. M & A dealflow is likely to remain strong throughout 2005,particularly in hot sectors such as retail, for-profiteducation and consumer products.

F I N A N C I N G T R E N D S , C O N S I D E R AT I O N SIf the supply of capital, whether from pri-

vate equity firms or debt markets, continues tooutpace demand, business owners will have con-siderable leverage in structuring and negotiating

favorable deals. It is important, however, thatthey maintain a clear-eyed perspective onrisk/reward ratios, especially since recent devel-opments have ratcheted up their likelihood ofbecoming over-leveraged.

Whenever capital chases a limited numberof quality deals, credit standards invariablyloosen. For example, hedge funds have aggres-sively pursued mezzanine and junior securedloan financing, even on transactions as small as$10 million to $20 million. To win this busi-ness, they often offer more leverage while at thesame time relaxing standard covenant metricsregarding EBITDA-to-debt ratios and fixedcharge coverage. This laxity in underwritingadds fuel to a debt market that is dangerouslyclose to becoming overheated.

Another recent development sparked by thehyperactive debt market is rapid refinancing byprivate equity sponsors. For example, a privateequity firm might put up $10 million to buy acompany and refinance that amount within 18months, effectively retaining ownership of thecompany while having no equity exposure. Thepotential downside of this “equity dividend”strategy – especially for former owners who stillhave a piece of the business – is that a majoradverse event (e.g., losing a big customer) couldcause the company’s entire equity value to col-lapse due to the additional debt burden.

Such factors need to be incorporated intothe evaluation process when formulating agrowth strategy and selecting a financing instru-ment and partner. Questions to consider include:

Is this the right time to cash out orexpand?

Are you willing to give up control? If so,how much of the business will you sell?

How much debt can your cashflow supportwithout jeopardizing the long-term viability ofyour business?

Will your private equity and/or lendingpartner be there if times get tough?

F I N A L W O R DThe financial community has re-entered the

middle market with renewed vigor. Still, certainworrisome factors warrant close attention. Thoughthe economy continues to grow, its engine – con-sumer spending – could become stalled by excessdebt. Since 2000, private household debt hassoared by $2.52 trillion, or 36%, and now is 86%of GDP – far above its 34-year average of 58%.Interest rates no doubt will steadily climb. Plus,jarring changes in geopolitical developments, oilprices or other variables could easily unnervefinancial markets and increase the likelihood of asudden retrenchment in credit.

The current debt market does not yet reflectthe precariousness of the economic climate, andlenders no doubt will continue to pursue middle-market “trophy” businesses (i.e., those marketleaders with defensible niches, high EBITDAmargins and superb management). Althoughthese businesses now have more pricing leverageand more opportunities for growth, uncertaintiesin the marketplace exacerbate their risks. Giventhese conditions, smart borrowers would be well-advised to work with lenders who are committedto their market sector, have the resources to with-stand any sudden downturns and can help themmitigate risks while taking full advantage oftheir businesses’ value and opportunities.

Timothy Hall ([email protected]) is a Directorin the Corporate Finance group of CapitalSource Inc.(NYSE: CSE), a specialized commercial finance com-pany offering asset-based, senior, cash flow andmezzanine financing to small and mid-sized borrow-ers through three focused lending units: CorporateFinance, Healthcare and Specialty Finance andStructured Finance. By offering a broad array offinancial products, CapitalSource has issued more

Financing Outlook for Mid-Market Companies:More Options, Opportunities and Risks

TIMOTHY HALL

A s s o c i a t i o n f o r C o r p o r a t e G r o w t h W A S H I N G T O N B U S I N E S S J O U R N A L A d v e r t i s i n g S u p p l e m e n t 1 1

T H E I S S U E

Businesses may face cash flow difficultiesfrom several factors, which may force thebusiness owner to focus too much on

restoring cash flow, and thereby ignoring crucialbusiness operations. Potential causes of cash flowdifficulties include:• Economic downturns• Interest rate increases• Decreases in sales due to market conditions or

competition• Collection problems• Carrying cost of non-productive assets• Inability of management to prepare for a crisis.

T H E E F F E C T S O F T H E I S S U EWhen cash flow shortages first arise, the

typical owner may be forced to react to that needwithout focusing on the long range effects.Putting off one bill to pay another seems at firsta simple solution to the problem and satisfiesthe immediate need. Initially, the owner thinksvery little of the problem, reacts on a simplebasis, expecting that the problem is short-lived.Most owners do not realize the long term effectsof such actions. Accounts payable are no longerpaid on a timely basis, bank payments becomelate, tax payments are delayed, payrolls are nottimely made, and the resulting catch up becomesmore and more difficult.

Suddenly, the owner is deluged with letters,telephone calls, demands from vendors, requestsfor COD payment, loss of credit standing, andeven serious employee morale problems. Moreimportantly, the owner can no longer effectivelymanage the day-to-day business operations, andfaces personal exhaustion and a loss of his morale.Before long, the owner is pre-occupied with dailycrises. Unreasonable demands are made, and reac-tions are based on merely keeping the businessalive. The business is no longer operated in aplanned method for steady growth and expansion.Lastly, employees are left in the dark and find itdifficult to function in their positions.

O P T I O N S AVA I L A B L EThe available options for the owner start to

narrow. How does one plan and operate the busi-ness in the face of disaster and daily crises? Howdoes one keep daily operations flowing with lim-ited cash? There are numerous strategies availablewhich include debt restructuring, finding newsources of capital, simply doing nothing with thehope that revenues will increase, selling the busi-ness at a loss, reducing expenses, or finding anasset to sell that generates cash or reduces debtand periodic payment of obligations. The finaloption above is the primary focus of this Article.

P L A N O F A C T I O NThe best move for the owner is to step

back, meet with its business professional advi-sors, develop a plan to curb the daily cashdemands, and program the payment of debts and

bills. But, without the ability to generate cash,this becomes a difficult task, which can lead tolegal ramifications against the business.

In the best situation, a business may findthat it has valuable non-income producing assetsthat could create a solid cash reserve and reduceits cash outflow. The most significant of suchassets, if available, may be the owned real estatein which the business operates. While it is truethat, after a sale to an outside owner, rents still

need to be paid inorder to operate inthe space, the elimi-nation of paymentsfor mortgages andtaxes may be offsetby the value realizedon the sale of suchassets. This would beparticularly true, forexample, if the busi-ness had borrowedagainst the realestate and had fallenbehind in the pay-

ment of its debt. The best result then may be tosecure the services of a competent real estate bro-ker to list and sell the real estate. This can evenbe done in the face of adverse circumstances,including a threatened foreclosure or forcedChapter 11 Bankruptcy Proceeding.Additionally, the owner can refinance the realestate if there is sufficient equity and take somecash out of the real estate to pay down highinterest debt, purchase new inventory to supportsales or to support turn around strategies.

I N T E N D E D R E S U LT SThe intended result of a planned action to

sell or refinance non-productive assets may havethe effect of reducing the monthly cash outflowof the business, allowing the business to make aPlan with its creditors for the orderly paymentof its debts, create new arrangements with ven-dors for ongoing merchandise needs, and, finally,to allow the owner and key employees to effec-tively focus again on the daily business needsand corporate growth.

E X A M P L ECompany A, a manufacturing company, had

for years increased annual revenues, reduced non-core expenses and effected nominal, but steadycash flow increases. Company A rents its locationfrom the Company owners who own the realestate in a General Partnership. Monthly rental(which included taxes, maintenance and insur-ance) covered the mortgage on the real estate.Company A occupied approximately two-thirdsof the property, and the General Partnership hadleased out the remainder. When the remainingone-third tenant moved from the premises andthe General Partnership failed to locate anothertenant, it suddenly found it necessary to increase

the rent paid by Company A in order to keepmortgage payments current. The increased cashdrain on Company A was like a downhill spiral.Company A missed vendor and tax payments, fellbehind in payroll, could not deliver merchandiseto its customers, and saw its sales drop dramati-cally. At the same time, the General partnershipfell behind in its mortgage payments. CompanyA was forced into a Chapter 11 BankruptcyProceeding and the General Partnership facedforeclosure on the real estate.

Company A and the General Partnershipthen engaged a professional firm to guide it in aprocess of staving off foreclosure, aidingCompany A in coming out of the Chapter 11,and helping with ongoing operations. The Planput in place was to create the sale of the realestate, create additional cash for the business,reduce the cash outflow and concentrate on busi-ness operations and marketing.

A sale of the real estate was accomplishedcoupled with a lease to Company A whichincluded a reduction in the size of the premisesand a reasonable amount of annual rental pay-ments. More importantly, the lease to CompanyA created a six month moratorium on rental pay-ments, effectively creating cash for Company A.At the same time, Company A created a Plan forthe payment of debt so that the cash flow crisescould be avoided. This also included a shortdeferral period for the commencement of vendorpayments. The sale of the real estate furtherenabled the General Partnership to pay-off thedebts on the property and to eliminate the cashdrain on Company A.

The result of the above turn-around strate-gy enabled the owner to again focus on growthand its business operations.

C O N C L U S I O NThe ability of a business owner to devote full

time and attention to daily operations and inter-nal growth issues is most vital for the success andfuture growth of the business. Distractions fromthat time are very costly, consume time in areasthat owners should avoid, and are major distrac-tions and interruptions to the daily business flow.Time and again there are case studies demonstrat-ing the disastrous effects to businesses when dis-tractions occur. The success of an owner to effec-tively oversee its business during stressful periodsdepends upon the ability of the owner to delegateresponsibility and to have the capacity to dealwith the stressful demands. The owner must wise-ly choose not only staff members, but also outsideadvisors who have the knowledge and the skillsets that match the project. The example givenhere is one wherein the owner did choose a capa-ble advisor who was able to sort through theissues, create legal barriers to business destruc-tion, and develop the means by which a sale ofnon-incoming producing property was utilized tosave the business, inject working cash in the busi-ness, and generate the time for the owner to effec-tively operate and manage the business. Growthof the business then became possible through theguidance of the owner.

Herbert S. Ezrin, is President of the PotomacBusiness Group, Inc., of Potomac, Maryland. He hasover thirty-five (35) years of experience in a widerange of businesses, law, accounting and manage-ment consulting. Over the past twelve (12) years, hehas focused on equity and M&A transactions, busi-ness growth and business turn-around situations. Hecan be reached at 301-983-0699 (office), 301-938-6378 (mobile) or at [email protected](email). at [email protected] (email).

Maintaining Business Growth In The Face OfCash Flow Difficulities – The Need To ConsiderThe Disposal Of Non-Income Producing Assets

HERBERT S. EZRIN


A N I N V E S T M E N T B A N K E R S V I E W

It is no secret to anyone in the governmentcontractor (GC) industry that for severalyears there have been unprecedented valua-

tions placed on acquired companies. No one,who is not blessed with a crystal ball, can exactly

predict the length ofany high valuationmerger and acquisi-tion (M&A) cycle.There are however,certain factors thatare known aboutM&A cycles that ifcarefully considered,can help ownersmake informed deci-sions as to the tim-ing of their exitstrategies in order tomaximize the value

of their ownership interests. The current bubblein the GC world has some unique factors goingfor it, but it is not unique to the GC world thatall high valuation cycles have a finite life.

R E C E N T I N D U S T R Y C Y C L E SThe temporary staffing industry valuation

bubble occurred in the middle 90’s, as domesticout sourcing of technology needs was growing ata torrid pace. This bubble resulted in acquisitionmultiples as high as 11 to12 times trailing earn-ings being paid by strategic buyers. At the endof a three year cycle, the industry valuationsreverted back to multiples of 4 to 5 times trail-ing earnings.

There were the “roll ups” of the 1990’s,when it was popular to buy and roll up frag-mented privately owned middle market compa-nies and resell them as IPO’s. The valuations forthe acquired companies were very high and thebubble lasted for about three years. Everyoneremembers the ridiculously high valuations ofthe internet and telecom industries, which cameto a screeching halt, again after about three yearsin early 2000.

W H AT W E C A N L E A R N F R O M T H E PA S TIt is important to understand that histori-

cally the higher valuation middle market M&Acycles consist of four important elements:

• Duration: M&A cycles driven by the macroeconomy typically last for periods of up to 3years, followed by a much lower valuationcycle (return to normal) of similar duration.

• Drivers: The robustness of the U.S. economy,changes in business processes and/or industryspecific growth factors are the primary driversof high valuation cycles.

• Multiples: In down cycles, valuations typicallyrevert back to a range of 4 to 5 times trailingearnings. In up cycles, valuation multiples riseto whatever multiple is supported by theindustry growth rate. Once the growth haspeaked, the higher valuation multiples willcome to an abrupt end. Buyers buy futureearnings and they pay multiples higher than 5only if earnings are growing.

• Buyer characteristics in high valuationcycles: Middle market M&A is a food chainwith the big fish (public or well financed pri-vate companies) gobbling up the smaller fish,eating all they can, getting satiated and thentypically spending several years dealing with

the digestive disorders (integration) thatresulted from their earlier binging.

S O W H AT D O E S T H E F U T U R E B O D E ? Most M&A experts estimate that we are

slightly more than two years into the currentcycle and that the current cycle is good for per-haps another twelve to eighteen months.

There is no question that the current bub-ble in GC valuations got its big push in early2002 following the tragic events of the previousyear. In terms of Government spending, whichhas floated all GC boats higher since 9/11, it isimportant to note that coming off a $400 billionrecord setting deficit last year Congress isalready looking at spending cuts and Agencyspending, even in defense and security, is show-ing some signs of a decline in the rate of increaseas well. It isn’t necessary that government spendless to end the boom, it is merely necessary thatit lower the rate of increase in spending. It is therate of increase, as opposed to absolute spending,that drives growth in the industry and allowsthe very high valuation multiples.

As to buyer characteristics, again deja vusets in. The last two to three years have seen arelative plethora of capital raises and IPO’s, ini-tiated by the larger (buyer) contractors whichhave been used to make acquisitions of middlemarket GC companies. The usual questions ariseregarding satiation and integration. Inevitablythe acquirers simply slow down in order to inte-grate what they have already acquired or becausethey have depleted the capital available foracquisitions. These are recent signs that that wemay be approaching the end of the very highvaluation cycle in the GC world.

Some of us will remember that until around2000, GC acquisition multiples were nothing tobrag about, ranging usually between 4 and 5times trailing earnings. In the last two years wehave seen multiples range as high as 8 to 11times trailing earnings. This is very reminiscentof the staffing industry bubble of the mid 1990sand again is driven by a very rapid industrygrowth rate. Even civilian agency contractorshave been basking in the glow of their non-civil-ian counterparts.

If history repeats itself, these high multi-ples are likely to recede in the near future, fol-

lowed by lower or considerably more moderatevaluation multiples for at least three years and insome sectors, permanently lowered multiples.The commercial M&A slump of 2000 to 2003witnessed a severe decline in valuation multiplesand a 50% decline in the number of transac-tions. Of course there will be some exceptionsfor certain highly motivated strategic acquisi-tions, but these will be relatively fewer and fur-ther between.

I believe almost all decisions to sell middlemarket companies are life decisions first and eco-nomic decisions second. Life decisions cover thewhole gambit from illness, to tiredness or just adesire to retire due to age. It is important thatthese life motivated decisions be made in aninformed way

Those who are not students of the eco-nomic cycles of the M&A world, or believe thatM&A investment bankers speak from kind oftransaction hungry bias would do well to take toheart Joseph DeLevaga’s observation written inthe 17th century in “Confusion de Confusiones”:“Take every gain without having the remorse ofmissed profits”. This classic text about bubbles(rational and irrational), and the strong psycho-logical compulsion to imagine them to be some-thing else, is usually published in combinationwith Charles McKay’s equally famous treatise“Extraordinary Popular delusions and theMadness of Crowds” (McKay 1841) on the samesubject. We can learn from the ideas and the his-tories in these texts that even the duration of alegitimate bubble is almost always overestimat-ed. But each generation and each industry seemsto need to relearn the same lesson. I coulddescribe a number of personal stories of clientswho have lost substantial wealth by relying onthe assumption that what was going on in themarket place was permanent and that historywould not repeat itself.

Dennis Roberts is Chairman and Managing Directorof The Mclean Group, a private investment bank pro-viding merger and acquisition, valuation and privateequity financing services. He has 35 years ofaccounting and investment banking experience.NASD licensed, he lectures nationally on the sub-jects of business valuation and M&[email protected]

Should I sell now?How Long Will the Current Valuation Bubble for

Government Contractors last?

DENNIS ROBERTS

BY JOHN D. SANDERS MERGER & ACQUISITION CONSULTANT WWW.JOHNSANDERS.COM

The Article- “Reverse Mergers as a Toolfor Liquidity” in the 2003 M&ASupplement- described the considera-

tions leading to a successful merger of a non-public company with a smaller public-tradedcompany to create a combination with goodgrowth potential, management incentives,potential for additional financing and tradingliquidity for all involved. The example used wasthe 1998 merger of Daedalus Enterprises(500,000 shares outstanding trading at $2.50per share) with ST Research (a $18 Million gov-ernment contractor based in Newington VA) toform SenSyTech (Nasdaq: STST). In 2002, an$18 Million secondary public offering was com-pleted at $8 per share. Revenues for STST inthe 2004 fiscal year were approximately $75million.

On September 30, 2004, SenSyTech was

merged with Argon Engineering of Fairfax VA(privately held and about twice the size) to form

Argon-ST (still onNasdaq as STST)—another “reversemerger” using thesame good businessconsiderations. Thecombined revenuesfor 2005 are estimat-ed at nearly $300Million, withapproximately 19million shares out-standing. However, ashare of the originalDaedalus, or ST

Research, remains a share of Argon-ST and isnow trading at well above $30 per share.Certainly, these “reverse mergers” have accom-plished successful growth and liquidity resultsfor all concerned, and can serve as models forother appropriate situations.

Reverse Merger, Again A Second Reverse MergerBoosts STST Even Further

JOHN D. SANDERS


BY PAUL SEROTKIN

To whom should smaller company CEOslook when selling their federal servicesfirm? Surprisingly, the answer today is

other smaller firms, as well as their mid-tierbrethren – which have embarked on acquisitionprograms to augment their organic growth.

Thus, while SAIC, CACI, Anteon and otherlarge firms still make attractive acquirers, theyincreasingly are facing competition from smalland mid-sized companies. The evidence is clearwhen reviewing the 70 acquisitions by corporatebuyers in 2004 in the sector (excluding privateequity transactions):

Examples of recent smaller acquirer successstories include: • Technology Service Corporation, a LA-company

with broad DC area operations, finds a strongerhome in Huntsville by acquiring Phase IVSystems;

• Digital Fusion, Huntsville, expands its localpresence with the acquisition of SummitResearch;

• FC Business Systems, Fairfax, doubles its rev-enues by picking up Computer and High TechManagement;

• Stanley Associates, Alexandria, on the upper endof the mid-tier with close to $300 million inrevenues, grows by buying Fuentez Systems; and

• Planning Systems, Reston, expands its marketfootprint by acquiring Neptune Sciences.

W H Y T H E B O O M ?Simply put, smaller firms have discovered

their inherent advantage over large companyM&A competitors: the Culture Trump Card.

Mid-sized firms still have that feel of entre-preneurship so appealing to selling founders

(whether or not they remain post-deal), givingacquired company management ready access tothe acquirer’s management team. The seller’sowners and employees retain a sense of criticalityin the acquiring company, as their revenue andprofitability may be material to the buyer. Inaddition, with capital a relative commodity andbenefit structures mostly within an accepted bestpractices range, culture can be a huge differentia-tor for modest sized firms. While bureaucracycan creep into even fairly small companies, thoseun-fossilized smaller firms can count on theentrepreneurial way as a large selling carrot.

A C O N F L U E N C E O F O T H E R FA C T O R SOther factors are contributing to help

smaller buyers. These include:• Attractive Financing Environment. Lenders are

more educated these days on government servicesM&A and have become very comfortable withmid-tier buyers who can afford to transact deals.

• Exploiting the “Law of Diminishing Returnsfor Large Buyers.” As Tier 1 and Tier 2 federalservices and system integrators firms growlarger, they are less likely to find truly strategicM&A fits in the small company pond, leavingmore opportunity for modest-sized companies.

• Financial buyers like the sector – and smallerfirms. Private equity funds gravitate to mid-tier firms as their preferred platform in the fed-eral sector, providing small and mid-sized com-panies the ability to maintain insider owner-ship while accelerating the growth of theirfirms organically and through M&A.

U N D E R S TA N D I N G T H E M & A PAT HSo what can new-to-M&A acquirers expect

once started down a dedicated acquisition path? First, the company needs to appreciate the

complexity of the undertaking, and the differ-ences from the more comfortable contractingworld. Even with a highly-vetted candidate targetlist and sufficient staff and external resources,acquirers are approaching companies they oftendo not know at the ownership level, with reliancelargely on dated public data, the target’s hype, orimpressions drawn from the marketplace. Further,at any given time, the target is technically not forsale – and perhaps emphatically so.

To overcome this challenge, the buyer and

its M&A advisors must convince the seller to putthe company up for sale, to negotiate only withthe buyer, and to complete a transaction where

both the buyer andseller are new to theprocess. While hav-ing done a deal ortwo is very helpful,similar challenges arefaced by the slightly-experienced small andmid-tier companies.

One way toincrease the odds ofsuccess is to approachexisting subcontractorsor prime contractors.As in any business

relationship, the companies start off on commonground. This said, the dynamics often quicklychange – as discussions shift to valuation, terms andrisks associated with M&A.

To the extent that the suitor is not a house-hold federal contractor name, credibility creepsinto the mind of sellers. Can the buyer afford thetransaction? Will they require me – and fellowowners – to take a large portion of the purchaseprice in contingent payouts? What do they knowabout completing and integrating acquisitions?What’s the synergistic fit?

HOW TO SUCCEED AS A FEDERAL M&A ACQUIRERFederal sector M&A is very competitive – espe-

cially for top-flight candidates. Generally lackingthe resources of the larger buyers, small and mid-size firms must arm themselves with as much corpo-rate mindshare, financial resources, and M&A acu-men as they can to be as successful in M&A as theyare in proposal development, human capital man-agement and contract execution. They should con-sider the following guidance:• Start with a Strategic and Capture Plan. Just

as the firm would approach a major proposal oroverture to a new customer, ensure that opera-tional leads, corporate leadership and the boardagree on the M&A “capture plan” and targetcompany characteristics (e.g., size, customerprofile, profitability).

• Expand the Company Board. Consider addingone or more directors, especially those with a

keen strategic sense, M&A experience andknowledge of the federal market. Once theM&A process is underway, keep the boardappraised on progress.

• Involve the Business Units. Draw on theexpertise of business unit managers and businessdevelopment executives to identify prospectivetargets. Your own personnel may know firmswhich operate under the radar of large acquirers.

• Visit your Commercial Banker. Since mostnew acquirers have neither “usable” companystock nor sufficient internally generated cash totransact a deal, their lender becomes integral tothe M&A process. Collaborate with your lend-ing source in advance of approaching targetcandidates to understand the boundaries ofaffordable deal size and structure.

• Have the Right Legal Counsel. M&A is apractice unto itself. Make sure your law firmhas transacted several M&A deals, or else• interview other firms that have.

• Dedicated Staff Responsibility. At least oneperson on staff – with good financial and strate-gic sense and among the corporate decision mak-ers – should spearhead the M&A effort.

• Build the External M&A Team. Externaladvisers, be they investment banks or M&Aadvisors, can augment internal resources bymanaging the M&A process, keeping the clientfocused on this effort, researching the market,winnowing the candidates, advising on valueand structure and helping to direct the negotia-tions with the lead target.

• Make your Intentions Known to the Market.In addition to informing the market at industryconclaves, educate investment banks of yourfirm’s initiative and buying criteria.

C O N C L U S I O NThe federal sector M&A landscape has

changed. Small and mid-sized firms are success-fully closing deals which previously were theprovince only of their larger competitors. So,when fielding a call the next time from a smallor mid-sized company CEO, firm owners shouldbe open to the unexpected.

Mr. Serotkin [email protected])is President of Minuteman Ventures LLC, an invest-ment bank that specializes in M&A transactions in thefederal and defense sectors.

Not-for-Sale: The Emergence of Smaller Company Buyers in the Federal Services Sector

PAUL SEROTKIN CORPORATE ACQUIRER SIZE NUMBER OF BY REVENUES TRANSACTIONS

$500 million or more 24 (34.2%)

$250 - $500 million 14 (20%)

$100 - $250 million 8 (11.4%)

$50 - $100 million 8 (11.4%)

Less than $50 million 16 (23%)


BY JOHN G. STAFFORD, JR.AND J. MICHAEL LITTLEJOHN

H O M E L A N D S E C U R I T Y C O N T R A C T I N GO P P O R T U N I T I E S

Since its creation in 2002, theDepartment of Homeland Security (“DHS”) hasplayed a significant role in our Government’sfight against terrorism. The consolidation of

over 22 federaloffices and pro-grams into a singlecabinet-level agencymakes DHS animportant prospec-tive customer forestablished govern-ment contractorsand for companiesdesiring to pene-trate the govern-ment marketplacefor the first time.With passage of theDepartment ofHomeland SecurityAppropriations Actof 2005, commit-ting $28.9 billionin net discretionaryspending to theagency, DHS hasthe funds to sup-port its mission andits acquisitionstrategies.President Bush hasrequested $41.1

billion for DHS in his FY2006 budget propos-al, further underscoring his Administration’scommitment to safeguard our borders and rein-forcing the agency’s purchasing power in theimmediate future.

To do business successfully with DHS,companies must understand the customer, itsmission, and the kinds of products and servicesof interest to the agency. The mission of DHSis to protect America against terrorism, focus-ing on six key areas: (1) intelligence and warn-ing; (2) border and transportation security; (3)domestic counterterrorism; (4) protection ofcritical infrastructure; (5) defense against cata-strophic threats; and (6) emergency prepared-ness and response.

The departments within DHS tasked withaccomplishing the mission are Customs andBorder Protection, Immigration and CustomsEnforcement, the Secret Service, the CoastGuard, the Federal Emergency ManagementAgency, and the Transportation SecurityAdministration. Each department has its ownprocurement team and unique acquisition objec-tives. In addition, business opportunities also areavailable with the Office of ProcurementOperations (which includes Science andTechnology, Information Analysis/InfrastructureProtection, and Citizenship and ImmigrationServices), and the Homeland Security AdvancedResearch Project Agency (which sponsors cuttingedge R&D).

According to preliminary reported statis-tics, DHS conducted 60,000 procurementactions in FY 2004, obligating more than $9billion. Top products and services included radionavigation equipment; automated informationsystem services; maintenance, and repair of alarmand signal systems; ADP and telecommunicationservices; alarm, signal and security systems; ADPsystems development services; guard services;and trailers. While many of the contractors pro-viding the top products and services are house-hold names, such as Unisys, Boeing, LockheedMartin, and General Dynamics, $1.7 billion wasawarded to small business prime contractors —amply demonstrating DHS’s commitment tobusinesses of all sizes. Fostering BusinessRelationships with the Private SectorGiven theimportance of the DHS mission to the Americanpublic, it is no surprise that the agency has beengranted streamlined acquisition authority to pro-cure goods and services. These special rules andprocedures were written to encourage contrac-tors, especially those who would not otherwisedo business with the Government, to sell theirproducts and services to DHS. As a result, many

of the more onerous procedural hurdles havebeen removed and DHS has greater flexibility incontracting with the private sector.

For example, if the mission would other-wise be “seriously impaired,” DHS is authorizedto depart from government-wide acquisitionrules and raise the micro-purchase threshold(which eliminates most all contract provisionsand clauses), raise the simplified acquisitionthreshold, and make “commercial item” buys upto $7.5 million regardless whether the goods orservices meet the definition under the govern-ment’s acquisition regulations.

In addition to its special streamlinedacquisition authority, DHS has undertaken afive-year pilot program to enter into OtherTransactions for R&D and prototype projects,to encourage and foster the development ofinnovative technologies that will help DHSdetect and protect against biological, chemicaland nuclear weapons. Other Transactions arenot subject to traditional procurement statutes,regulations, and mandatory boilerplate contractclauses, giving DHS and its contractors muchgreater flexibility when negotiating the termsof these agreements.

DHS also has authority to award personnelservices contracts with a somewhat unique twist.Congress gave DHS the ability to contract forthe services of experts, consultants and theirrespective organizations without regard to thepay limitations set by the Office of PersonnelManagement “whenever necessary due to anurgent homeland security need.”

L I A B I L I T Y P R O T E C T I O N F O R A N T I - T E R R O R I S MP R O D U C T S A N D S E R V I C E S

After September 11, businesses interestedin providing homeland security products andservices were concerned that they could face lim-itless, uninsured legal exposure to third parties iftheir anti-terrorism product or service failed toprevent or deter a terrorist attack. Facing theinability to obtain insurance for their products, amyriad of potential litigation, and unpredictablylarge judgments against them, many businesseswere unwilling to create and develop anti-terrortechnology innovations the federal governmentand the private sector desperately desired. As aresult, Congress passed the SAFETY Act(“Support Anti-Terrorism by Fostering EffectiveTechnologies Act”) as part of the HomelandSecurity Act of 2002.

The SAFETY Act protects Sellers (andusers) of “qualified” anti-terrorism technologies(referred to within the government as “QATTs”).It can cover any product or service that has beendesigned or modified for detecting, deterring,preventing or limiting the harm of an act of ter-rorism. DHS determines whether a product orservice is “qualified” based on a review of a seriesof factors, including an assessment of the poten-tial for third party liability, the likelihood thatthe technology will probably not be deployedwithout the protection of the SAFETY Act, andthe effectiveness of the product or service indeterring terrorist attacks. In addition, the sellermust show that it has obtained liability insur-ance for terrorists acts up to a reasonable amountthat does not “unreasonably distort” the price ofthe product or service.

Once qualified, the SAFETY Act ensuresthat the liability of a qualified technology seller(QATT Seller) — as well the seller’s contractors,subcontractors, suppliers, vendors, and down-stream customers — will be minimized by sever-al protections:• An injured party can only sue a QATT seller

in federal court. • There are no punitive damages or prejudgment

interest.• Liability is limited to the amount available

from the Seller’s liability insurance and othercollateral sources.

• If the QATT is also “certified” by DHS, thenthe “government contractor defense,” whichcould absolve the Seller of any liability, alsoapplies.

Because of these protections, many federalagencies intend to use QATT’s in their procure-ments, and it is likely that many private busi-nesses will be eager to implement QATT’s toprotect themselves against potential liabilities.

The SAFETY Act does have a few short-

comings, however. In some of its public discus-sions, DHS has taken a narrow view about whichproducts and services will be covered by the Act.The application process developed by DHS hasbeen criticized as overly burdensome. Manyorganizations have argued that the DHS isrequiring unnecessary information and that theprocess is taking much longer than Congressintended. Moreover, there is a concern that theSAFETY Act does not provide adequate protec-tions against public disclosure for the highlysensitive business information that companiesmust give DHS to obtain qualification.

Thus far, approximately 125 applicationshave been filed, and 10 products or serviceshave been designated as a QATT. Eight of the10 have also been “certified” for the govern-ment contractor defense. The “approved prod-ucts” include maintenance and repair of screen-ing equipment at airports, security services forgovernment installations, a data-miningknowledge management tool, explosive detec-tion systems, and an anthrax detection systemfor mail screening.

There is a move underfoot to streamline theapplication process and to amend the statute toaddress some concerns. As DHS perfects itsprocess, the SAFETY Act will become a moreeffective tool for businesses looking to developanti-terror products and services while reducingtheir risks. Companies should carefully consider

the benefits of the SAFETY Act as they maketheir long range plans to enter the homelandsecurity market.

In summary, DHS offers many unique busi-ness opportunities if you understand the cus-tomer, the mission, and the special acquisitionrules and procedures by which the agency oper-ates.

John G. Stafford, Jr. has more than 25 years of pub-lic procurement experience and is a shareholder inthe McLean, Virginia office of Greenberg Traurig,L.L.P. (www.gtlaw.com). He serves as a member ofthe national advisory board for “The GovernmentContractor,” a weekly analysis of topical procure-ment issues, and is a contributing author to “TheBriefing Papers Second Series,” monthly guidelineson government contract topics.

J. Michael Littlejohn advises all types of businesseson federal government contracting as a shareholderof Wickwire Gavin, P.C. in Vienna, Virginia(www.wickwire.com). He is the past Chair of theGovernment Contracts Section of the Federal BarAssociation and was the founder of that Section’sHomeland Security Committee. He has taught gov-ernment contracts law as an adjunct professor of lawat George Mason University, and he is an activemember of the National Defense IndustrialAssociation.

Contracting with the Department of Homeland Security

JOHN G. STAFFORD, JR.

J. MICHAEL LITTLEJOHN

Arecent survey of senior executives from the nation’s 1,000 largest compa-nies by Accountemps, sought answers to the following question, “What isthe most annoying or overused phrase or buzzword in the workplace

today?” Since the National Capital region wins the prize for double-speak, theSupplement Editors decided to add a few suggestions of our own to many highlyrecognizable business buzzwords for 2005 identified by Accountemps(www.accountemps.com). At the end of the day, when we tried to think outside thebox to find value added substitutes, our word mojo failed us. To be serious, whilemost of the terms below are highly descriptive when used properly, through over-use they have reached a tipping point into ambiguity or irritation. Thus, while youmay see in the Supplement’s articles a few of these phrases; they are used only intheir most synergistic form.

A C C O U N T E M P S R E S P O N S E S I N C L U D E D :

“At the end of the day”

“Thinking outside the box”

“Synergy”

“Paradigm”

“Metrics”

“Take it offline”

“Win-win”

“Value-added”

“Get on the same page”

“Customer centric”

“Generation X”

“Core competency”

“Alignment”

“Incremental”

Our additions:

Strategic initiative

Mission critical

Virtual solutions

Perfect balance

Growth levers

Are We Communicating?Buzzwords Gone Bad


BY MARK CAPALDINI AND PAUL D. ECONOMON

Many investment bankers believe thatbuy side M&A transactions are moredifficult than those on the sell side and

that such projects have a substantially lowerprobability of closing. Therefore, they avoidthese engagements altogether. While their con-cern is warranted in many situations, it arisesfrom problems that, while understandable, canbe addressed and avoided.

The biggest problems in buy side M&Aengagements often arise from a lack of clarity anddiscipline, and they generally fall into two cate-

gories: tactical prob-lems and organiza-tional commitment.

Tactical prob-lems have both finan-cial and non-financialorigins. An exampleof a non-financial tac-tical problem is over-simplifying thestrategic challengesfaced by the prospec-tive acquirer, such aslack of new productor service lines. Theacquirer mistakenlyconcludes that anacquisition will “fix”what is actually amuch more funda-mental problem, suchas the lack of a com-petent sales forceand/or a desired cus-tomer base.

Acquirers focus-ing heavily onincreasing theirdesired customer base

have a greater chance of success in their M&Aengagements. Such focus causes them to addressfundamental strategic challenges and to place theproposed acquisition in proper perspective.

Another tactical problem is the acquirer’slack of clarity on “cultural fit” issues. Manyacquirers fail to recognize and communicate thespecific values, goals and operating philosophieswhich are bedrocks for their organizations. Inthose instances, the seller may not understand thenon-economic value of consummating the trans-action, and/or the buyer may underestimate post-acquisition integration issues arising from clash-ing corporate cultures, such as when a defensecontractor acquires a commercial entrepreneurialorganization that is used to quick decision mak-ing to capture market opportunities. On theother hand, when the acquirer clearly expressthese “soft considerations” in their initial com-munications to the seller, these considerationsoften become key attractions to the sellerthroughout the transaction process and act to“sell the seller” on why a transaction is attractive.

Tactical financial problems arise whenacquirers fail to assemble a team of M&A profes-sionals in a timely and thoughtful manner beforethey begin their search. Not only do acquirersneed an internal team of senior executives andcorporate development specialists, they shouldalso retain seasoned, outside advisors before theybegin the acquisition process. Examples includeadvisors with various areas of expertise such asfunding, accounting, tax, legal, M&A transactionintermediation and financial planning.

Without such a team of M&A profession-als, acquirers have less chance for a successfultransaction because they do not define accept-able: (i) minimum and maximum target sizes;(ii) EBITDA ranges as a percentage of sales; (iii)minimum and maximum purchase prices; (iv)financing sources, such as internal cash or stock,external debt sources, or earn-outs; (v) transac-tion structures; (vi) tax consequences; and (vii)contingent liability situations.

Having an experienced team in place canalso help acquirers develop the financial metricsand analytical tools necessary to examine theimplications that a buy side M&A transactionmay have on the company’s income statement,balance sheet, and cash flow statement. Theteam may also assist the acquirer in developing aranking process for the targets. An acquisitionteam sharpens the acquirer’s decision-making

process so it does not lose attractive dealsbecause it cannot promptly evaluate sellers.

Organizational commitment originatesfrom the acquirer’s overall strategy and oftenfrom its CEO. M&A should be an integral com-ponent of a coherent corporate strategy, not areplacement for strategy. If M&A activity is notspecified in its growth plan, such as a key proj-ect with milestones that the CEO articulateswith specific revenue, headcount and/or cus-tomer expectations, then the acquisition strategyis likely an “experiment” and destined to fail.

Most CEO’s can and do delegate substantialwork to other senior executives during any sig-nificant transaction. However, when he or she isnot directly involved in a buy side effort, both inprocess oversight and direct interaction with thetarget “in the later stages,” the process has amuch higher risk of failure.

The acquiring company must understand andbe committed to the process, as the time requiredto identify, contact, meet, analyze, filter, negotiate

letters of intent with, perform due diligence on andthen execute definitive agreements with targets canfeel like a marathon. Process fatigue can occur,especially if parts of the process are repeated withnumerous targets. It is not uncommon for thisprocess to take six months or more. The acquirer,its CEO, executive management team and Board ofDirectors must have the stamina and a deep organi-zational commitment to endure this ongoingprocess with their external M&A team.

Note also that one qualified target is notenough — two to four viable targets are typicallyrequired for a buy side M&A project to succeed.All the key players must have realistic expectationsabout the process and the decision-making rolesthey will play, if any, to avoid unexpected and dis-astrous eleventh hour “commitment” issues.

The characteristics that successful acquirersoften share include: (i) a strong, closely coordi-nated team of executives and external advisors;(ii) attention to the “tactical problems” of trans-actions; (iii) strong “organizational commit-

ment”; (iv) a realistic and detailed project plan,with key milestones and time frames for rapiddecision-making; (v) a comprehensive system forthe research and identification of potential candi-dates (usually over 100), so that the widest possi-ble net is cast to identify the most suitable tar-gets (usually 2 to 4); (vi) an approach methodolo-gy that neutralizes the “noise” surrounding fre-quent inquiries made by various intermediaries;and (viii) a clear plan to identify and engage sell-ers who may not have initiated a sales processyet.

Paul Economon is a member of the Washington, DClaw firm of Koltun & King, P.C., which specializes inbuy-side and sell-side M&A transactions, all levelsof financing, and general business representation.His partner, Lawrence W. Koltun, contributed to thisarticle. [email protected]. Mark Capaldini is apartner with Focus Enterprises, a 20-partner nation-wide investment banking firm specializing in mid-market buy-side and sell-side M&A and corporatefinance. His partner, Douglas E. Rogers, also con-

Keys to Successful Buy Side M&A Transactions

PAUL D. ECONOMON

MARK CAPALDINI


Documents

2 Advertising Supplement WASHINGTON BUSINESS JOURNALminutemanventures.com/news/pdf/2005_05_05_not_for_sale-WBJ.pdf · 2 Advertising Supplement WASHINGTON BUSINESS JOURNAL Association