Commitment – Integrity – Performance

Government Contracting M&AAnnual NCMA Workshop | March 14, 2012

SpeakersDavid Meyers• CEO and Founder of ERG, Inc., consulting firm offering multidisciplinary skills in 20-

plus service areas, including environment, energy, worker safety, and homeland security.

• Sold to U.K.-based AEA Technology in 2010 Paul Serotkin• Senior Advisor, Venture Management, Investment Bank• Senior Executive and Shareholder in several Defense/Federal Contractors including

Glevum Associates, UFA, Titan, AverStar, Pacer Systems and Pacer Infotec

Seller’s Perspective

From ‘Entrepreneur’ to ‘Shareholder’As company matures, the goals & priorities of the founder(s) commonly shift from Entrepreneurial to Wealth Maximization & Realization • Maximize Current or Long-Term Value for Shareholders• Liquidity for Shareholder(s)

Strategic Choices: • Harvesting Legacy Contracts or Positioning for Accelerated Growth• Maintain Shareholder Control

Aggressiveness and ability to implement strategic plan tempered by:• Tolerance for on-going and/or additional investment• Tolerance for growth-driven debt

The Goal is to Grow, But How?Owner seeks to accelerate the growth of the company by....

Factors contributing to selection of strategic initiative include: • Company’s competitive position • Market Opportunities for Service Offerings• Associated Capital Requirements• Access to Required Capital • Shareholder(s) and Management’s Desire, Willingness and Ability to:

• perform various operations roles• incur near-term investment expenses • commit to a long term strategy

Access to Capital• Cash Flow from Operations• Owner Financing• Debt Financing• Partial Sale

• Private Equity• Public Equity

• Total Sale• Strategic Buyer• Private Equity

Determining Why and When to SellChanging Market Risks• Budget Realities• Small Business Policy• BRAC/RealignmentReality Checks• Shareholder Burnout/Boredom/Other Interests

Timing to Sell• Succession planning prompted by retirement goals or health concerns• When shareholder value is greater than the NPV of anticipated future values.• Adverse changes in tax codes• Procurement cycle of current and anticipated contractsWhich begs the question: What is the Business Worth?

Buyer’s Perspective

Revenue

Sustainable Profitability

Historical Growth

Legal Structure

Subcontracted Revenue

Days Receivable

Bill Rates

Financial Strategic Contracts OperationsCustomers

Mission Related Domain Knowledge

Security Clearances

Contract/Agency Concentration

Pipeline & BD Opportunities

Proprietary Tools

Geographic Footprint

Contract Vehicles

Visibility Into Future Cash Flows

Contract Expansion Opportunity

Contract Performance

Prime Contracts

Set-Aside Contracts

Succession Planning

Business Development Team

Back Office & Systems

Employee Turnover

Virtual Bench

Process Certifications

Legal & Tax Issues

Corporate Culture

Buyer’s Hypothetical Perspective

Financial Indicators

$100m+ 1.8x

$50m-$100m 1.4x

$20m-$50m 1.2x

$5m-$20m 1.0x

Under $5m 0.8x

10-20% Steady

6-10% Steady

0-5%

Fluctuating

Break-even

Long History of 10%+ CAGR

6-10% CAGR

3-5% CAGR

Short history

Recent flat or negative

growth

Revenue SizeThe larger a company, the more impact it will have to an acquirer. Size also is a litmus test for maturity, state of business systems, quality of management, etc.

Sustained ProfitabilityThe ability of a company to produce sustainable profits allows for reliable forecasts of cash flow. A company with regular cash flow can borrow more as this reduces default risk. Higher margins decrease chance of business failure, allow faster growth, permit payment of dividends, etc.

Historical Growth A company with a sustained history of revenue and profit growth is worth more than either a new company or one with periods of flat or negative growth.

Strategic Factors

DoD/Intel with “Black”1.75x

DoD/Intel 1.5x

Mix of Civilian/DoD/Intel 1.25x

100% Civilian 1.0x

Mix of Comm, State & Local, Civilian 0.75x

Customers Civilian Agencies are attractive, Intelligence Community and DoD Clients are more desirable as more discretionary funding is spent on Defense and Intel capabilities. Commercial and State & Local add complexities to business and typically dilute value.

Project Lead 1. 5x

SMEs 1.25x

Blend 1.10x

Operations 1.0x

Help Desk 0.75x

Mission Related Domain KnowledgeThe more intimate the knowledge, the more valuable the service offering. Support or Staffing Services are lower value, Daily Operations are middle, Mission Critical Subject Matter Experts add value, and Project or Task Leads are highest value.

100% TS/SCI 1. 5x

60% Cleared 1.25x

20%-60% Cleared 1.10x

>0 Cleared 1.0x

No Clearance

0.75x

Security ClearancesSecured Personnel and Facilities are barriers to entry, and are indicative of access to customers, trusted relationships. Personnel with Top Secret, TS/SCI and above are most valued. Facilities holding security clearances and SCIFs have a competitive advantage.

Contracts

Sole Source with Growth1.5x

Growth for Company 1.25x

Growth for Acquirer 1.1x

Steady Contract w/in Desired Agency 1.0x

No Growth Contracts

0.75x

Contract Expansion Expandable contracts for the company suggests revenue growth opportunities post-acquisition. The target continues to expand the original service offering, and the acquirer can leverage the acquired firm’s contracts and clients. Growth opportunities for Company is built into the Forecasted Cash Flow.

Contractor of Year Award

100% Recompete

High CPARs

50-70% Recompete

0-50% Recompete

Rate

Contract Performance History of successful recompetes, strong reputation, high CPARs are indicators of a contractor’s viability to maintain or grow within an agency. Strong history reduces risk perception of future awards.

100% Full & Open 1.00x

60% F&O 0.9x

20%+ Small Business 0.75x

20%+ SDVOB 0.5

20%+ 8(a) 0.25x

Set-Aside Contracts Due to recent changes in recertification requirements, contracts won under preferential treatment are severely discounted. A company with more than 20% 8(a) contracts will find few interested buyers. Strategic acquirers tend to stay away from buying any preferential contracts.

Revenue

Sustainable Profitability

Historical Growth

Legal Structure

Subcontracted Revenue

Days Receivable

Bill Rates

Financial Strategic Contracts OperationsCustomers

Mission Related Domain Knowledge

Security Clearances

Contract/Agency Concentration

Pipeline & BD Opportunities

Proprietary Tools

Geographic Footprint

Contract Vehicles

Visibility Into Future Cash Flows

Contract Expansion Opportunity

Contract Performance

Prime Contracts

Set-Aside Contracts

Succession Planning

Business Development Team

Back Office & Systems

Employee Turnover

Virtual Bench

Process Certifications

Legal & Tax Issues

Corporate Culture

Buyer’s Hypothetical Perspective

Federal M&A Value Drivers

EBIT

DA

Mul

tiple

16.0x

12.0x

8.0x

4.0x

Financial: Revenue Size, Backlog, Margins, Bill RatesCustomer: Civilian => Homeland Security =>DoD/ICContracts: Prime/Sub, Set-Aside vs. Full & OpenEmployee Pool: SMEs, Education, Clearances, Access to talent

Service Offering: Focused IT, Engineering, C4ISR, IA

Influences:• Public Markets• Foreign Buyers• PEGs vs. Strategics

ContactVenture Management, Inc.Paul Serotkinpaul@venturemanagement.com781-254-7267

Jason Gayljason@venturemanagement.com202-329-2377

Mark Shappeemark@venturemanagement.com805-644-5335

16

Overview of ERG

Environmental, energy, and health consulting for government agencies

92% Federal 5% State 3% Commercial

53 significant contracts 917 projects so far this FY

17

Overview of ERG Locations

Lexington, MACorporate Headquarters

Boston, MAWashington D.C.Arlington and Chantilly

Research Triangle Park, NCOffice and Laboratory

Austin, TX

Atlanta, GA

Prairie Village, KS

Chicago, IlSacramento, CA

Nashua, NHSurvey & Data Center

Gainesville, FL

Cincinnati, OH

3

43 remote employees

6

92

92

9

4636

46 20

1

11 11

18

Client Retention

Customer Expansion

1984 Today

EPA

OSHA

CDC

EPA

OSHA

EPA

OSHA

CDC

FDA

EPA

OSHA

CDC

FDA

20+ States

EPA

OSHA

CDC

FDA

20+ States

DoD

HHS

DOI

EPA

OSHA

CDC

FDA

20+ States

DoD

HHS

DOI

DOL

NOAA

GSA

Prime Contract Growth19

BOEM

DOE

DOL

National Leadership Areas

Water quality regulations Air quality regulations Worker health and safety regulations,

standards, and guidance Toxic air pollution monitoring Climate programs Life cycle assessment

20

National Leadership Areas

Water conservation

Environmental health assessments

Environmental compliance and enforcement of regulations

Cost benefit analysis

Transportation/environmental

21

Growth and Acquisitions Founded in 1984

11 people

1989 EPA Small Business Contractor of the Year

1994 ERG acquires Meridian Research, Inc.

1996 ERG acquires government consulting division of Radian Corporation

2000 ERG acquires transport division of former Radian Corporation

2003 ERG acquires Franklin Associates22

Trends in Competition and Procurement

Major budget cuts in domestic programs Key competitors surviving with difficulty Major layoff of partners at competitors Clients delay spending due to budget

uncertainty Wins of new awards at ERG has compensated

for budget cuts

23