1. A Global Reach with a Local Perspective
2011
Rocket City
Gov Con
Conference
September 22, 2011
www.decosimo.com
Business Valuation and Government
Contractors
BRENT MCDADE – BRENTMCDADE@DECOSIMO.COM

2. Decosimo Advisory Services
 Business Valuation
 Litigation Support
 Transaction Advisory

3. What We Will Cover Today
 What is value?
 Approaches to value
 Levels of value
 Valuing Government Contractors

4. What is Value?

5. Why is value important?
 Taxes
 Financial statement reporting
 Divorces
 Shareholder disagreements
 Because value is what it’s all about.

6. What is Value?

7. A Funny Thing Happened on My Way to A
Nobel Prize

8. A Funny Thing Happened on My Way to A
Nobel Prize

9. The Three Approaches
 Income
 Market
 Asset

10. The Income Approach
“Prediction is difficult, especially about the future.”
--Niels Bohr

11. The Market Approach
 Compare to comparable investments
 Price to Earnings Ratio
 Total Capital to Revenue Ratio
 Total Capital to EBITDA
 Etc.
 Rely (theoretically) on the valuation arithmetic
performed by others

12. The Market Approach
But do we know when irrational exuberance has unduly
escalated asset values, which then become subject to
unexpected and prolonged contractions…”
- Allan Greenspan

13. The Asset Approach
 Also known as the cost approach
 How much is our stuff worth?
 How much do we owe our creditors?
 The difference is the value of our equity.
 Problem: How do we value certain types of stuff?

14. The Asset Approach
“I cannot change the fact that my paintings do not sell. But
the time will come when people will recognize that they are
worth more than the value of the paints used in the picture.”
-- Vincent Van Gogh

15. Levels of Value

16. What is Value?

17. Simplified

18. Building Value for Government Contractors
 Value of your business hinges on three components:
 Expected Cash Flows
 Anticipated Growth
 Perceived Risk

19. Increasing expected cash flows
 Cash flow = cash in – cash out
 Good managers typically focus here

20. Increasing anticipated growth
 Function of lots of things
 Better managers focus here, too

21. Driving down perceived risk
 Only the best managers think about this

22. Build up of Discount Rate
Risk Free Rate of Return 4.1%
Equity Rate of Return (Risk Premium) 6.0%
Small Cap Companies 2% to
6.4%
Subtotal 12.1% to
16.5%
Company specific risk ????
Discount Rate ____

23. Minimizing Perceived Risk of Future Cash
Flows
 Reduce customer concentration risk
 Expand product/service offering
 Increase number of government contracts
 Increase the diversity of contracts (Primes and
branches of government or military)
 Reduce supplier concentration risk
 Increase number of suppliers
 Where develop in-house resources with high retention
rates

24. Minimizing Perceived Risk of Future Cash
Flows
 Reduce management risk
 Establish an independent management team
 Executes daily operations and maintains the
supplier/customer relationships
 Establish track records of multiple team members
and organizational systems
 Expertise
 Securing contracts
 Executing contracts
 Unique facilities or intellectual property
 Diversity outside of government contracts

25. CONNECT WITH ME
Brent McDade, ASA, CBA
423.266.5212
brentmcdade@decosimo.com
On LinkedIn:
www.linkedin.com/in/brentmcdade
The contents and opinions contained in this article are for informational purposes only. The information is
not intended to be a substitute for professional accounting counsel. Always seek the advice of your
accountant or other financial planner with any questions you may have regarding your financial goals or
specific situations.