Mergers and acquisitions for government contractors

Due diligence

Understanding your transaction needs and investment thesis allows us to help you manage risk across financial, operational and strategic drivers to support the business going forward. Our approach considers not just the quality of earnings but also the key business drivers, industry-based issues and complex deal advisory matters, such as contract waterfall analysis, working capital assistance and purchase agreement reviews.

We pair real-life industry experience from our government contracts consulting team with deep capabilities across multidisciplinary client service teams, including financial, M&A tax, technology and cyber, and operations (human resources and government compliance), resulting in data-driven decisions and confidence to close.

Transaction analysis

Our approach includes confirming and validating diligence findings, including synergy targets​; identifying contract vehicle restrictions and regulatory roadblocks that may prevent the realization of value objectives​; supporting carve-outs by analyzing people, processes, applications and infrastructure to develop an appropriate standalone cost base; creating a road map to drive process transformation through post-close execution while maximizing operations and financial performance to optimize enterprise value.

Post-close execution

Our team will build a detailed execution plan focused on maximizing synergies, minimizing risks and ensuring business continuity​; establish the optimal target operating model to maximize value capture while supporting the overall investment thesis​; communicate cost accounting and business system changes to stakeholders, train personnel and prepare for Defense Contract Audit Agency (DCAA) audits​; capture opportunities to deliver increased revenue growth, cost take-out and to improve long-term EBITDA performance​; and prepare for an efficient first-year audit that enables management to focus on more relevant, key operational matters​.

Government contracts strategy and compliance

Our team is composed of former industry senior executives, government auditors and consulting professionals. These professionals weave their extensive government contracting experience through every stage of the transaction. We think like investors through the interpretation and functional application of cost accounting and business process requirements. Our mission is to help our clients protect their business value and create the conditions necessary to realize the investment thesis and shorten time to value.

Our deep knowledge of the Federal Acquisition Regulation (FAR), Cost Accounting Standards (CAS) and agency supplements (e.g.:  Defense Federal Acquisition Regulation Supplement— DFARS and Department of Energy Acquisition Regulation—DEAR) is leveraged during:

Due diligence:

• Developing a contracts risk profile based on contract types, acquisition methods and customers to understand regulatory risks, considerations and opportunities
• Determining the ability to meet or keep regulatory exemptions or preferred status
• Assessing competitiveness of wrap rates and indirect rates
• Identifying gaps and understanding risks of the current state of processes and internal controls compared to government contracts requirements
• Assessing and quantifying exposure risk from unsettled indirect costs, DCAA audit findings and pricing clawback provisions (Truthful Cost or Pricing Data Act)
• Advising on the ability to recover transition service agreement (TSA) costs under government contracts post-transaction
• Developing a government contracts market road map to support investment thesis objectives

Post-transaction:

• Indirect rate optimization: Developing an indirect rate structure that supports government market strategy while improving profitability, clarity of resource consumption and agility to market
• Supporting government audits: Developing communication strategy, preparing for contract audits and negotiating findings
• Streamlining controls and business processes: Ensuring the ability to adhere to DFARS business systems within a comprehensive enterprise risk mitigation framework

Accounting policy and financial reporting

The period following a transaction closing involves completion of a multitude of accounting and financial reporting requirements. Audit-ready, timely accounting and fully integrated financial reporting is a must. RSM’s transaction accounting team can quickly prepare closing statements and a GAAP-compliant, audit-ready opening balance sheet. We draw on our extensive experience with the post-close process to provide technical accounting, required valuations, purchase price allocation (PPA) and supporting documentation. RSM’s transaction accounting team provides a systematic and scalable approach to meet your purchase agreement reporting and post-close financial accounting and reporting needs. As we move through the post-close process, our focus on transaction accounting frees up management’s time to focus on execution of their integration initiatives.

Some of the key considerations include the following:

• Accounting policy alignment and chart of account harmonization
• Revenue recognition by contract type (T&M, CPFF, FFP, LOE, etc.)
• Performance obligations (prototypes, production units, integrated services, maintenance)
• Combining contracts (MSA, SOW, CLIN)
• Revenue recognition by revenue stream (e.g., managed services, IP, training and education, licenses, etc.)
• Purchase price accounting, including step-up of assets, contract loss reserves, leases, customer relationships and implications on EPS accretion/dilution
• Debt and equity accounting
• Contract accounting, including CAS versus FAS differences
• Day 1 GAAP compliance and compliance support, including financial integration considerations
• Closing statement and balance sheet assistance
• Financial statement, pro forma, budget/forecast preparation (KPIs)
• Audit readiness

Valuation

Our team works seamlessly with you and our technical accounting professionals to fair value the purchase consideration, assets acquired and liabilities assumed to prepare your post-close opening balance sheet (ASC 805, IFRS 3). This could include contingent liabilities (earnouts), equity consideration, specialized inventory, personal property, real property, loss contracts and complex derivatives.

In addition, we consider and allocate a portion of the purchase price to the intangible assets acquired: contract backlog, customer relationships, developed software and technology, in-process research and development (IPR&D), off-market contracts and leases, trade names, and workforce. Simultaneously, we work with owners to prepare tax valuations for strategic gift and estate planning, ensuring the transaction maximizes the return for all involved. On a go-forward basis we prepare related impairment testing (ASC 350/360) and stock compensation valuations (ASC 718 and IRC 409A).