United States

The contract waterfall

WHITE PAPER

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There are certain attributes to contracting with the federal government, which can make a government contractor a relatively more attractive acquisition candidate than a similar, commercially based firm. These can include the difficulty in penetrating the federal government marketplace, the assuredness and quick payment of accounts receivable and the fact that future customer funding is a matter of public record. Arguably however, the single greatest attraction offered by a federal government contractor over its commercial counterpart is the predictability of future revenue and profit streams due to the government's issuance of multiyear contracts. Federal contractor acquisition candidates who are more adept at highlighting the probability of future revenue streams often receive a payoff through higher valuations. This white paper addresses the critical role of the contract waterfall as a valuation tool in the sale and acquisition of government contractors, as this is the main analysis used to highlight future revenue and profit streams on multiyear contracts.

As opposed to the historical financial data used to prepare adjusted quality of earnings and working capital analyses, the contract waterfall is a forward-looking projection that attempts to convert backlog on multiyear contracts into future revenue streams by fiscal year. The term contract waterfallderives from the fact that the analysis is performed at the contractual level, and as the contracts end, projected revenues tail off over the three-year projection period, creating a waterfall effect. As the slope of the waterfall can greatly affect valuations, both buyers and sellers consider this document to be a pivotal data point to be analyzed during due diligence.

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