As entrepreneurial acquirers, we have established, based on the learnings we have taken in the

last few weeks, investment criteria that we hope will allow us to create value in the years

following the acquisition of Project Capitol. The key positive points that we find interesting that

make the company an appropriate firm for a search fund acquisition are the following:

● Technological business: ​As we have seen, growing markets is a must in order to

avoid type I errors. Based on our experience and trends we have seen in the last few

months, technology-related businesses are the ones that offer higher growth

expectations.

● Keep it simple: Project Capitol is an IT services firm that provides ERP services to a

variety of firms including public facilities and utilities. The software business is easy to

understand and has been well explored in the past.

● Recurring revenues: Project Capitol has reached revenues above 40M$ in the last 2

years, of which only 6% come from new clients. This fact allows us to infer that

customer retention is great, and that the revenues come from a stable customer base,

indicating a good portion of recurring revenues.

● Light assets: ​The software nature of the business means that the fixed costs and

capital expenditures are low and sporadic ​The software nature of the business means

that the fixed costs and capital expenditures are low and sporadic

● Entry barriers and competitive advantage: Project Capitol is one of the few firms with

secret facility clearance. This can constitute an important entry barrier that protects

Project Capitol’s revenues.

● Historic growth: Project Capitol’s sales have grown at a 21% CAGR in the last two

years, showing a good performance and allowing us to think that it is an attractive

company.

● Unique Clientele Base: ​The firm has a large existing clientele base of firms such as

the US Army, American Navy, the US Government, the government of Mississippi,

Verizon, Lockheed Martin, etc. The uniqueness of the clients depicts the niche position

the firm enjoys in the market.

 ● Low customer concentration: ​According to the teaser, Project Capitol has more than

70 customers, which leads us to think that customer concentration and therefore the

impact of losing a client is low. However, this is something that needs to be confirmed in

the due diligence process.

● Debt-free: ​Project Capitol is debt-free, which can be an indicator of a healthy cash

generation that has been able to sustain the growth of the company. This fact can also

be a good indicator of a good financial capacity to bear a debt in an LBO.

However, although the above mentioned points might be promising, we are strongly committed

to our investment criteria, and a number of concerns arise regarding Project Capitol, some of

which could be deal breakers. Therefore, during the due diligence process we need to be sure

of the following:

● Customers willing to sell: The teaser does not confirm if the sellers are willing to fully

exit the business or if only a minority stake is for sale. We would not pursue this

opportunity if the current owners do not plan to sell 100% of the shares.

● Headcount: ​according to the information we have, Project Capitol has 314 employees,

some of them in India. These numbers give us a ratio of $150k in revenues per

employee. We believe that this fact can be both a threat and an opportunity depending

on the causes we find in the Due Diligence process, as can indicate a potential for

further operating leverage or structural low profitability. The latest would lead us to let

the deal go, as well as discovering a significant employee-related liability.

● EBITDA Margin: ​The firm has an EBITDA of 5.4 Million USD in 2015 and is expected

to grow to 7.14 Million USD by 2019. The margins have remained stable at 12% which,

although decent, are quite tight for value creation purposes. Due Diligence should

confirm the capacity of the business to increase the operating leverage ratio in order to

prove its scalability.

● Origin of recent growth: ​We will focus on understanding the key facts that have driven

the growth of the company. The attractiveness of the company would be strongly

damaged if the market is not growing, necessary to decrease the chances of failing.
 ● Customer concentration: ​In case the revenue of the firm is concentrated in a small set

of clients, the attractiveness of the company may decrease, given the higher risk of

losing an important portion of the revenues.

Our approach to this matter will be based on a deep understanding of the chances of these

firms sticking to Project Capitol’s products, the switching costs that may act as an entry

barrier, difficulty of approaching alternate clients that could be tapped and the scope to

grow and expand within these firms.

Depending on the result, this matter could allow us to leverage in the negotiation with the

owners in order to decrease the multiple paid, or could even become a deal breaker if

the concentration results in extreme risk.

● Subscription-based business: Software services as Project Capitol’s are usually

based on periodical purchases/sales every certain period. Subscription-based revenues

would enhance our interest in the company.

● Working capital management: Although a customer base concentrated in the public

sector implies a limited default risk, it also limits the power of Project Capitol to

negotiate its collection period. This fact could place too much pressure on the cash

generation of the company.

● Future needs of further CAPEX: The teaser estates that the infrastructure in place

would allow to create a $150M boutique. During the Due Diligence, we would also

check how this calculation was made and the need for future CAPEX in other to achieve

these figures.

● Client Approach and Deal Finalisation Approach: Given that a large chunk of the

clients is government clients, it becomes important to understand the approach adopted

to tap these clients. In case, some of these deals came about due to the influence

enjoyed by the current owners, then this may not be sustainable once they are gone.

● Client Contract Periods: It is important to see when exactly the contracts with the

existing customers expire and their impact on EBITDA in case of non-renewal. This is
 important to determine the valuation of the firm and certain contingents might be put in

the agreement of the value in case of a major fall in the revenue/EBITDA schemes.

● Technical Diligence:​ A due diligence of the internal software and platforms used by

the clients need to be carried out to ensure that the software is robust and of high

quality. The software must be amenable to changes as may be determined by business

needs.

Regarding these last two points, we would analyze how attractive the return over the net assets

is, following the ratios seen in class.

MARKET

Market Analysis:

After all this analysis, in case none of the critical issues stated above results in a deal breaker,

we would be ready to make an offer to acquire Project Capitol in the following terms:

● Purchase Price Offer: ​Based on our knowledge of the company and the market, we

would be ready to pay 6x (EBITDA – CAPEX), given a debt-free company

($32M-$37M). This is due to the fact that, although software companies usually do not

need significant CAPEX, the affirmation the did in the teaser about the infrastructure in

place would lead to further CAEX. This should not be a problem for the sellers if the

business is truly based on software.

● Acquisition structure: Given the proven capacity of the company (confirmed in the

Due Diligence) to generate cash, we strongly believe that we should leverage the

company up to a level that does not compromise the stability of Project Capitol.

According to this, we would ask for debt equivalent to 70% of the purchase price, ($22M

assuming no CAPEX). Also, we would ask our investors for $8M and a $2M seller note.