2-Valuation-OII-SOW_OGC-est1.doc

Performance-Based Statement of Work (SOW) For Independent Valuation Consulting Services For

Office of Investment and Innovation

This SOW describes the tasks and requirements needed by the Small Business Administration (SBA), Office of Investment and Innovation (OII) for the performance of independent valuation reports on investments in small business concerns (SBCs) held in the portfolios of Small Business Investment Companies (SBICs).

1.0 Background

The SBIC program was created to stimulate and supplement the flow of private capital to SBCs. It does this by licensing teams of experienced private equity fund managers who seek eligible SBCs to make loan, debt and/or equity investments. Most SBICs are licensed with the expectation that they will receive financial assistance from SBA in the form of SBA-guaranteed debentures (“leveraged SBICs”) and some are licensed with the understanding that they will not receive financial assistance from SBA. This SOW is focused on leveraged SBICs.

The SBICs’ general partners (or board of directors in the case of a corporate SBIC) are responsible for adopting an SBA-approved valuation policy and preparing valuation reports on investments held by the SBICs in accordance with that SBA-approved valuation policy. Most general partners (or board of directors) adopt the “SBA Valuation Guidelines”. The general partners (or board of directors) are responsible for preparing and approving valuation reports on the SBICs’ investments. The valuation reports must conform to the SBIC’s SBA-approved valuation policy adopted by the SBIC. The Office of SBIC Operations (OSO), within OII, is responsible for the financial and regulatory oversight of SBICs in active operations. As part of its financial oversight of leveraged SBICs, OSO may, at times, need an independent third party professional to prepare valuation reports to compare to those valuation reports prepared by the general partners (or board of directors) of investments held by leveraged SBICs. Such valuations may be critically important for OSO in performing its oversight responsibilities appropriately. This includes determining the financial condition of leveraged SBICs for the purposes of:

1. regulatory compliance;

2. issuance leverage commitments; and

3. processing just-in-time leverage draws.

In addition, in certain circumstances, OSO relies upon valuation reports from independent third party professionals in order to calculate a leveraged SBICs’ capital impairment percentage (CIP), a regulatory mandated measurement for determining an SBIC’s financial condition. CIP measures the extent to which both operating losses and investment losses of an SBIC (both realized and unrealized) have eroded the SBIC’s private capital commitments. A CIP above an SBIC’s maximum permissible percentage triggers an event of default that requires SBA to transfer the SBIC to the Office of Liquidation for recovery to minimize losses.

2.0 Overall Objective

The objective of this contract is to obtain third-party expertise in assessing the degree to which SBICs are adhering to the SBA Valuation Guidelines or SBA-approved valuation policy, assess the earnings capacity of SBCs to determine repayment ability of SBIC debt investments, assess the likelihood of recovery of SBIC debt investments in distressed SBCs, determine the value of equity securities and/or assess an SBCs value at the time of a projected sale.

The Office of Investment and Innovation (OII) has a need to obtain valuations of certain small business concerns (SBC), which are the underlying investments held by Small Business Investment Companies (SBIC). This is necessary to evaluate the financial condition of SBICs and for OII to perform its oversight responsibilities appropriately. These responsibilities include, but are not limited to, evaluating the financial condition of SBICs when considering leverage commitments and requests to draw against leverage commitments, each of which create credit risk to SBA. In addition, confirming the value of the underlying portfolio companies in a timely manner will assist SBA in considering whether to transfer an SBIC to the Office of Liquidation (OL) in circumstances where such a transfer would minimize losses to the Government.

The intent of this contract is to provide a resource to examine/confirm the valuation of SBCs identified by the OII Analysts on a more comprehensive basis and from the viewpoint of an objective third party. This will allow the OII Analysts to recommend appropriate courses of action based on verified information in a timely manner as part of SBA’s risk mitigation oversight strategy.

3.0 Applicable Conditions Consistent with the requirements of the Small Business Investment Act of 1958, as amended, OII seeks to ensure that loans and investments made by SBICs are of such sound value, or so secured, as to reasonably assure repayment. OII seeks a qualified small business valuation contractor (“Contractor”) capable of designing and conducting evaluations and assessments on SBCs. The Contractor will help develop overall valuation frameworks and will suggest new or clarify existing measures and metrics. Work may include recommending updates to the current SBA Valuation Guidelines for SBICs and provide analyses for the proposed work detailed in this SOW. The assessments could include portfolio analysis and best practice identification across the private equity industry.

4.0 Third-Party Overall Performance Standard The Contractor shall perform “Valuations” on SBCs as directed by SBA through a written request. These Valuations will be either a Valuation (or Appraisal) Engagement or a Calculation Engagement, or both.

· The Valuation (or Appraisal) Engagement shall be performed in accordance with the professional standards of one or more business valuation professional organizations, (NACVA, AICPA, USPAP, ASA, etc).

· The “Calculation Engagement” shall be a professional application of the SBA Valuation Guidelines or the SBIC’s approved valuation policy.

5.0 Specific Requirements

Valuation Task: The Contractor shall perform either a Valuation (or Appraisal) Engagement or a Calculation Engagement, or both as requested by SBA on SBCs for the purpose of assessing:

1. the degree to which the SBIC is adhering to the SBA Valuation Guidelines or the SBIC’s approved valuation policy;

2. the earnings capacity of SBCs to determine the repayment ability or recovery of SBIC debt investments and value of equity investments taking into consideration determinations about industry and economic outlook as well as company projections;

3. valuation of the SBC currently and/or as of the time of projected sale; and

4. the economic outlook in general and the condition and outlook of the specific industry in particular.

The Contractor shall prepare a valuation report (Report) for each SBC that must be coherent, supportable, and understandable. The Report must include a section that provides an assessment of the valuation prepared by the SBIC’s general partner (or board of directors) as to conformity with the SBA Valuation Guidelines or the SBIC’s approved valuation policy and addresses areas where the SBIC’s general partner’s (or board of directors) valuation report does not conform to the SBA Valuation Guidelines or the SBIC’s SBA-approved valuation policy and provides an analysis demonstrating how the deviation affected the result. In addition, the Report should include, as applicable, the following sections titled using wording similar in content:

1. Letter of Transmittal

2. Table of Contents

3. Introduction

4. Summary of Conclusion

5. Sources of information

6. A description of the fundamental analysis

7. Identification of the assumptions and limiting conditions

8. Representation of the member

9. Qualifications of member

10. Appendices and exhibits

Training and Assistance Task (included in the pricing for the Valuation Task): The Contractor shall provide a level of general valuation support to answer questions as needed and provide general advice in the area of valuation. As requested, the Contractor will provide training on topics of interest to SBA.

Interim Monthly Reports Task (included in the pricing for the Valuation Task): The Contractor shall prepare interim reports on a monthly basis identifying the current status of tasks performed under the contract, any problems or concerns, findings to date, and recommendations. The Contractor shall deliver these reports in Microsoft Word via email within 7 calendar days after the end of each month to the SBA’s Technical Point of Contact (POC).

Outlook Report Task (included in the pricing for the Valuation Task): The Contractor shall call upon professional expertise as well as analytical tools and resources at its disposal to provide a report on the current and mid-term outlook for each of the industries represented in the portfolio of the SBIC under review. This report should be detailed, including all assumptions and reasoning leading to conclusions. In addition, the Contractor shall apply professional expertise and appropriate analytical tools and resources at its disposal to provide a discussion of the near term and long term economic outlook and how it might affect the SBIC’s portfolio. Note that this task may be requested separately, or in connection with a valuation report as described above.

Related Services Task: On occasion the Contractor may be asked to provide special related services, special data analysis, special reports, or extended training. If this task is required, the parties shall negotiate a firm-fixed price based on the hourly rates provided in the Contractor’s pricing schedule.

6.0 Deliverables

Delivery or Performance-Period Requirements: The Contractor shall produce the final Report for each SBC appraised containing the features outlined above within 45 days after SBA identifies the SBC. While it is acknowledged that there may be required form elements that must appear in the Report, the Contractor is expected to give evidence of having considered the unique characteristics of both the SBIC and the SBC so that the report is less a generic document and more an individualized engagement. Further, all valuation inputs, assumptions and definitions of terms must be clearly articulated in a separate section of the report in the beginning of the report.

The Contractor shall include in the Report a separate section containing a conclusion for the SBC appraised as the Contractor believes it should be reported under the SBIC Valuation Guidelines or the SBIC’s SBA-approved valuation policy, as appropriate. The Contractor shall discuss the assumptions behind its conclusions, and explain why its findings differ from the SBIC’s conclusion, if indeed it does. The Contractor shall include in the Report the conclusion(s) of the Valuation Engagement and/or the Calculation Engagement. If the two engagements result in different conclusions, there should be a discussion section indicating what factors led to the different conclusions.

7.0 Travel From time-to-time, the Contractor shall attend meetings at OII offices located at 409 3rd Street, SW, 6th Floor, Washington, DC 20416 as needed to support those tasks identified in this SOW. As necessary, the Contractor shall travel to SBCs or to the SBIC in which portfolio the SBC exists to perform work in connection with the contract.

Travel will not be separately reimbursed, and is part of Contractor’s fully loaded valuation pricing.

8.0 Other Direct Costs

Contractor’s Other Direct Costs (ODCs) will not be separately reimbursed. Any ODCs shall be a part of Contractor’s fully loaded unit pricing.

9.0 Service Delivery Summary The Contractor shall submit the Report electronically via email in portable document format (.pdf) within 45 calendar days after SBA written request, unless a different time frame is agreed to with the SBA.

10.0 Government Furnished Property and Services Government furnished information: SBA will provide SBA valuation guidelines and Form 468 financial statements, as needed.

11.0 Security

All information obtained by the Contractor from SBA and SBICs shall be disclosed only to SBA personnel and shall not be used for any other reason by the Contractor or its staff, and shall not be disclosed to any third party without the express written consent of the Contracting Officer’s Representative (COR). The Contractor shall sign a confidentiality agreement and a conflict of interest agreement to ensure that the Contractor safeguards the information provided by the SBA or prepared by the Contractor with regards to this contract.

All working papers, notes, photocopies, deliverables, and other materials produced by the contractor and received by the contractor is considered SBA property, meaning that SBA has title to these data. These files will be kept by the Contractor, but are subject to review by SBA, their auditors, and designees. They must be accessible for review within three (3) working days of request. Upon completion of this contract the Contractor must destroy all files obtained from this contract.

All software purchased (and/or modified after purchase) and databases created for use under this contract will become the property of SBA and will be delivered to SBA upon completion of this contract.

No additional security clearance is contemplated at this time. However, should security clearances be required at any time for Contractor’s employees working on this SOW, the COR will coordinate those clearances, and the SBA will pay for the clearances.

12.0 Place of Performance

The Contractor shall perform the duties listed above at the Contractor’s office and supply all necessary equipment and information needed to accomplish these tasks. As necessary, the Contractor shall travel to SBCs or to the SBIC in which portfolio the SBC exists to perform work in connection with the contract. Costs associated with travel will be included in the Contractor’s fixed price.

13.0 Period of Performance (POP) The POP for this contract is for a base year and four option years.

14.0 Invoicing

When each valuation is assigned, Contractor may invoice one-third (1/3) of the firm-fixed unit price. After SBA OII accepts the final Report, Contractor may invoice the final two-thirds (2/3) of the firm fixed unit price. Acceptance occurs either by an email from the COR or the passage 60 days without comment from the SBA.

All invoices shall use SF1034 and include:

1) The requisition number and contract number found on the SF-1447;

2) A unique invoice number, such as “SBHQ-17-R-0009 – No. 1;” and

3) Other required information as identified on the form SF1035.

15.0 Performance-Based Provisions

In addition to a Contracting Officer (CO), both a COR and a POC will be assigned by the SBA to this contract once the award is made.

16.0 Non-Personal Services Contract

Contractor personnel rendering the services pursuant to this contract are not subject, either by the contract's terms or by the manner of its administration, to the supervision and control usually prevailing in relationships between the Government and its employees.

17.0 Attachments

The following are attached to this SOW:

1. Form 468 Financial Statement form;

2. SBA Valuation Guidelines;

3. The Confidentiality and Conflict of Interest Agreements to be completed on behalf of the Contractor and each of its employees who work on this Contract; and

4. Report template, to be used as a guide.

SBC Valuations – Statement of Work

SBC Valuations – Statement of Work