M&A Considerations In Government Contracts

government contracts

Considerations For When A Government Contractor Is An Acquisition Target

Acquisition of any company requires significant and comprehensive due diligence reviews. This process is even more lengthy and burdensome if the target company holds government contracts. Below is an overview of some of the unique considerations in due diligence reviews when the company being acquired is a government contractor.

Small Business / Socioeconomic Considerations

If the target company holds small business or socioeconomic classifications, it may lose those outright or due to affiliation rules as a result of an acquisition or merger. While the target company likely will not lose any current contracts it holds as a result of a change in size or socioeconomic classification, it may not be able to compete for set-asides on a go-forward basis.

Security Clearances / Foreign Buyers

When the target company holds security clearances for performing work on government contracts and the acquiring company does not, the parties should timely notify the Defense Security Service of the transaction. Obtaining the required clearances can take some time and create delays in closing if not properly accounted for. Additionally, if the buyer is a company under foreign ownership, control, or influence (FOCI), it cannot hold a facilities clearance unless the FOCI is mitigated.

Novations / Ancillary Contracts

If the sale includes all or substantially all of the assets of the target company, novation of the target company’s contracts under Federal Acquisition Regulation 42.12 will be required. Additionally, a sale may also trigger notice and consent requirements in the assignment or change of ownership provisions of any subcontracts, teaming agreements, vendor agreements, or joint ventures.

Conflicts of Interest

If the parties work in the same industry, the due diligence team should review whether the merger or acquisition will create any organizational conflicts of interest. Contracts may not be able to be performed due to OCI’s or mitigation measures may need to be implemented to maintain current contracts or obtain new awards.


Government contractors are highly valuable targets. However, as generally noted in this article issues unique to public contract law arise in the due diligence review. As with most transactions involving the government, reviews and obtaining the necessary approvals take time and if not accounted for may delay the closing process. Additionally, acquiring companies should be adequately educated on the regulatory burdens of government contractors and how they impact the commercial components of the company in order to be prepared to undertake the requirements of the target company on a go forward basis.

Kristi Morgan AronicaKristi Morgan Aronica, Government Contracts Attorney