Six Key Strategies for Successfully Managing Mergers & Acquisitions (M&A) in Government Contracts

Navigating mergers and acquisitions (M&A) in government contracts can be a complex process that requires careful planning and execution to ensure compliance with federal regulations. In the world of government contracting, understanding the regulatory landscape and maintaining adherence to contract obligations are essential for a successful transition and to avoid future liabilities. Whether you are a lawyer or an executive involved in M&A transactions, these six essential tips will help you navigate the intricacies of government contracts during such deals.

First and foremost, conducting a government contracts-focused due diligence review is crucial. Unlike standard commercial transactions, deals involving federal contractors necessitate specialized diligence. In addition to reviewing financials, intellectual property, and employment matters, acquirers must assess the seller’s performance under government contracts, compliance history, and exposure to government investigations or enforcement actions. Areas of particular focus include pending audits or cost disputes with the government, past performance ratings (CPARs), ethics and compliance program maturity, treatment of commercial item claims, and cybersecurity compliance, among others. These detailed diligence checklists can be customized for each transaction and are crucial for a comprehensive understanding of the situation.

Understanding when a novation agreement is required, and planning accordingly, is another key aspect of successful M&A in government contracting. Federal contracts generally cannot be transferred without the government’s consent. In cases of asset deals or mergers altering the legal entity performing the contract, the buyer must secure a novation agreement from the contracting agency. This process, requiring evidence of the buyer’s ability to perform, can be lengthy and involves extensive documentation. Effective strategies to avoid disruptions include engaging with contracting officers early, identifying contracts requiring novation, and building in time and contingencies in transaction documents.

Additionally, evaluating the impact on small business and socioeconomic status is crucial during M&A transactions. If the target company has been operating as a small business, 8(a), HUBZone, SDVOSB, or WOSB, the transaction may affect its eligibility. The Small Business Administration necessitates notification within 30 days of a merger, acquisition, or sale, and the contractor must recertify its status. Loss of status can impact eligibility for small business set-asides, prime and subcontracting opportunities, and existing contract options or task orders. Buyers should anticipate how recertification may influence the target’s backlog and future pipeline and should consider structuring the transaction accordingly.

Ultimately, navigating M&A in government contracts requires attention to detail and an understanding of the intricate regulatory environment specific to federal procurement. By following these essential tips, lawyers and executives involved in M&A transactions can ensure a smoother transition and mitigate potential risks and liabilities associated with non-compliance with government contract regulations.