Discussions
Buying a Federal Contractor: The Hidden Asset Transfer Risks
Mergers and acquisitions (M&A) within the government contracting sector are heating up. Private equity firms and larger prime contractors are constantly scouting for smaller entities with niche capabilities or specific contract vehicles. However, buying a business with federal contracts is not as simple as signing a stock purchase agreement. The value of the deal often hinges on the target company's ability to seamlessly transfer its contract backlog and maintain its billing status. Central to this transfer is the validity and structure of the entity’s SAM registration.
During the due diligence phase, the federal entity profile serves as a "health check" for the target company. It reveals far more than just address data; it exposes the company’s claimed size standards, its socio-economic certifications, and its debt status with the government. A failure to audit this profile before closing the deal can lead to acquiring a company that is technically ineligible for the very contracts that made it an attractive target in the first place.
The Complexity of Novation Agreements
In the commercial world, contracts transfer relatively easily during a sale. In the federal world, the Anti-Assignment Act generally prohibits the transfer of government contracts to a third party. To get around this, you must go through a formal process called "novation," where the government explicitly agrees to recognise the buyer as the successor in interest. The entity profile is the pivot point for this process. If the registration data is altered incorrectly before the novation is approved, the government systems may block payments to both the old and new entities. Structuring the deal as a stock purchase versus an asset purchase drastically changes how you handle the registry update, and getting it wrong can freeze cash flow for months.
Verifying Small Business Recertification
Many targets are attractive because they hold lucrative set-aside contracts (e.g., 8(a), HUBZone). However, these contracts are often tied to the specific size and status of the original owner. When a large company buys a small business, the "affiliation rule" kicks in. The revenue of the buyer is added to the revenue of the target, often pushing the target over the size standard. The buyer must understand that upon closing, the target may be required to recertify its size in the federal database. If they lose their small business status, they may be able to keep existing contracts but will be ineligible for future set-aside options, significantly altering the valuation of the acquisition.
Debt Flags and offset Lists
The federal database tracks more than just eligibility; it tracks liability. During due diligence, a savvy buyer will look for "debt subject to offset" flags associated with the target’s Taxpayer Identification Number (TIN). This flag indicates that the company owes money to a federal agency—perhaps from a previous contract overpayment or unpaid payroll taxes. If you acquire the entity without resolving this, the government will garnish your future contract payments to satisfy the old debt. Accessing and interpreting these specific status markers is a critical step in assessing the true financial health of the target.
Succession of Key Personnel and Points of Contact
A practical, often overlooked aspect of the transition is the administrative access to the profile itself. We have seen deals close where the previous owner—who was the sole administrator of the account—leaves the company on bad terms or retires to a remote island without handing over the login credentials or the multi-factor authentication keys. This leaves the new owners locked out of their own payment system. Part of the closing checklist must include a formal handover of the "Entity Administrator" role, ensuring that the new leadership team has immediate, unfettered access to manage the government relationship.
Conclusion
In the high-stakes arena of government contracting M&A, the entity registration is a single point of failure. It is the digital bridge between the contract and the bank account. By treating the registration profile as a core asset requiring rigorous due diligence and careful legal structuring, buyers can ensure that the transition of ownership results in profit, not paralysis.
Call to Action
Ensure your merger or acquisition proceeds smoothly by securing expert management of the entity transfer process.