Six Essential Tips for Navigating Mergers & Acquisitions (M&A) in Government Contracts

In honor of the release of the 6th Edition of the Government Contracts Compliance Handbook, we are sharing six essential tips for successfully navigating Mergers & Acquisitions (M&A) in government contracting. The complexities involved in M&A transactions for government contractors require careful planning and execution to ensure continued compliance with federal procurement regulations. For lawyers and executives involved in these transactions, understanding the regulatory landscape and maintaining adherence to government contract obligations are critical to achieving a smooth transition and avoiding future liabilities. These six tips will guide you through the key considerations for handling government contracts during M&A transactions. 

1. Conduct a Government Contracts-Focused Due Diligence Review

Unlike commercial deals, transactions involving federal contractors require specialized diligence. Beyond the usual review of financials, IP, and employment matters, acquirers must assess the seller’s performance under government contracts, history of compliance, 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 cost/pricing data 

• Status of indirect cost rate settlements 

• Cybersecurity compliance, including NIST 800-171 and DFARS obligations 

• Supply chain integrity, Buy American Act and Trade Agreements Act compliance 

Our Handbook provides a detailed diligence checklist that can be tailored to each transaction. 

2. Understand When a Novation Agreement Is Required (and Plan Accordingly)

Federal contracts generally cannot be transferred without the government’s consent. When a transaction involves an asset deal or a merger that changes the legal entity performing the contract, the buyer must obtain a novation agreement from the contracting agency. This process can take several months and requires extensive documentation, including evidence of the buyer’s ability to perform. 

To avoid disruptions, parties should: 

• Engage with contracting officers early 

• Identify contracts that may require novation 

• Build in time and contingencies in transaction documents 

• Consider using a transition services agreement to bridge the post-closing gap 

A stock purchase typically does not require novation, but sellers should still anticipate post-closing disclosures and certification obligations. 

3. Evaluate the Impact on Small Business and Socioeconomic Status

If the target has been performing as a small business, 8(a), HUBZone, SDVOSB, or WOSB, the transaction may alter or eliminate that eligibility. The Small Business Administration requires 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 

• Options or task orders under existing contracts 

Buyers should model how recertification may affect the target’s backlog and future pipeline—and should consider structuring the transaction or post-closing operations to preserve eligibility where feasible. 

4. Assess Organizational Conflicts of Interest

The combination of two government contractors can trigger OCIs that may limit the ability of the post-closing entity to pursue future opportunities. For example, if one entity has provided systems engineering services and the other intends to compete for implementation work on the same program, that may create an OCI. 

OCI risk can be managed by: 

• Conducting a comprehensive pre-closing OCI review 

• Mapping out current and prospective contract pursuits 

• Structuring mitigation plans (firewalls, separate teams, divestitures, etc.) 

Failure to address potential OCIs pre-closing can result in bid protest losses or contract performance restrictions. 

5. Address Cybersecurity Compliance and Infrastructure Readiness

Cybersecurity obligations are a growing priority for both federal agencies and deal participants. If the target handles Controlled Unclassified Information (CUI) or provides cloud services, it may be subject to specific requirements under DFARS, FedRAMP, or Executive Order 14028. 

Acquirers should: 

• Assess whether the target’s systems are compliant with applicable requirements 

• Review incident response and reporting history 

• Plan for integration or segmentation of IT environments post-closing 

As rules evolve—especially with proposed FAR and DFARS updates—cyber compliance will only grow in importance in transaction diligence and risk allocation. 

6. Prepare for Successor Liability and Enforcement Exposure

Successor liability is a real and present risk in the government contracts context. Buyers can inherit exposure for False Claims Act violations, Cost Accounting Standards noncompliance, procurement fraud, and cybersecurity breaches. 

Buyers should mitigate these risks through: 

• Thorough diligence and disclosure 

• Strong indemnity and escrow provisions 

• Representations and warranties insurance (where appropriate) 

• Post-closing compliance upgrades and monitoring 

Where national security, foreign ownership, or classified work is involved, additional scrutiny under CFIUS or NISPOM rules may apply, requiring early planning and expert guidance. 

Navigating the complexities of M&A transactions in government contracting requires careful planning, due diligence, and compliance expertise. By following these six essential tips, contractors can help ensure a smooth transaction while minimizing legal and operational risks associated with government contracts. 

These tips, drawn from the 6th Edition of the Government Contracts Compliance Handbook, reflect our commitment to helping government contractors navigate complex regulatory and compliance challenges. For tailored legal guidance on M&A transactions, government contracts compliance, or dispute resolution, our elite government contracts practice group is here to assist.