In the realm of mergers and acquisitions (M&A) in government contracting, the stakes are high. Federal procurement regulations pose unique challenges, and failure to navigate these complexities can result in costly penalties, reputational damage, and even loss of government contracts. As lawyers and executives navigate these transactions, it’s essential to understand the regulatory landscape and maintain adherence to government contract obligations. To achieve a smooth transition and avoid future liabilities, our 6th Edition of the Government Contracts Compliance Handbook offers six essential tips for handling government contracts during M&A transactions. ###

1. Conduct a Government Contracts-Focused Due Diligence Review

Unlike commercial deals, government contracting transactions require specialized diligence. The review process should extend beyond the usual examination of financials, intellectual property, and employment matters. #### Areas of Focus
* 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
A government contracts-focused diligence review will help identify potential risks and ensure that the acquirer is adequately prepared to meet the regulatory requirements of the target’s government contracts. Understand When a Novation Agreement Is Required (and Plan Accordingly)

Federal contracts cannot be transferred without the government’s consent. When a transaction involves an asset deal or merger that changes the legal entity performing the contract, the buyer must obtain a novation agreement from the contracting agency. #### Key Considerations
* 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 novation agreement can help ensure a seamless transition of government contracts, minimizing disruptions to the business and protecting the buyer’s interests. Evaluate the Impact on Small Business and Socioeconomic Status

The target’s status as a small business, 8(a), HUBZone, SDVOSB, or WOSB can be altered or eliminated during an M&A transaction. 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 and Its Implications
* Eligibility for small business set-asides
* Prime and subcontracting opportunities
* Options or task orders under existing contracts
Buyers should consider how recertification may affect the target’s backlog and future pipeline, as well as model the transaction or post-closing operations to preserve eligibility where feasible. Assess Organizational Conflicts of Interest

The combination of two government contractors can trigger organizational conflicts of interest (OCIs) that may limit the post-closing entity’s ability to pursue future opportunities. #### Managing OCI Risk
* 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. Address Cybersecurity Compliance and Infrastructure Readiness

Cybersecurity obligations are a growing priority for both federal agencies and deal participants. The target’s systems may be subject to specific requirements under DFARS, FedRAMP, or Executive Order 14028. #### Key Considerations
* Assessing compliance with applicable requirements
* Reviewing incident response and reporting history
* Planning for integration or segmentation of IT environments post-closing
As rules evolve, particularly with proposed FAR and DFARS updates, cybersecurity compliance will become increasingly important in transaction diligence and risk allocation. 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. #### Mitigating Risks
* Thorough diligence and disclosure
* Strong indemnity and escrow provisions
* Representations and warranties insurance (where appropriate)
* Post-closing compliance upgrades and monitoring
Buyers should take proactive steps to mitigate these risks, ensuring a smooth transition and protecting their interests. By following these six essential tips, contractors can navigate the complexities of M&A transactions in government contracting with confidence. The 6th Edition of the Government Contracts Compliance Handbook offers expert guidance on regulatory compliance, risk management, and transaction planning. For tailored legal guidance on M&A transactions, government contracts compliance, or dispute resolution, our elite government contracts practice group is here to assist. This article highlights the importance of due diligence in M&A transactions involving government contractors. By conducting a thorough review of government contracts, novation agreements, small business and socioeconomic status, organizational conflicts of interest, cybersecurity compliance, and successor liability, contractors can minimize risks and ensure a smooth transition. These six tips are designed to help contractors navigate the complexities of M&A transactions in government contracting, ensuring compliance with federal procurement regulations and avoiding potential liabilities. By following these guidelines and consulting with a qualified government contracts attorney, contractors can achieve a successful transaction and maintain their reputation as trusted providers of goods and services to the government. The key to success in M&A transactions involving government contractors lies in the ability to navigate complex regulatory landscapes, manage risk, and prioritize compliance. By doing so, contractors can ensure a smooth transition and protect their interests. For more information on M&A transactions, government contracts compliance, or dispute resolution, our elite government contracts practice group is here to assist. We provide expert guidance and support to help contractors navigate the complexities of government contracting and achieve their goals. Our team of experienced government contracts attorneys and advisors offers tailored advice on M&A transactions, regulatory compliance, and risk management. Contact us today to learn more about our government contracts practice and how we can help you succeed in the complex world of government contracting.