Can You Sell Your Business If You Have Government Contracts?
Yes, you can sell a business with government contracts, but the Anti-Assignment Act prohibits direct transfer of federal contracts to a buyer. The FAR 42.12 novation process allows the government to recognize a successor, though approval typically takes three to six months with no guaranteed timeline. Set-aside certifications like 8(a), HUBZone, or SDVOSB may be lost if the buyer does not independently qualify, potentially destroying the contract value that drives the acquisition.
Key Takeaways
- The Anti-Assignment Act (41 USC Section 6305) prohibits transfer of government contracts, but FAR 42.12 novation provides a legal pathway 1.
- Government contract novation typically takes 3-6 months with no fixed regulatory timeline for processing 2.
- Set-aside certifications including 8(a), HUBZone, and SDVOSB may be lost upon sale if the buyer does not independently qualify 4.
- Stock purchases avoid triggering the Anti-Assignment Act because the contracting entity does not change under FAR 42.1204(b) 2.
- Security clearance transfers require separate processing under 32 CFR 117.8, with facility clearance averaging approximately 180 days 3.
How Do Government Contracts Affect Selling Your Business?
This condition doesn't make your business unsellable — but it does change the math. Here are the primary ways it impacts your transaction.
Anti-Assignment Act Blocks Transfer
Federal law flatly prohibits transfer of government contracts: a purported transfer annuls the contract as far as the government is concerned 1. This means an asset sale cannot simply assign contracts to the buyer. The FAR 42.12 novation process is the only mechanism for the government to recognize a successor contractor in an asset deal.Novation Adds 3-6 Month Timeline
Unlike private contract assignments that close in days, government novation has no fixed regulatory timeline. Practitioners report typical processing of 3-6 months or longer 2. The ABA has recommended a 90-day processing deadline, but this has not been adopted. During this period, the seller must remain as prime contractor while the buyer performs as subcontractor.Set-Aside Status May Be Lost
If government contracts were awarded through set-aside programs like 8(a), HUBZone, or SDVOSB, the buyer must independently qualify for those certifications. SBA requires 60-day approval for 8(a) ownership changes and 30-day notification for SDVOSB changes 4. If the buyer cannot recertify, the contract value that drove the acquisition may evaporate.Security Clearances Require Separate Transfer
For classified work, ownership changes require immediate reporting to the Cognizant Security Agency under 32 CFR 117.8 3. Facility Security Clearances may be invalidated if the new entity introduces Foreign Ownership, Control, or Influence issues. Current FCL processing averages approximately 180 days, adding significant timeline risk to the transaction.Asset Sale vs. Stock Sale: Which Works for Government Contracts?
| Factor | Asset Sale | Stock Sale |
|---|---|---|
| Novation Requirement | Required under FAR 42.12; 3-6 month government approval process 2 | Not required; entity survives unchanged per FAR 42.1204(b) |
| Anti-Assignment Act | Triggered; contracts technically annulled without novation 1 | Not triggered; no change in contracting party |
| Liability Assumption | Buyer selects assets, avoids inheriting liabilities | Buyer inherits all liabilities including DCAA audit exposure |
| Set-Aside Status | Requires SBA recertification within 30 days of approved novation 4 | May be preserved if ownership percentages still meet program requirements |
| Security Clearances | Buyer must obtain new FCL; 180-day average processing 3 | FCL may survive if KMP clearances transfer and no FOCI issues arise |
| Tax Treatment — Buyer | Stepped-up basis; IRC Section 197 amortization of contract-related intangibles | Carryover basis unless Section 338(h)(10) election made |
| Operational Continuity | Requires interim subcontracting arrangement during novation period | Seamless continuity; no contract performance gaps |
| Best When | Buyer wants clean assets and contracts are full-and-open competition (no set-aside) | Classified work, critical set-aside certifications, or complex contract portfolio |
What Types of Government Contracts Transfer Differently in a Sale?
Not every situation is treated the same. Each type has different transfer rules, timelines, and risks that affect your sale.
Fixed-Price Contracts
Transfer Rule
Subject to Anti-Assignment Act; novation required for asset sales
Typical Handling
Most transferable contract type; straightforward novation because cost accounting systems are less relevant
Timeline
Novation processing typically 3-4 months for simple fixed-price contracts
Watch Out
Unfavorable fixed-price terms that looked reasonable pre-sale may become losses under buyer's cost structure 2.Cost-Plus Contracts
Transfer Rule
Novation required plus government must approve buyer's accounting systems
Typical Handling
Buyer must demonstrate DCAA-compliant cost accounting system before government approves novation
Timeline
4-6 months; accounting system approval can extend timeline significantly
Watch Out
DCAA audit findings against the seller's cost accounting system can taint the novation application and delay approval 8.IDIQ and Task Orders
Transfer Rule
Base IDIQ vehicle requires novation; individual task orders may or may not transfer separately
Typical Handling
Novation of the base IDIQ typically transfers all active task orders, but new task orders post-novation require the buyer to compete independently
Timeline
3-6 months for base vehicle novation; task order transfers are concurrent
Watch Out
IDIQ ceiling amounts do not guarantee future revenue — buyers must assess the pipeline of upcoming task order competitions 5.Blanket Purchase Agreements (BPAs)
Transfer Rule
Generally non-transferable; buyer must compete for new BPA
Typical Handling
BPAs are typically excluded from transaction value; buyer builds relationship with agency and competes in next solicitation
Timeline
New BPA competition varies by agency; typically 60-180 days
Watch Out
Sellers who include BPA revenue in valuation overstate transferable contract value — BPAs are relationship-based, not contract-based 7.Set-Aside Contracts (8(a), HUBZone, SDVOSB)
Transfer Rule
Contract awarded to specific certified entity; recertification required upon ownership change
Typical Handling
Buyer must independently qualify for the same set-aside program or contract may be terminated for convenience
Timeline
SBA 8(a) ownership change decisions within 60 days; SDVOSB notification within 30 days [4]
Watch Out
If buyer does not qualify for the set-aside program, the contract that drove the acquisition may be terminated, destroying deal economics 4.How to Sell a Business With Government Contracts: Step-by-Step
Inventory All Government Contracts and Classify Transferability
Compile a complete list of every active government contract, task order, and blanket purchase agreement with agency, value, period of performance, set-aside designation, and security requirements. Fixed-price contracts are the most transferable. Cost-plus contracts require government approval of the buyer's accounting systems. IDIQ individual task orders may transfer independently. BPAs generally cannot transfer and must be re-competed.
Pro tip: Contracts expiring within 12 months have minimal novation value — focus buyer attention on multi-year contracts with option periods remaining 5.
Evaluate Whether Stock Sale Can Avoid Novation Entirely
A stock purchase avoids triggering the Anti-Assignment Act because the contracting entity survives unchanged. Under FAR 42.1204(b), novation is not required when ownership changes via stock purchase with no legal change in the contracting party. However, stock sales force the buyer to inherit all liabilities. The trade-off between novation avoidance and liability assumption is the central structuring decision in every government contractor sale.
Pro tip: Stock sales still require reporting the ownership change to contracting officers within 30 days, even though novation is not triggered 2.
Prepare the Complete FAR 42.12 Novation Package
If proceeding with an asset sale, assemble all required novation documentation: the proposed novation agreement, purchase and sale documents, list of all affected contracts, evidence of transferee capability, authenticated instruments of transfer, board resolutions, audited balance sheets, and evidence that security clearance requirements are met. Incomplete packages are the primary cause of novation delays. Filing a complete package on day one post-close maximizes your chances of timely government approval.
Pro tip: The FAR prescribes only a 30-day comment period after the contracting officer notifies affected offices — a complete filing moves through faster 2.
Structure Post-Closing Subcontracting During Novation Period
Because novation begins only after closing, establish an interim subcontracting arrangement where the seller remains the prime contractor and the buyer performs as subcontractor until government approval. This ensures continuous contract performance without interruption. Include detailed cooperation covenants in the purchase agreement requiring both parties to diligently process the novation. Address the scenario where the government declines novation, as FAR 42.1204(c) permits refusal.
Pro tip: Model interim subcontracting agreements on the Lockheed Martin/Leidos template, which is publicly available in SEC filings 7.
Negotiate Tiered Purchase Price With Novation Escrow
Structure the deal with a holdback of 10-20% of purchase price released upon successful novation approval. This protects the buyer against the risk of government refusal while ensuring the seller receives full value once novation is confirmed. Include an earnout component for contracts where set-aside recertification is uncertain. The tiered structure aligns incentives: the seller cooperates fully with novation, and the buyer pays fair value upon confirmation.
Pro tip: IBBA data shows lower middle market deals average 6.0x EBITDA, but government contractor premiums can reach 4.0-5.0x when contracts are successfully novated 5.
What Are the Biggest Risks of Selling a Business With Government Contracts?
Government Can Refuse Novation
FAR 42.1204(c) permits the government to decline novation and hold the original contractor to performance obligations. There is no appeal process for novation refusal. If the government declines, the original contractor remains liable, the buyer cannot perform on the contracts, and the economic basis of the deal collapses. This risk must be addressed in the purchase agreement with clear termination and refund provisions [2].
Set-Aside Recertification Failure
If the buyer cannot independently qualify for the same set-aside programs that awarded the contracts, those contracts may be terminated for convenience. The SBA has 60 days to decide on 8(a) ownership change requests, and SDVOSB requires notification within 30 calendar days of material ownership changes [4]. Failure to recertify can eliminate 50-80% of the revenue base for businesses heavily dependent on set-aside work.
Security Clearance Transfer Gaps
Classified contracts cannot be performed without an active Facility Security Clearance. If the buyer introduces Foreign Ownership, Control, or Influence issues, the FCL may be revoked under 32 CFR 117.11 [3]. Current FCL processing averages 180 days, creating a window where classified work must either pause or be subcontracted back to the seller entity, increasing costs and operational complexity.
DCAA Audit Findings Destroy Deal Value
Defense Contract Audit Agency findings related to cost accounting, billing irregularities, or system inadequacies can trigger government-wide suspension or debarment. Buyers conducting diligence will scrutinize DCAA audit reports and Contractor Performance Assessment Reports for any findings below satisfactory [8]. Unresolved audit findings can reduce valuations by 20-30% or kill the deal entirely.
What Government Contract Red Flags Make Buyers Walk Away?
Knowing what buyers scrutinize helps you prepare. Address these before going to market.
Sole-source contracts expiring within 12 months
Contracts nearing expiration have minimal novation value because the government can simply re-compete the requirement rather than approve a novation. Buyers discount expiring contracts to near-zero value, and if these represent a significant revenue share, the entire deal economics collapse.
Set-aside status that the buyer cannot qualify for
If the seller's revenue depends on 8(a), HUBZone, or SDVOSB set-aside contracts and the buyer does not independently qualify for those programs, those contracts may be terminated for convenience upon sale [4]. This is the single most common deal-killer in government contractor acquisitions.
Classified work without cleared facility or personnel
Contracts involving CUI or classified information require active Facility Security Clearances and cleared Key Management Personnel. If the buyer lacks these or introduces FOCI issues, the security clearance transfer can take 180+ days or be denied entirely [3], creating an extended performance gap.
DCAA audit findings or unresolved cost accounting issues
Adverse DCAA findings signal systemic cost accounting problems that can trigger government-wide suspension or debarment. Buyers face inherited liability for past overbilling plus future compliance costs. Unresolved findings reduce valuations by 20-30% and may prevent novation approval entirely [8].
CPARs ratings below satisfactory on active contracts
Contractor Performance Assessment Reports below satisfactory signal execution problems that follow the contract through novation. Poor CPARs affect the buyer's ability to win future work and may cause the government to scrutinize the novation application more carefully, extending the timeline.
Heavy reliance on BPA revenue that cannot transfer
Blanket Purchase Agreements are generally non-transferable and must be re-competed. If 30% or more of revenue comes from BPAs, the buyer must discount that revenue stream to zero for novation purposes and compete independently, creating significant revenue uncertainty post-close [7].
How Is a Business With Government Contracts Valued?
Government contractor valuations depend heavily on whether contracts can be successfully novated to the buyer.
EBITDA
70% from government contracts
× Full Multiple (Contracts Novated)
Assumes successful novation
= Full Enterprise Value
If all contracts transfer
× Risk-Adjusted Multiple
Discounted for novation uncertainty
= Risk-Adjusted Value
Cash at close
+ Earnout for Successful Novation
Released upon government approval
Key insight: The $2 million gap between risk-adjusted value and full enterprise value represents the novation risk premium. Structuring this gap as an earnout or escrow rather than a permanent discount means the seller receives full value once novation is confirmed, while the buyer is protected if the government declines. In practice, government novation approval rates are high for well-prepared filings, making the earnout a realistic path to capturing the full $9 million [5].
Government contractor sales are the most process-driven transactions in the lower middle market. Think of novation as a second closing: you close with the buyer on day one, then close with the government over three to six months. Plan for both from the start.
Clayton Gits
Managing Director, Ad Astra Equity
15+ Years in M&A
How Ad Astra Handles Your Sale
We've closed dozens of transactions in situations like yours. Here's our playbook — and what makes the difference between a smooth close and a blown deal.
Our Approach
Comprehensive Situation Assessment
We evaluate your specific condition, identify risks, and quantify the impact on valuation before going to market.
Optimal Deal Structuring
We model asset sale vs. stock sale scenarios and structure the transaction to maximize your net proceeds given your circumstances.
Buyer Management & Negotiation
We create competitive tension among qualified buyers, manage disclosure timing, and negotiate terms that protect your interests.
Smooth Close Coordination
We coordinate all parties — attorneys, CPAs, lenders, counterparties — to keep the deal on track and prevent last-minute surprises.
By the Numbers
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What Does Selling a Business With Government Contracts Actually Look Like?
Representative example based on composite of actual transactions. Details anonymized.
The Business
Defense contractor, $12M revenue (80% DoD), $2.4M EBITDA, 45 employees, facility security clearance, SDVOSB certified
Financial Breakdown
Novation Escrow
Held pending government novation approval at month 5
Interim Subcontracting Costs
Seller remained prime contractor for 4 months post-close
Legal and Advisory Fees
FAR novation counsel, M&A advisory, security clearance attorneys
Security Clearance Transfer
FOCI mitigation documentation and KMP clearance processing
Deal Outcome
Enterprise Value
$9,600,000
Costs & Deductions
$500,000
Net to Seller
$8,655,000
Time to Close
120 days
Key Lessons
- The asset sale structure required novation, but the buyer qualified as SDVOSB, preserving the set-aside status that generated 60% of revenue.
- Filing the complete novation package on day one post-close accelerated government approval to month 5, beating the typical 6-month timeline.
- The interim subcontracting arrangement ensured zero days of contract performance interruption, which maintained the CPARs rating throughout transition.
- The $500K novation escrow was released in full upon government approval, bringing total seller proceeds to $9,155,000 including the escrow release.
How Do Government Contracts Affect Taxes When Selling?
Asset Sale — IRC Section 197 Contract Intangible Amortization
The value allocated to government contract relationships and customer-based intangibles qualifies for 15-year amortization under IRC Section 197. In a government contractor sale, the contract backlog itself has quantifiable value that the buyer can amortize, creating annual tax deductions that reduce the effective cost of acquisition over 15 years.
Example
On a $9.6M asset sale with $3M allocated to contract-related intangibles, the buyer receives $200,000 in annual amortization deductions for 15 years, saving approximately $47,600 annually at the 23.8% rate 5.Key point: Section 197 amortization of contract intangibles provides buyers a meaningful tax incentive to pay fair value for the government contract backlog 5.
Stock Sale — Avoiding Double Tax for C-Corp Contractors
Many defense contractors are C-corporations. A stock sale avoids the double taxation that occurs in C-corp asset sales, where the corporation pays 21% federal tax on asset sale gains and shareholders pay an additional 23.8% on the distribution. The combined effective rate of approximately 39.8% makes asset sales significantly more expensive for C-corp sellers.
Example
On a $9.6M stock sale of a C-corp with $2M basis, the seller pays $1.81M in capital gains tax at 23.8%. An asset sale would generate approximately $3.02M in combined corporate and shareholder tax at the 39.8% effective rate 6.Key point: C-corp government contractors save approximately 16 percentage points in effective tax rate by structuring as a stock sale rather than an asset sale 8.
Stock Sale With Section 338(h)(10) Election
A Section 338(h)(10) election treats a stock purchase as a deemed asset sale for tax purposes. The buyer receives stepped-up basis and amortization benefits of an asset deal while maintaining the legal form of a stock sale, which avoids triggering the Anti-Assignment Act. Both parties must agree to the election, and the seller bears the tax cost of the deemed asset sale.
Example
A 338(h)(10) election on a $9.6M stock purchase gives the buyer $9.6M in depreciable and amortizable basis while preserving government contracts without novation 7.Key point: Section 338(h)(10) is the preferred structure for government contractors because it combines novation avoidance with buyer tax benefits 5.
How Long Does It Take to Sell a Business With Government Contracts?
Weeks 1-4
Contract Inventory and Pre-Marketing Preparation
- Compile complete government contract inventory with transferability analysis
- Assess set-aside recertification requirements for prospective buyers
- Review DCAA audit history and resolve any open findings
- Verify facility security clearance status and KMP clearances
- Engage M&A counsel experienced in FAR novation requirements
Weeks 5-10
Buyer Identification and Negotiation
- Target buyers who qualify for existing set-aside certifications
- Present contract portfolio with novation risk analysis
- Negotiate LOI with tiered pricing reflecting novation contingency
- Determine asset vs. stock sale structure based on clearance and certification needs
Weeks 11-16
Due Diligence and Novation Package Preparation
- Buyer diligence on contract performance history and CPARs
- Prepare complete FAR 42.12 novation documentation package
- Initiate security clearance transfer process under 32 CFR 117.8
- Draft interim subcontracting agreement for novation period
- Execute purchase agreement with novation escrow provisions
Months 5-8
Post-Close Novation and Clearance Processing
- File novation request with all contracting officers on day one post-close
- Operate under interim subcontracting arrangement during novation
- Process SBA recertification for set-aside programs within 30 days
- Complete security clearance transfer and FOCI resolution
- Release novation escrow upon government approval
What Documents Do You Need to Sell a Business With Government Contracts?
Have these ready before engaging buyers. Missing documents delay diligence and erode buyer confidence.
Complete Government Contract Inventory
All active contracts, task orders, and BPAs with agency, value, performance period, set-aside designation, and option years remaining.
FAR 42.12 Novation Package
Proposed novation agreement, purchase documents, affected contract list, transferee capability evidence, and authenticated transfer instruments.
Set-Aside Certification Records
Current 8(a), HUBZone, SDVOSB, or other certifications with expiration dates and recertification requirements for the buyer.
Facility Security Clearance Documentation
Active FCL records, Key Management Personnel clearance levels, and any FOCI mitigation agreements currently in place.
DCAA Audit Reports
All Defense Contract Audit Agency audit reports from the past three years including any findings, corrective actions, and current status.
Contractor Performance Assessment Reports
CPARS ratings for all active and recently completed contracts showing performance history and any ratings below satisfactory.
Audited Financial Statements
Three years of audited financials required for novation package and buyer diligence, including government contract revenue breakdowns.
Board Resolutions Authorizing Sale
Corporate resolutions approving the transaction and authorizing officers to execute novation agreements with contracting officers.
Subcontracting Plan Template
Draft interim subcontracting agreement for the novation period specifying performance obligations, payment terms, and cooperation covenants.
Legal Opinion on Contract Transfer
Outside counsel opinion confirming the legal basis for novation and identifying any contracts that cannot be novated under current FAR guidance.
Selling Your Business If You Have Government Contracts — FAQ
Selling a Business With Government Contracts? Let’s Talk Strategy.
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Sources & References
This article is based on publicly available data from regulatory agencies, industry associations, and peer-reviewed publications. All sources are independently verifiable.
- 141 U.S.C. Section 6305 — Prohibition on transfer of contract
Cornell Law · 2024
- 2FAR 42.12 — Novation and Change-of-Name Agreements
Acquisition.gov · 2026
- 332 CFR Part 117 — National Industrial Security Program
Cornell Law · 2021
- 4SBA 8(a) Business Development Program
SBA · 2024
- 5IBBA Market Pulse Q4 2024
IBBA · 2024
- 6Close or Sell Your Business
SBA · 2024
- 7M&A Deals: Key Trends 2025
SRS Acquiom · 2025
- 8Calder Capital Market Update Q2 2025
Calder Capital · 2025
Editorial disclaimer: This content is provided for informational purposes only and does not constitute legal, tax, or financial advice. Every business sale is unique — consult qualified professionals for guidance specific to your situation. Ad Astra Equity is not a law firm, accounting firm, or registered investment advisor.