What are Important Concerns for Merger and Acquisitions M&A of Small Business Firms in Government Contracting

Theodore P. Watson, Esq Strategic companies often seek to acquire small businesses that currently have government contracts. However, buyers must seriously invest the time and resources to make sure that they are considering the essential issues that can arise.

One of the common issues that arise is whether the acquired company will maintain its small business status? Quite a few facts must be known. There is no straightforward answer. Government contractor merger and acquisition attorneys can spend weeks or months going through the various scenarios and make an educated guess as to whether the purchased company will remain as a small business under SBA size standards. 13 C.F.R. § 121.404 creates some concerns when companies acquire small business government contractors or there is a merger and acquisition.

New Requirements: The revisions to SBA small business size and affiliation laws added a new requirement under 13 C.F.R. § 121.404 that small business offerors must recertify their size status within 30 days of a merger, sale, or acquisition, even if the solicitation does not explicitly demand it. This recertification obligation applies both when contract novation is not required and when the merger sale, or acquisition occurs after the offer but before the award. Consequently, small businesses that can no longer meet the small business certification after an acquisition will lose eligibility for small business set-aside awards related to pending proposals.

The general rule is that courts and SBA regulations tend to suggest that small businesses that have already submitted their proposals but not yet awarded, have to recertify their status when there is some level of acquisition or merger of companies.

Large companies that acquire small businesses must consider that the target companies may lose their eligibility for these set-aside awards after the acquisition is finalized.

In other situations, the small business may still be able to bid on small business set-asides. This is where government contractor merger acquisition M&A lawyers can help.

Here is a popular case that our government contract small businesses M&A lawyers prevailed in:

In the case of HWI Gear, Inc. v. United States bid protest at the U.S Court of Federal Claims decided a case where the very mergers and and acquisitions issues of small business recertifications were of concern. The court’s decision was successful on our part. However, the decision provides insight into how the new recertification requirement from the SBA will impact buyers and their small business targets with pending bids and proposals.

As we pointed out during litigation, the court invalidated the award to Mechanix Wear, LLC due to the contracting officer’s failure to inquire about Mechanix’s change of size status following its acquisition and the offeror’s failure to recertify its status as required by FAR 52.219-28.

The HWI Gear case involved a Department of the Army small-business set-aside procurement. Mechanix, in its proposal, self-certified as small, but after the submission and before the award, it was acquired by Gryphon Investors. Mechanix informed the contracting officer about its change in corporate structure from a standard corporation to a limited liability corporation (LLC), without providing further details. The court held that both Mechanix’s failure to recertify its status and the agency’s failure to require the recertification violated FAR 52.219-28, which mandates small business contractors to recertify their size and socioeconomic status within 30 days of a merger or acquisition not requiring novation.

The lesson here is that there are several issues to consider when buying a government contractor small business. Merger and acquisition of a company that has government contracts take a lot of investigation and due diligence before a buyer executes the M & A agreements.

When initiating a merger or acquisition of a small business with government contracts, buyers must consider several additional factors to ensure a smooth and successful transaction:

1. Compliance with small business regulations: Buyers need to thoroughly understand the applicable small business regulations, such as the Small Business Administration (SBA) rules, as they play a crucial role in determining a contractor’s eligibility for small business set-aside contracts. It is important to assess whether the target business qualifies as a small business and if it will retain its eligibility post-acquisition. If the target loses its small business status, the buyer may no longer be able to benefit from the advantages associated with small business set-aside contracts, potentially impacting the financial viability and growth prospects of the merged entity.

2. Contract novation requirements: Buyers must carefully review the terms of the existing government contracts held by the target business. Certain contracts may require contract novation—a formal process that transfers the contractual rights and obligations from the original contractor to the acquiring entity. It is crucial to assess the novation requirements under FAR 42.12 and ensure compliance to avoid contract termination or legal complications. Failure to comply with novation requirements can result in the loss of valuable contracts and potential liability.

3. Due diligence and risk assessment: Thorough due diligence is essential to evaluate the target business’s financial health, contractual obligations, compliance with government regulations, and any potential legal risks. This includes examining the target’s financial statements, contract documentation, past performance, and any ongoing investigations or legal disputes. Buyers should engage government small business attorneys and financial experts experienced in government contracting to identify and assess potential risks and liabilities. Understanding the seller’s contractual relationships, customer base, and competitive position will help buyers make informed decisions and develop an integration plan that minimizes disruptions to ongoing operations.

By addressing these additional considerations, buyers can mitigate risks, ensure compliance with regulations, and maximize the value of the merger or acquisition of a small business with government contracts. Thorough preparation and diligent execution are key to a successful transition and the long-term success of the merged entity in the government contracting marketplace.

For immediate help planning and conducting your due diligence for a merger of a government contracting firm that is a small business, contact the small business M&A lawyers at Watson& Associates, LLC today. Call Toll- Free 1.866.601.5518. Speak to Theodore Watson.