If you are looking to purchase company that does work with government agencies, it is critical to conduct the proper due diligence before the transaction is completed. Make sure you have a full grasp of the rules and regulations that apply to that company and that the seller has complied by the rules. At Kreischer Miller, we have assisted many clients in completing due diligence for government contractors and we have represented buyers who have received notices from the government that they are not in compliance with certain rules and/or regulations. It’s much easier to address issues as part of due diligence than to respond to a government auditor or the contracting officer of the agency.

During the due diligence process, a potential buyer should ask if the company does business with any government agency and if it does, obtain a copy of the contract to read its terms and conditions. Most federal government contracts require that the seller be in compliance with the Federal Acquisition Regulations. These regulations cover everything from contract procurement, contracting methods, and contract types to special programs, general contracting requirements, contract management, and protests, disputes, and appeals. In most cases, the federal government will have a “most favored nation” clause in its contracts. This means that the federal government is entitled to most favored pricing, all things being equal. If the seller is providing discounts or rebates to private-sector clients and not providing the same terms to the government, a buyer has to be aware of this exposure.

Additionally, if the company’s customers are in different states, the buyer needs to understand the rules and regulations of each state to verify that the seller is in compliance. Some initial questions potential buyers may want to ask the company, depending on individual circumstances, include:

  • What types of contracts do you have with the government? Most contracts are firm-fixed price contracts, but some are time-and-materials while others may be cost-plus. If the contracts are cost-plus, you will want to make sure you understand how the costs are developed and that there will be no major changes post-acquisition.
  • Are there any set aside contracts? Some contracts are “set aside” for small or disadvantaged businesses. If you purchase a company that has these types of contracts, you will have to recertify that you still meet the credentials. If you do not, the contracts will probably have to be rebid.
  • Has there been any correspondence between you and any government agency that may impede the buyer in continuing the work?

Most advisors will tell a potential buyer that they should be purchasing the assets of the seller versus the stock. However, there are a few things to keep in mind. Since the government contracts are with the selling company, a buyer would have to get the existing contracts transferred to the purchasing company. This can be a time-consuming process and the government may decide not to transfer the contract and put it back out to bid. In most cases, we find it better to purchase the stock of these companies if the government business is significant to the seller.

Purchasing a company that has significant government contracts may be a very worthwhile venture for your organization. However, it is always important to consult with both an attorney and an accountant who are familiar with the issues surrounding government contractors to be sure that you understand all of the potential risks as well as the benefits.

David E. Schaffer can be reached at Email or 215.441.4600.