Many government contracting businesses rely on set-aside contracts (SDVOSB, 8(a), WOSB, HUBZone). While great for winning work, they can severely limit buyers when selling. If the new owner doesn’t qualify, those contracts can disappear, putting the deal at risk. I’ve seen this scenario play out many times—companies built around their 8(a)-designation scrambling to sell as their status nears expiration. If your business relies solely on its set-aside status rather than its product, capabilities, or value proposition, you may face a lower valuation and a severely limited buyer pool. Here’s how buyers and sellers can navigate this challenge:
1. Assess Set-Aside Risk Early
• Sellers: If 50%+ of revenue comes from set-aside contracts, your buyer pool is limited. I recommend that no one portion of your revenue base is more than 30% of your base, and you spread out the contract set aside types.
• Buyers: Ask for a contract breakdown upfront to avoid surprises. Be sure you are buying for past performance and capability as much as you are for current contracts. And identify a future pipeline.
2. Plan for a Transition Strategy
• Some contracts allow for temporary transition periods, but others don’t.
• Explore mentorships, JVs, or keeping the seller involved during rebid cycles.
3. Structure the Deal to Share Risk
• Use earnouts, seller financing, or escrow to offset lost contracts.
• Tie part of the purchase price to contract retention success.
4. Reduce Set-Aside Dependency Before Selling
• Sellers: Start pursuing unrestricted contracts 1-2 years before selling.
• Buyers: If you don’t qualify, look at partnering with a certified firm.
5. Get GovCon-Specific M&A Advice
• Standard M&A strategies don’t always work in GovCon.
• Work with GovCon attorneys to review novation risks, contract eligibility, and DCAA compliance.
Final Thought:
Ignoring set-aside risks can tank a deal. Buyers must understand contract restrictions, and sellers should prepare early to expand their buyer pool. A well-planned exit ensures higher valuation and a smoother sale.