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What to Expect When Buying Another Company That Happens to be a Contractor

shaking handsSpeaking from personal experience, the process of going through with a business acquisition as a seller or a buyer is never easy. An acquisition involving two government contractors can be especially tricky. Use these guidelines to make your transaction less complicated and less stressful.

One proven way to grow your government contracting company is to acquire another business with its own book of government business, but you must understand the essence of the transaction and how the operations of the acquired company may impact your cost model. This is especially true if your company and the company you are acquiring is a federal contractor with cost reimbursable contracts. You must pay special attention to the impact this transaction will have on your indirect expense rates and the revenue previously recognized on cost reimbursable contracts.

A newly acquired business base and its associated indirect expense rate structure will need to be factored into your pricing model. Factoring the new business base and its supporting costs should be part of a business forecast to determine the impact on year end indirect expense rates. For example, how does adding direct labor to your overhead base impact your indirect rates if costs in your overhead pool don't increase by a similar percentage? Will your company recognize indirect cost variances that could require a refund to your customer - the federal government - based on your current provisional indirect cost rates? 

Acquiring a government contractor means having to deal with an overlay of due diligence considerations not present when buying a business with an all commercial client base. You will need to address the statutes and regulations governing the acquired company before closing the transaction to assure compliance and to avoid regulatory issues that may crop up later. These issues are outlined below to help you stay on top of things as you grow your company through acquisition.

Procedural aspects of the acquisition include, but are not limited to:

  1. Novation Agreements -- The Anti-Assignment Statute (41 U.S.C.15) prohibits transfer of a government contractor to a third party unless the government agrees to recognize the third party as successor in interest. Therefore, acquiring companies must understand the regulations set forth in Title 48 CFR Part 42.1200. According to the regulations, contractors must provide a formal notice to the government, the submission of detailed information to the contracting officials, and a standard novation agreement detailing the rights and obligations of the transferor and the transferee.

  2. Subcontracts -- The acquiring company will need to review all existing subcontracts of the acquired company to ensure that they will not be affected by the acquisition. Check to determine if any subcontracts include provisions regarding assignment and if so, ensure the assignment can take place and that all necessary actions are taken. Make sure any subcontracts contain the flow-down clauses required by FAR and determine whether the prime or subcontractor has any potential claims against the other.

  3. Security Clearances -- Does the acquired company hold facility security clearances? This is of particular importance when the acquisition is structured as an asset sale since security clearances do not automatically transfer to the acquiring company along with other assets. The acquiring company must have its own facility security clearance under this scenario.

  4. Outstanding Proposals for Government Work -- Both parties need to identify the proposals the acquired company has that are outstanding for possible award. If these proposals relate to procurements where the Truth in Negotiations Act applies (where the price is expected to exceed $2 million), the parties will need to determine whether any additional cost and pricing data disclosure needs to be made to the government.

  5. Cost Accounting Standards -- According to 41 U.S.C. 422, certain contractors must comply with the Cost Accounting Standards (CAS) and disclose their cost accounting practices. CAS contains a comprehensive set of rules that ensure the contractor's accounting systems are compliant and that actual work billed to the government is consistent with the estimates contained within a proposal. If applicable, the parties will need to determine whether revisions must be made to the CAS disclosure statements and what standards may apply to their transaction.

The information presented above shows that, while business acquisitions are never easy, an acquisition involving one or more government contractors is often fraught with details not encountered in commercial B2B acquisitions .

Why not make your transaction somewhat simpler and more certain, by using an accounting software program that works with your acquisition? Using the power of SYMPAQ , you can consolidate the operations of the company and the acquiring company to assess the impact of indirect expense rates, giving you a key metric for future planning.

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