Selling a Federal Contractor’s Assets Can Require Government Novation

Identify which legal entity will perform after closing

An asset sale involving federal contracts needs a government-contract transfer workstream before the seller treats the backlog as freely transferable. FAR subpart 42.12 describes recognition of a successor in interest through novation where appropriate. It distinguishes asset transfers from a stock purchase that leaves the contracting party legally unchanged, in control of the assets, and performing the contract. Other ownership-change issues may still require attention even when a novation agreement is unnecessary.

Ask government-contract counsel to map every active contract, task order, unpaid balance, performance obligation, and contracting officer. Identify which entity holds the award now and which entity will employ the people and own the performance assets after closing. A purchase agreement between buyer and seller cannot compel the government to recognize the buyer. The transaction timeline should therefore reflect the actual agency process and required documentation.

Model cash if recognition is delayed

Assume a hypothetical asset sale includes contracts expected to produce $180,000 of monthly collections and $135,000 of monthly operating cash costs. A two-month disruption in the expected collection timetable creates a $360,000 gross collection gap, while two months of operating costs total $270,000. These numbers do not establish a right to withhold performance or a predicted agency delay. They show why the buyer and seller need a funded transition arrangement rather than assuming invoicing changes instantly at closing.

Compare who will pay employees, submit invoices, receive payments, and bear performance risk during the transition under counsel's supported structure. If a holdback is proposed, identify its release conditions and whether it actually supplies operating liquidity. The seller's proceeds model should not count cash that remains committed to contract performance or unresolved transition obligations as available for personal distributions.

Prepare the agency package early

The FAR provides a written-request process through the responsible contracting officer and specifies supporting information for successor recognition. The government evaluates whether recognition is in its interest and reviews the proposed successor's responsibility and performance capability. The detailed package can include transaction documents, affected-contract lists, organizational information, and other required evidence. Ask counsel to use the actual applicable checklist and agency instructions rather than an informal promise that the buyer has experience.

Preserve requests, submissions, questions, agency correspondence, executed agreements, and resulting contract modifications. Reconcile the affected-contract schedule with the data room and the accounting system. Include unbilled and billed-but-unpaid amounts so a contract with little remaining performance is not overlooked. If several offices are involved, determine the responsible officer using the governing process and coordinate information consistently.

Keep the seller’s remaining obligations visible

If the government does not concur in a transfer, the original contractor can remain obligated, and failure to perform can have serious consequences. Do not dissolve the selling entity or remove its performance capacity merely because the private deal has closed. Counsel should explain the transaction's required guarantees, liabilities, cost matters, and continuing obligations. The owner needs that explanation in the post-closing cash and compliance plan.

Separate novation from changes in registrations, banking, security requirements, certifications, and subcontract arrangements. Some matters have their own rules and cannot be inferred from a signed purchase agreement. Assign owners and completion evidence to each workstream. The company should continue to track contract closeout, final payments, and records after the main transfer is recognized.

Before signing, have the sale team review a single timeline showing legal closing, government submissions, expected performance, invoice responsibility, and funding. Identify which assumptions remain uncertain and the contractual response if they change. The practical goal is a sale structure that preserves contract performance and produces a realistic seller payday, with government recognition treated as an actual process rather than a boilerplate assignment sentence hidden at the back of the agreement.

Maintain enough access to the former contractor’s books and personnel to answer later agency questions. Final overhead and contract closeout issues can persist after the owner receives the main purchase payment. Identify who pays those administrative costs and who may sign responses. A records-access clause is more useful when it names the responsible custodian and a workable delivery process.