In the private sector, when Company A buys Company B, the contracts transfer automatically. In the federal sector, this is illegal. The Anti-Assignment Act prohibits the transfer of government contracts. To get around this, the government must approve a “Novation Agreement,” essentially agreeing to recognise the buyer as the successor in interest. This is a complex legal process, but technically, it all revolves around the entity registration.
For the buyer, the due diligence phase must include a deep dive into the target’s renew SAM history. Has the target maintained continuous registration? Are there debt flags? Once the deal closes, the buyer cannot simply change the name in the database. That triggers a validation mismatch with the IRS and CAGE systems. The transfer of the digital identity must be choreographed perfectly with the legal novation to ensure that invoices don’t get rejected during the transition period.
Stock Purchase vs. Asset Purchase
The structure of the deal dictates the administrative burden. In a “Stock Purchase” (buying the entity whole), the UEI remains the same. You just update the ownership data. In an “Asset Purchase” (buying just the contracts), you may need to move the contracts to a new UEI. This is much harder. It involves the government modifying every single active contract. Understanding the registration implications of the deal structure before signing the Letter of Intent can save months of administrative pain and legal fees.
The “Successor-in-Interest” Validation
When a novation occurs, the CAGE code office (DLA) must validate the new owner. They will ask for the novation agreement and the bill of sale. Until they sign off, the CAGE code may be locked. This means no payments. We have seen acquisitions where the new owner assumed cash flow would continue day one, only to face a 90-day payment freeze while the CAGE code was updated. Cash reserves are essential during this transition.
Recertification of Size Status
If a large company buys a small business, the small business may lose its “small” status due to the affiliation rule. The contracts may require “Recertification of Size” upon novation. If the target company’s value was based on its backlog of small business set-aside contracts, and the acquisition forces a recertification that makes them “other than small,” that backlog might be worthless for future option years. The entity profile is where this size status is publicly tracked. A strategic buyer models this size shift before closing the deal.
Legacy Debt and the “Do Not Pay” List
The federal database tracks debt. If the target company owes money to the government (e.g., unpaid payroll taxes from 5 years ago), that debt stays with the UEI. If you buy the entity, you buy the debt. The government will offset (garnish) your contract payments to pay it back. Checking the target’s status for “Debt Subject to Offset” is a critical step in financial due diligence. You do not want to buy a company only to find out their first $50,000 in revenue is already spoken for by the Treasury.
Conclusion
M&A in the federal sector is high-stakes poker. The entity registration contains the “tells” that reveal the true value and risk of the target. By mastering the mechanics of novation and entity transfer, investors can ensure that they are buying an asset that generates cash, not administrative liabilities.
Call to Action
Ensure your acquisition closes smoothly by letting our experts manage the entity transfer process.
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Federal Contracting Center strives to provide the best SAM registration and renewal service. If your business needs to register with the U.S. Government’s System for Award Management (SAM) or renew a registration, call us today, and we’ll simplify the process.
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