Why does the anti-assignment statute sit in a manufacturing LOI?
Federal contracts are not ordinary receivables. The anti-assignment statute and FAR Subpart 42.12 exist so the government knows who it is buying from. A manufacturer that treats a prime contract like a commercial PO will write an asset-sale LOI that cannot be performed. Stock sales can leave the contractor entity in place and still require a change-of-name or a notice. Asset sales generally require a novation if the buyer wants to be the contractor.
The contracting officer decides whether to recognize the successor. That decision is not a broker deliverable. HedgeStone's job is to put the backlog on a schedule, flag which lines are federal, and refuse a process that pretends the schedule is a commercial consent list. Read customer contract assignment for the commercial cousin. This page is the FAR cousin.
Aerospace and defense files are the usual suspects. A job shop with one Army spare contract is still in this statute. Size of the book does not create a de minimis exception you can invent in a teaser.
What does a novation package actually contain?
FAR 42.12 lists documents the contractor typically submits: the proposed novation agreement, evidence of the transfer of assets, a certified copy of the transaction documents, an opinion of legal counsel, and a list of affected contracts. The contracting officer can ask for more. Guarantees, a performance plan, and evidence that the successor can perform are common. Publish the live FAR text as the checklist, not a blog memory.
| Artifact | Why the CO cares | What a CIM must not promise | Who prepares |
|---|---|---|---|
| Proposed novation agreement | Legal recognition of the successor | "Automatic assignment at close" | Gov-con counsel |
| Evidence of asset transfer | The company that will perform | A draft bill of sale with no list | Deal counsel |
| List of affected contracts | Scope of recognition | "All government work transfers" | Seller + counsel |
| Capability / guarantee evidence | Performance risk | "The buyer is obviously qualified" | Buyer + counsel |
| Accounting-system facts | Cost-type / flexibly priced work | "DCAA will be fine" | Controller + DCAA counsel |
SBA 7(a) still caps at $5 million (Source: SBA). An individual buyer who needs both 7(a) and a novation is stacking calendars. Write both into the process.
How should close, subcontracting, and interim performance be designed?
Parties sometimes close the equity or the assets and leave the seller in place as the recognized contractor while a novation is pending, with a subcontract to the buyer. That structure is a risk allocation, not a default. It can create affiliation, payment, and export-control messes. It can also be the only way a CO will keep work moving. Counsel designs it. The LOI should either authorize that structure or forbid it. Silence is how week twelve becomes a fight.
Do not tell employees the buyer "already owns the Army work" before the CO has recognized anyone. Rumors on a cleared or export-controlled floor are how you get a customer call you cannot walk back.
How do set-asides, CMMC, and ITAR attach to the same backlog?
Novation recognizes a successor contractor. It does not move an 8(a), SDVOSB, WOSB, or HUBZone badge. See loss of set-aside status. It does not certify CMMC. See CMMC and DFARS. It does not replace a DDTC notice. See ITAR and EAR. A buyer who needs all four is buying a federal stack, not a job shop with a logo.
Price the stack before you exclusive. A high bid that cannot hold the set-aside or cannot novate the only contract that matters is a walk, not a trophy.
What does a single-contract file look like when that contract is federal?
A 28-person machine shop has 40 percent of sales on one Army spare contract and the rest commercial. The owner wants an asset sale for tax reasons. The buyer's LOI assigns "all contracts." Week four, government-contracts counsel says FAR 42.12 applies and the CO will want a package that does not yet exist. The commercial work can assign if those POs allow it. The Army work cannot.
The process then splits. Either the parties move to a stock sale so the contractor entity survives, or they build a novation path with an interim subcontract, or they price the commercial book alone and treat the Army work as a maybe. Each path is a different valuation. Pretending they are the same path is how the 223-day median (Source: BizBuySell) becomes a failed exclusive.
HedgeStone will put the federal lines on a one-page schedule before teasers go out: agency, contract type, set-aside, novation likely, CMMC clause present, ITAR flag. That page is not a novation package. It is how you stop lying to yourself.
Jason Taken is a business broker. He does not submit novation packages or call contracting officers on your behalf as if he were counsel. Educational information only. Confirm FAR 42.12 with government-contracts counsel. Data current as of September 2026.
Who talks to the contracting officer, and when?
The seller's existing government-contracts counsel, or newly retained counsel, should own agency contact. A broker introducing a buyer to a CO before an NDA and before a novation strategy is how rumors start inside the program office. Sequence it: numbers first, federal schedule second, counsel-to-counsel third, CO contact when counsel says the package is real. Selling the company without that sequence is how a quiet process becomes a customer conversation you did not authorize.
If the CO asks for a meeting, prepare a performance plan that names the plant, the key people who will stay, and the quality system that already ships the part. Do not send a teaser. Do not send a CIM. Send what counsel says the FAR and the CO actually asked for.
How should DCAA history change the data room?
Cost-type and certain flexibly priced contracts bring audit exposure the buyer inherits. Incurred-cost submissions, accounting-system opinions, and pending questioned costs belong in the room. A seller who recasts a DCAA reserve as a one-time add-back is asking the QoE team to fight the government. Put the correspondence in the folder. Let quality of earnings and government-contracts counsel read the same PDF.
A buyer who has never lived through an incurred-cost audit will under-staff the first year. Budget a government-contracts accountant, not just a plant-floor controller. The multiple does not pay that salary by itself. The cash-flow model must.
What if only some contracts are novatable and others are not?
Split the backlog on a spreadsheet the buyer can defend to a lender. Column one: commercial work that assigns or re-quotes. Column two: federal work counsel believes can novate on a defined calendar. Column three: federal work that will die or finish under the seller. Price each column. A blended multiple on a blended fantasy is how SBA underwriters and QoE teams both walk.
If column three is the profit, you are selling a wind-down with a machine list, not a going concern. Say that in the first strategy call. Some owners still sell. They sell a different thing.
How do facility clearances and FOCI change the same week?
A facility clearance is not a novation and not a set-aside. Foreign ownership, control, or influence can block a clearance even when FAR 42.12 would otherwise be available. If any bidder is foreign or foreign-backed, stack CFIUS and clearance counsel onto the same Gantt chart. A CO who will novate a commercial-item contract may still refuse a classified follow-on.
Do not put classified documents in the ordinary data room. Use the cleared channel counsel names. HedgeStone will not host classified files on a marketing site or in a generic virtual room.
What should individual buyers hear before they fall in love with a federal book?
An owner-operator who can run the cell may still be the wrong contractor in the CO's eyes if the quality system, the accounting system, or the responsible management have never touched federal work. Personal guarantees on a 7(a) do not impress a contracting officer. Capability evidence does. If the buyer cannot write that evidence, they are buying iron and a commercial remainder. Help them see that before they pay a diligence deposit they will resent.
Change-of-name agreements under FAR 42.12 are not novations. If the entity remains the same contractor and only the name changes, counsel may use the change-of-name path. If assets move to a new entity, you are in novation territory. Mixing those two words in an LOI is how both sides draft the wrong agreement. Put the correct word in the letter after counsel picks it.
Past performance as a bid evaluation factor also fails to move automatically. The successor may need to argue past performance through novation recognition or through a newly scored bid. A CIM that says the buyer inherits CPARS as if they were furniture is wrong. Government-contracts counsel can explain what, if anything, travels.
A six-week novation calendar that actually gets used
Week 1. Pull every federal contract, order, and BPA. Mark cost-type versus firm-fixed. Mark set-aside. Mark whether a CMMC or DFARS cyber clause sits in the vehicle. This list is the only honest starting point.
Week 2. Government-contracts counsel chooses novation versus change-of-name versus 'this work will not travel.' Deal counsel aligns the purchase-agreement structure to that choice. The broker stops using the word assign for federal lines.
Week 3. Buyer writes a performance plan that names the plant, the quality system, and the people who will stay. If those people have not signed retention, the plan is fiction. See key-employee agreements.
Week 4. Package drafts circulate. The CO is not copied yet. Internal contradictions between the asset list and the contract list get fixed before anyone calls the agency.
Week 5. Counsel authorizes contact. The meeting uses the FAR checklist, not a teaser. If the CO wants a guarantee, the buyer prices it or walks.
Week 6. LOI walk rights get rewritten to match reality. If recognition will miss the hoped-for close, the date moves or the federal column is carved out. No champagne on a maybe.