M&A Series
The Hidden Risk in GovCon M&A: When Set-Aside Contracts Limit Your Buyer Pool
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.
Quick Tips for Selling a Business
Selling a business isn’t just a transaction; it’s a strategic journey that can transform your hard work into lasting value. Whether you’re considering an M&A exit in the near future or a few years down the road, planning ahead is key to securing the best outcome for you, your employees, and your legacy.
🔑 Here are some key steps to get started:
1️⃣ Valuation - Know your business’s worth and understand what drives its value.
2️⃣ Streamline Operations - Efficiency and profitability attract buyers.
3️⃣ Financial Clean-Up - Accurate records and financial clarity build trust.
4️⃣ Succession Planning - Ensure a smooth transition to retain value.
5️⃣ Engage with Verus Datum at launch - We will help you connect with M&A experts that can navigate complex negotiations for the best terms.
💡 Remember: Exit planning isn’t about leaving, it’s about preparing for your business’s future. Start now to make the process smooth, maximize value, and leave on your terms! #ExitStrategy #BusinessSale #MergerAndAcquisition #MABusiness #BusinessExit #SmallBusinessOwner #EntrepreneurLife #FuturePlanning #BusinessGrowth #MaximizeValue
An Example of Why Many M&A Deals Fail
If you research M&A, you’ll find a common statistic: more than half of deals fail. But what does that really mean? It means they fail to meet expectations.
I believe a big part of the problem is that deals aren’t managed well from the start. Brokers focus on EBITDA multiples. Buyers treat acquisitions as project exercises—a checklist of due diligence tasks with the sole goal of getting to closing. But are we looking deep enough?
Let me share a real-world story of a deal I did NOT close on the buy side.
A $32M Disaster Waiting to Happen
Company A had $40M in revenue, with 80% ($32M) tied to a single NASA contract expiring in 18 months. They had $4M in EBITDA, and the brokers were pushing for an 8x multiple—$32M.
Now, let’s put that into perspective:
The deal would take about six months to close.
That would leave the buyer only 12 months of guaranteed revenue.
If the contract wasn’t renewed, $32M in revenue would drop to $8M overnight.
I made an offer: $6M with an earn-out based on contract renewal. If we won the follow-on, the sellers would get more. The advisor called my offer offensive. My response?
"Without us, your client is out of business in two years."
Who was right? Well, let’s just say that company is no longer in business.
Why M&A Deals Fail
Buying that company for $32M would have been insane. The broker didn’t understand how to properly value the business or educate their client, and as a result, the deal collapsed—not just with us, but with everyone.
This is why so many deals fail.
Sellers are ill-advised and ill-prepared for the realities of their business value.
Buyers don’t look beyond the numbers to assess risk and long-term viability.
Brokers push multiples based on anecdotal conversations and blue-sky forecasting, rather than what actually makes sense.
M&A is More Than Just EBITDA Multiples
If you’re looking to sell or buy a business, avoid advisors who focus only on multiples. Valuation is a piece of the equation—but not the only piece.
Successful deals happen when:
✅ The right expectations are set.
✅ Due diligence is used as an integration tool, not just a checklist.
✅ Long-term relationships are built between buyer and seller.
If the only thing a dealmaker cares about is EBITDA, expectations won’t be met—and the deal will fail.
Final Thought
M&A isn’t just about getting to the closing table—it’s about making the right deal. If sellers don’t properly prepare and buyers don’t look beyond the surface, the numbers won’t matter. The deal will fail—just like Company A.