Zachary, agree with many of ^redacted‌ 's comments. A couple qualifications. A majority of middle market and lower middle market government services deals are structured as equity deals taxed as asset deals to, among other things, avoid the novation process and related transactions that Mark flags, but still get a step up in basis and the ability to depreciate goodwill. If you use a preclosing F Reorg, you'll need to notify the government, but no novation. If you're navigating set aside contracts going from small to large or SDVOSB to non-set aside, you're even more likely to land on this structure (longer conversation). That being said, the novation process is an option and, though intimidating, it's another due diligence item and you may get comfortable. Ask a lot of questions: How sticky is the relationship? Who has the relationship with the KO? How long has the KO been on the contract? What's kind of contract? Is it a set-aside? Are there past performance aspects that need to convey? SBIR Phase I or Phase II involved? Clearances that could be dislodged? etc. etc. Net-net, if you're looking at a services business rather than a business selling goods to the government, you're more likely to get comfortable buying equity... happy to chat.

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Hi ^redacted‌: I'm a former active-duty Air Force contracting officer and I'm currently an EVP at a professional services firm directly supporting the US federal government. One thing you should keep in mind is that "set-asides"/socio-economic status doesn't transfer with the entity. A good example would be a "women-owned small business" (WOSB) being acquired by a majority male ownership and management team. The WOSB entity would lose it's status as a WOSB — similarly the same would occur with other types of entities (i.e., minority-owned, veteran-owned, etc.) unless the acquiring ownership and management team meet the respective requirements. With that said, you'd want to SERIOUSLY look at the customer/revenue concentration, as well as where the entity currently stands in terms of its growth. For many govcons, transitioning from a "small business" (based on NAICS code) to an "other than small business" is a real challenge, and some entities intentionally decide to "remain small" leading them to be more likely targets for a "lifestyle business" rather than one in which an successful exit might be achieved. Happy to chat about this further if you'd like!