Federal contracts are not freely assignable. If your firm is acquired, merges, restructures its ownership, or transfers assets to a new legal entity, your existing federal contracts do not automatically follow unless the government agrees to recognize the new entity as the contractor of record. That agreement is a novation, and for an SDVOSB firm it carries a second, higher-stakes question layered on top of the ordinary contract mechanics: does the ownership change put your SDVOSB certification itself at risk.
What a Novation Agreement Actually Does
A novation is a formal, tripartite agreement among the government, the original contractor, and the successor entity, under which the government recognizes the successor as having all the rights and obligations of the original contract. Without it, the successor entity has no legal standing to perform, invoice, or receive payment under a contract that was awarded to the predecessor entity — regardless of how the underlying business transaction was structured or how confident the parties are that it is “basically the same company.”
When Novation Is Required
Novation is generally required whenever there is a transfer of assets resulting in a change of the contracting party — a stock sale that changes controlling ownership without changing the legal entity typically does not require novation, since the same legal entity remains the contractor. An asset sale, a merger where a new surviving entity is formed, or a corporate restructuring that moves the contract into a different legal entity generally does require it. The distinction between a stock transaction and an asset transaction is exactly where firms get this wrong — get transaction counsel with federal contracts novation experience involved before the deal structure is finalized, not after.
The Novation Process Under FAR 42.12
The successor must submit a novation package to the responsible contracting officer, which includes evidence of the transfer (the purchase agreement, merger documents, or equivalent), a list of all affected contracts, evidence the successor is a legally organized and existing business entity, and a formal request that the government recognize the successor. The contracting officer reviews the package, may request additional information, and if satisfied, executes the novation agreement. This process is not instantaneous — expect it to take weeks to several months depending on the number of affected contracts and the responsiveness of the contracting activity, and continue coordinating closely with your contracting officers on invoicing and performance continuity while it is pending.
The SDVOSB-Specific Risk Novation Does Not Address
A novation agreement transfers the contract. It says nothing about whether the successor entity still qualifies as an SDVOSB. These are two entirely separate questions evaluated by two different processes, and firms that treat a successful novation as confirmation that their SDVOSB status survived the transaction are making a serious mistake.
SDVOSB eligibility depends on a service-disabled veteran maintaining unconditional ownership of at least 51 percent of the business and control over its management and daily operations — the full criteria are spelled out in the SDVOSB requirements checklist. Any transaction that changes ownership percentage, brings in new equity partners, changes board composition, or alters management control can jeopardize that eligibility — independent of whether the deal is structured as a stock sale or asset sale, and independent of whether novation is required or granted.
What Triggers SDVOSB Reassessment
A change of ownership, a change in the veteran’s degree of unconditional control, the addition of minority investors with rights that could be read as limiting the veteran’s control (supermajority voting requirements, veto rights over ordinary business decisions), or a change in the officer or board structure can all trigger a review of continued eligibility. The SBA can conduct this review at recertification, in response to a status protest from a competitor, or on its own initiative if it becomes aware of a material ownership change.
This is why any transaction — sale, merger, new investor, even a change intended purely for estate planning or tax purposes — needs to be evaluated for SDVOSB impact before it closes, not after. Once the deal is signed, unwinding a structure that inadvertently breaks eligibility is far more disruptive than structuring it correctly the first time.
Sequencing the Transaction Correctly
Engage counsel with both federal contracts novation experience and SDVOSB eligibility experience before the deal structure is finalized — these are related but distinct specialties, and generalist M&A counsel frequently misses the SDVOSB-specific exposure entirely. Model the post-transaction ownership and governance structure against SBA’s control and ownership requirements before signing anything, not as a post-closing cleanup item. If the transaction as structured would jeopardize SDVOSB eligibility, restructure it before closing — earnout structures, board composition, and veto rights can often be adjusted to preserve eligibility without abandoning the underlying business rationale for the deal.
What Happens If Eligibility Is Lost Mid-Contract
Losing SDVOSB status does not automatically terminate contracts already awarded and being performed as an SDVOSB set-aside, but it does end your eligibility for new set-aside awards going forward, and it can trigger a status protest on any pending competition. For contracts still in the proposal or evaluation stage at the time of a status change, the impact is more immediate and more severe — you may no longer be eligible for the award at all. This is precisely why the SDVOSB impact analysis has to happen during deal structuring, before any pending competitions are affected, rather than as a reaction after a competitor files a status protest.
Bottom Line
Novation and SDVOSB eligibility are two separate approvals governed by two separate frameworks, and a successful novation tells you nothing about whether your certification survived the transaction. Any ownership change — sale, merger, new investor, restructuring — needs both a novation strategy and an independent SDVOSB eligibility analysis, sequenced before the deal closes, not discovered afterward when a competitor files a status protest or a contracting officer flags the change during your next recertification.