Short answer: For most private companies, a change of ownership is a contract and tax question. For a federal contractor, it is also a regulatory one. Depending on the company, a sale, a buyout, a transfer to family or an owner’s death can call for a novation agreement, an SBA size or status recertification within 30 calendar days, a changed-condition report for a facility clearance, and ITAR registration notices on a 5-day or 60-day timeline. The time to plan for them is in the buy-sell agreement and the estate plan, not after closing.
Many Florida aerospace, defense, engineering, software and manufacturing companies on the Space Coast are privately held by a founder or a few owners. When an owner sells, brings in a partner, hands the company to family or dies, a government contractor ownership change sets off rules an ordinary small business never sees. Here is what each rule says and how to plan for it.
Why this is different from ordinary succession
The basics of succession, such as separating ownership from control, apply to every owner, and our article on business succession planning for Florida owners covers them. Supplier contract flow-downs, IP ownership and sale readiness are covered in our Space Coast business growth article. This article covers only what changes when the company holds federal contracts, an SBA small-business status, a facility clearance or ITAR registration.
Federal contracts: asset sale vs. equity sale
The starting rule is federal law. Under 41 U.S.C. § 6305(a), the party that receives a federal contract or order may not transfer it, or any interest in it, to another party. A purported transfer in violation of that rule annuls the contract or order as far as the federal government is concerned.
The Federal Acquisition Regulation (FAR) explains how a buyer can still take over a contract. Under FAR 42.1204(a) (42.903(a) under the FAR overhaul’s Part 42 deviation used by DoD, NASA and most agencies), the government may recognize a third party as the successor to a contract through a novation agreement, when it is in the government’s interest. That applies when the third party’s interest comes from a transfer of all the contractor’s assets, or of the entire portion of the assets involved in performing the contract. Examples include an asset sale with the buyer assuming liabilities and a transfer incident to a merger.
Under FAR 42.1204(b) (42.903(b)), a novation agreement is unnecessary when ownership changes through a stock purchase, there is no legal change in the contracting party, and that party remains in control of the assets and keeps performing the contract. The FAR adds that, whether the deal is an asset purchase or a stock purchase, there may still be ownership-change issues that should be addressed in a formal agreement with the government.
Asset sale vs. equity sale, in short:
- Asset sale: the buyer’s entity needs the government to recognize it as the successor, which means a novation agreement.
- Sale of shares or membership interests: the same entity keeps the contracts, so novation is generally not needed, but the SBA, clearance and ITAR rules below may still apply.
Deal structure, and which entity holds each contract, drives the paperwork, so it helps to know both before signing a letter of intent. Our pages on mergers and acquisitions and when to walk away from an acquisition cover the broader deal process.
Small-business set-asides: the 30-day recertification
If the company won contracts as a small business or under an SBA program, the SBA’s rules add a clock. Under 13 CFR § 125.12(a), recertification of size and small business program status (8(a), HUBZone, WOSB/EDWOSB or SDVOSB) is required within 30 calendar days of a merger, acquisition or sale of or by the company or an affiliate that changes the controlling interest. The company and the acquiring company must each recertify if each has received an award as a small business or program participant (§ 125.12(a)(1)). The SBA’s size rules point to the same section (13 CFR § 121.404(i)).
Recertification does not change the terms and conditions of an existing award (§ 125.12(a)(3)). What it can change is what comes next. Under § 125.12(e)(2), a recertification showing that the company no longer qualifies as small, or no longer qualifies for its program, can make it ineligible for some pending set-aside or reserved awards, depending on when the triggering event happens relative to the offer, and can limit which future set-aside or reserved awards it may compete for.
In plain terms, a buyer’s size, or whether a new owner fits a program’s requirements, can change what the company can bid on after the deal.
Facility clearances: reporting changed conditions
A company cleared for access to classified information has reporting duties of its own. Under 32 CFR § 117.8(c)(7), contractors must report certain changed conditions, including:
- a change of ownership or control of the contractor, including stock transfers that affect control of the entity (§ 117.8(c)(7)(i)); and
- any change to the information previously submitted for key management personnel (KMP), including, as appropriate, the names of the individuals the contractor is replacing (§ 117.8(c)(7)(iii)).
In practice, the company’s facility security officer (FSO) submits these reports to the cognizant security agency. Bring the FSO into ownership planning early. We can assist with these reports, working alongside your FSO on what to report and when.
ITAR-registered companies: 5-day and 60-day notices
Companies registered with the Department of State’s Directorate of Defense Trade Controls (DDTC) under the International Traffic in Arms Regulations (ITAR) have two notice rules to watch.
- Within 5 days: Under 22 CFR § 122.4(a), a registrant must give DDTC a written notification, signed by a senior officer, within five days of a change in, among other things, its legal organization structure, its ownership or control, or its board of directors, senior officers, partners or owners.
- At least 60 days in advance: Under § 122.4(b), a registrant must notify DDTC by registered mail at least 60 days in advance of any intended sale or transfer to a foreign person of ownership or control of the registrant or any entity of it. That notice does not replace any separate approval the ITAR requires for exports to a foreign person.
A buyer with foreign ownership changes the timeline, because the 60-day notice has to go out well before closing. We can assist with these filings, working alongside your export-compliance advisor.
Building these rules into the buy-sell agreement and the estate plan
These deadlines do not wait for an estate to be settled. Relying on estate administration to decide who controls the company is usually too slow for a 5-day or 30-day window, which is one reason our succession planning article stresses planning ahead.
LLCs
Under Florida’s LLC Act, a member who dies is dissociated as a member (Fla. Stat. § 605.0602(7)(a)). A person who receives a transferable interest gets the right to the distributions the transferor would have received, but not the right to take part in management (§ 605.0502(1) and (2)). The deceased member’s legal representative may exercise the member’s rights to settle the estate, including any power the member had to let a transferee become a member (§ 605.0504).
For a government contractor, the point is to name, in the operating agreement, who steps into management quickly. A change in senior officers or owners starts the 5-day ITAR notice, and a change in key management personnel is a reportable changed condition under the clearance rules. Our articles on LLC operating agreements and ownership vs. control go deeper.
Corporations
Florida lets a corporation’s articles, bylaws or a shareholder agreement restrict share transfers (Fla. Stat. § 607.0627(1)). A restriction can give the corporation or others a first opportunity to buy, require approval of a transfer, or prohibit transfers to designated persons or classes of persons, as long as the approval or prohibition is not manifestly unreasonable (§ 607.0627(4)). A shareholder agreement that meets § 607.0732 can also establish who serves as directors or officers and how they are selected (§ 607.0732(1)(c)). Together, these let owners screen buyers and plan leadership changes before shares move.
Incapacity
A power of attorney terminates when the principal dies (Fla. Stat. § 709.2109(1)(a)), so an agent cannot keep signing for an owner after death. For an owner who is alive but unable to work, see business owner incapacity planning.
Who may own
If shares or membership interests pass to a family member or to a trust, the new owner may need to fit the clearance or SBA program rules that apply to the company. Whether a particular heir or trust fits depends on the facts and is worth checking before the estate plan names them.
People and know-how
Key engineers and program managers can matter as much as the contracts. Florida allows contracts that restrict competition if they are reasonable in time, area and line of business (Fla. Stat. § 542.335(1)). A court will enforce a restrictive covenant only if it is in a writing signed by the person it is enforced against (§ 542.335(1)(a)), and the party seeking enforcement must prove a legitimate business interest, which includes trade secrets (§ 542.335(1)(b)). Information counts as a trade secret only if, among other things, the company makes reasonable efforts to keep it secret (§ 688.002(4)). For IP assignment and confidentiality in supplier work, see our Space Coast business growth article.
A one-page ownership-change checklist
| Event | What it can trigger | Deadline or approval | Source | Who handles it |
|---|---|---|---|---|
| Asset sale or merger that moves contracts to a new entity | Novation agreement | The government must agree to recognize the successor | 41 U.S.C. § 6305(a); FAR 42.1204(a) / 42.903(a) | Owner and counsel, with the contracting officer |
| Sale of shares or membership interests | Usually no novation; possible formal agreement on ownership-change issues | Raise with the contracting officer | FAR 42.1204(b) / 42.903(b) | Owner and counsel, with the contracting officer |
| Merger, acquisition or sale that changes the controlling interest of a small business or SBA program participant | Size and program status recertification | Within 30 calendar days | 13 CFR § 125.12(a) | Owner and counsel, with the CPA on size figures |
| Change of ownership or control, or of key management personnel, at a cleared company | Changed-condition report | Report as the rule requires; follow the FSO’s guidance on timing | 32 CFR § 117.8(c)(7)(i), (iii) | FSO, coordinating with the owner and counsel |
| Change in ownership, control, legal structure, board, senior officers or owners at an ITAR registrant | Written notice to DDTC signed by a senior officer | Within 5 days | 22 CFR § 122.4(a) | Senior officer and export-compliance advisor |
| Intended sale or transfer of ownership or control to a foreign person | Advance notice to DDTC by registered mail | At least 60 days before | 22 CFR § 122.4(b) | Senior officer and export-compliance advisor |
| An LLC member’s death | Dissociation; the transferee gets distributions, not management | Set in advance in the operating agreement | Fla. Stat. §§ 605.0602(7)(a), 605.0502, 605.0504 | Owner and counsel, before it happens |
How we help
Brian handles the government-contracts pieces of an ownership change himself, including novation, SBA recertification and the related ownership-change steps, along with the buy-sell agreement, operating or shareholder agreement and estate plan that sit behind them. Brian can also assist with facility clearance reporting and ITAR registration notices, working alongside your FSO and export-compliance advisor. For related work, see our business law, business succession planning and contracts and transactions pages, and our article on post-closing integration.
Frequently asked questions
Do I need a novation agreement if I sell my company? In an asset sale, usually yes, if the buyer will take over the contracts. The government may recognize the buyer as successor through a novation agreement (FAR 42.1204(a) / 42.903(a)). In a stock purchase where the same entity keeps performing, novation is generally unnecessary (FAR 42.1204(b) / 42.903(b)).
Does a sale affect our small-business set-aside contracts? Existing awards keep their terms (13 CFR § 125.12(a)(3)), but recertification is due within 30 calendar days of a change in controlling interest (§ 125.12(a)), and a disqualifying recertification can affect pending and future set-aside awards (§ 125.12(e)(2)).
What do we report if ownership changes and we hold a facility clearance? A change of ownership or control, including stock transfers that affect control, and changes to key management personnel (32 CFR § 117.8(c)(7)(i), (iii)). We can assist, working alongside your FSO.
What ITAR notices apply when ownership changes or the buyer is foreign? Written notice to DDTC within five days of a change in ownership, control or senior people (22 CFR § 122.4(a)), and at least 60 days’ advance notice of an intended sale or transfer to a foreign person (§ 122.4(b)). We can assist, working alongside your export-compliance advisor.
What happens to these obligations if an owner dies? The obligations continue. A death can change who owns the company and who holds senior or key management roles, which the clearance and ITAR rules treat as reportable. A deceased LLC member is dissociated (Fla. Stat. § 605.0602(7)(a)) and a power of attorney ends at death (§ 709.2109(1)(a)), so the plan should already name who takes over.
Should our operating agreement or shareholder agreement address these rules? It is worth considering. Florida law lets owners require approval of a buyer or bar transfers to designated classes of persons when not manifestly unreasonable (Fla. Stat. § 607.0627(4)), and lets shareholder agreements set who serves as officers (§ 607.0732(1)(c)). Building the notice windows and a management successor into those documents gives the company a plan before it needs one.
Talk with us before an ownership change
If you own a company with federal contracts and are thinking about a sale, a new partner, or what happens if you cannot run it, a consultation can help you map what an ownership change would set off before it happens. Schedule a free consultation: call (386) 244-9633 or visit our contact page. The Law Offices of Brian Giaquinto serves clients throughout Central Florida from its Daytona Beach office and meets Brevard County clients by appointment at the Suntree Business Center, 3270 Suntree Blvd., Melbourne.
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This article is for general educational purposes and is not legal advice. Reading it does not create an attorney-client relationship. Statutes and case law change; consult an attorney about your specific situation.