An article by Seyfarth partner Robert Bodansky was published in the November 3 issue of the Washington Business Journal. In the article, Bob describes the novations process for purchasers of companies that work for the federal government.
According to Bob, with traditional company acquisitions, the purchaser is able to perform contracts immediately after closing. However, when the company acquired is a federal contractor, the purchaser must undergo a formal novations process after closing before it can fulfill its contracts. This involves the buyer and seller submitting a novation request asking the government for consent to the transfer of the contracts. Frequently, the process can involve a lot of back and forth, resulting in days, weeks, or months of lost income for the purchaser.
While most government contracting officers will not consent to a novation before a transaction closes, Bob recommends that buyers discuss the proposed transaction with the contractor prior to closing. “While not final or binding, this informal presentation well in advance of closing is crucial,” he emphasizes. “It can materially reduce the time needed after closing to obtain the novation agreement. Importantly, if the contracting officer is clearly opposed to the proposed transfer, there likely is little reason for the purchaser to continue with the transaction.”
Most importantly, Bob advises buyers to be prepared for the lag time after closing. “Regardless, a purchaser needs to anticipate that there could be a period, possibly an extended period, during which revenues from the contract may not be received. Seller and purchaser alike need to anticipate and coordinate each party’s role during the gap period and the purchaser needs to have in place appropriate working capital or financing to fill any gap period.”
To read the entire article, click here: http://www.bizjournals.com/washington/blog/fedbiz_daily/2011/11/novations-mind-the-gap.html?ana=e_wash_fedbiz