Activity is picking up after a slow start but buyers and sellers must approach transactions with a higher degree of clarity, discipline and a shared understanding what truly drives value, writes Adam August with Holland & Knight. Mergers and acquisitions in the government contracting space have always reflected broader trends in federal spending, procurement, and private equity appetite. But today’s market is unlike the “gangbuster” environment of a few years ago. Buyers are cautious, sellers are under the microscope, and every weakness matters.
Today there is a ton of interest in buying and selling properties (lots of “sizzle”), but fewer transactions are actually getting completed and those that do are harder than ever (only a little “steak”).
In this environment, both sides must approach transactions with clarity, discipline, and a shared understanding of what truly drives value.
A Grim Start, Then a Shift
The first half of 2025 was particularly challenging for GovCon M&A. Macroeconomic headwinds such as tariffs and inflationary pressure cooled investor appetite. Within the sector, workforce reductions and delays driven by the Department of Government Efficiency compounded the malaise.
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But the tone shifted midyear after the public fallout between President Trump and Elon Musk. That rupture clarified priorities within the administration. With clearer budget directions – and certain programs and offices signaled as unfavored – both acquirors and sellers could plan around policy rather than guessing at it. The result: new energy in GovCon M&A.
The winners in today’s GovCon M&A market are innovators in areas such as offensive cybersecurity, counternarcotics, technologies that support the Golden Dome missile defense initiative and those that are contra-China and that enhance border control. Businesses that offer solutions and intellectual property, or those that give buyers access to customers, capabilities and products command premium interest and valuation.
Sellers: Preparation Is No Longer Optional
In the past, hot markets forgave a lot. Buyers overlooked imperfections in contract structures, customer concentration, or reliance on set-aside work. Not today. Too much “hair” on a deal doesn’t just reduce valuation–it can kill it outright.
For sellers, that means:
- Diversify beyond concentration. Overreliance on a single recompete, customer or program will not withstand diligence.
- Shift work mix upward. Low-end, commoditized contracts won’t earn a premium multiple.
- Be cautious with set-asides. They support growth but don’t guarantee valuation.
The bar for readiness has risen. Sellers must invest in pre-sale diligence, clean up corporate housekeeping, and demonstrate both durability and growth potential, all within the administration’s priorities.
Buyers: Caution Without Paralysis
Buyers face their own challenge: closing certainty. Deals often get “DOGE’d” –delayed or disrupted by protests or administrative shifts. The lesson is clear: not all backlog is created equal.
Diligence should prioritize:
- Revenue durability. Backlog must be defensible, not speculative.
- Prime, full-and-open awards. Far more valuable than subcontracted or restricted work.
- Resilient customer access. Vehicles like single-award IDIQs or entrenched SBIRs reduce uncertainty.
Buyers aren’t simply acquiring a book of business, they are underwriting stability and future access.
What Really Drives Value
Despite headwinds, the fundamentals are consistent. Durable revenue and profits are paramount, and predictability is king. Software solutions and protected intellectual property, even more than high-end services, is highly valued. Buyers want sustainable visibility into the future matters more than trailing numbers through multi-year backlog. Expanding opportunities on the total addressable market carries weight. Finally, resilient routes to the customer through unique positioning are highly prized. Sellers who show these traits will still attract strong demand.
Structuring Creativity
Not every deal is a full sale. Minority investments and recapitalizations are increasingly common, particularly for small businesses balancing growth with set-aside eligibility. These structures provide liquidity and capital without sacrificing control. They can serve to help founders buyout co-founders, add cash to the balance sheet for stability, key executive hires and business acquisitions, and to professionalize the organization with board members and collaboration with other portfolio companies for best practices.
After the investment yields enhanced infrastructure and growth, the business is often able to trade at a significantly higher valuation among greater competition.
Lessons for Both Sides
The overarching truth in GovCon M&A is simple: discipline matters. Sellers should be prepared for scrutiny. In this environment, nothing will be overlooked. They should fortify their story with backlog prime positions and durable access. Most importantly, sellers should be realistic. Strategic multiples are difficult to come by and are typically reserved for strategic assets.
Buyers are willing to underwrite durability, not just growth. They demand a thoughtful, strategic rationale: expanded markets, capabilities, or access. Would-be buyers must be prepared to walk away–no deal is better than a bad deal.
Looking Ahead
After a grim first half of 2025, political and budget clarity has revived momentum in GovCon M&A. Buyers are highly motivated but discerning. Sellers can still achieve strong outcomes, but only with preparation and transparency.
The winners will be those who embrace the new reality: every issue matters, every weakness is scrutinized, and every deal must be justified by durable, strategic value.
For both buyers and sellers, success now depends on discipline, preparation, and a clear-eyed view of the future.
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