Buying or Selling a Small Business Government Contractor? Draft the Letter of Intent Carefully to Avoid Immediate Affiliation

Sheppard Mullin – Buying a small business government contractor may not be as simple as a standard acquisition. This is particularly true if the small business wants to continue to qualify for federal small business set-aside and sole-source awards during negotiations. The SBA treats agreements to merge as having a “present effect” on the power to control a concern. So if a letter of intent is sufficiently firm to be considered an agreement in principle, the SBA’s regulations require such agreements be given “present effect” on the power to control a concern – deeming the two entities are immediately affiliated. This means a letter of intent must be carefully drafted to ensure it does not trigger the present effect rule before the parties are ready or willing to be affiliated.