Novation and Change-of-Name Agreements for Software Companies: Federal Contracts in an Acquisition

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By — Founder of GovExpress; prior domain experience at Bloomberg Government and GovWin IQ.

In a commercial software acquisition, customer contracts usually move with the business, sometimes after a consent letter. A federal contract does not move that way. The government contracted with a specific legal entity, and federal law says that entity cannot hand the contract to someone else on its own.

This guide covers why a federal contract cannot simply be assigned, when the government will recognize a new owner through a novation agreement, when a lighter change-of-name agreement is enough, and what a software company should line up before and after a deal closes. The rules cited here are from 41 U.S.C. 6305 and FAR Subpart 42.12, Novation and Change-of-Name Agreements.

Why a federal contract cannot just be assigned

The Anti-Assignment Act, 41 U.S.C. 6305, prohibits a contractor from transferring a government contract, or any interest in it, to another party. A purported transfer in violation of the statute annuls the contract as far as the government is concerned, while the government keeps its rights of action for breach.

The statute protects the government’s choice of contractor. The agency evaluated your company’s capability, past performance and responsibility. A buyer of your company was never evaluated.

A separate law, the Assignment of Claims Act (31 U.S.C. 3727, implemented in FAR Subpart 32.8), lets a contractor assign the right to payment to a financing institution under set conditions. That is a financing tool. It does not move the contract itself.

Novation: how the government recognizes a successor

FAR 42.1204 lets the government, when it is in the government’s interest, recognize a third party as the successor in interest to a contract. The new party’s interest has to come from a transfer of all of the contractor’s assets, or of the entire portion of the assets involved in performing the contract. The FAR’s examples include a sale of those assets, a transfer of assets in a merger or consolidation, and the incorporation of a proprietorship or partnership.

The mechanism is a three-party novation agreement among the transferor (the original contractor), the transferee (the new owner) and the government. Two features of the standard agreement matter most:

  • Recognition is discretionary. The government is not required to approve a novation. The contracting officer considers whether recognizing the transferee is in the government’s interest.
  • The transferor stays on the hook. In the standard form, the transferor waives claims against the government and guarantees the transferee’s performance of the obligations it assumes.

One agreement can cover every affected contract. FAR 42.1202 assigns the work to a single responsible contracting officer, usually the one at the contract administration office cognizant of the contractor. FAR 42.1203 has that officer collect the submission, notify the other affected contracting offices and process the agreement.

When novation is not needed

Stock purchases. Under FAR 42.1204(b), when ownership changes through a stock purchase, there is no legal change in the contracting party, and that party stays in control of the assets and keeps performing, a novation agreement is not required. Many software acquisitions are structured as stock or membership-interest purchases, so the contracting entity survives. The contracting officer may still ask for evidence of the transaction.

Name changes. Under FAR 42.1205, when a contractor changes its name and the rights and obligations of the parties stay the same, the parties sign a change-of-name agreement instead of a novation. A rebrand, or a legal name change after an acquisition that left the entity in place, usually lands here.

Whether a deal is an asset purchase, a merger or a stock purchase is a question for your deal counsel. That answer decides which path applies.

What the submission includes

FAR 42.1204 lists what the contractor submits to the responsible contracting officer. For a novation, that includes:

  • Signed copies of the proposed novation agreement.
  • A copy of the instrument that made the transfer, such as the purchase agreement or certificate of merger.
  • A list of all affected contracts, with each contract number and type, the contracting office, the total value as amended and the approximate remaining unpaid balance.
  • Evidence of the transferee’s capability to perform.
  • Board resolutions and opinions of legal counsel for the transferor and transferee.
  • Balance sheets of the transferor and transferee as of dates immediately before and after the transfer.

A change-of-name submission under FAR 42.1205 is shorter: signed copies of the change-of-name agreement, the document showing the name change, an opinion of counsel and the list of affected contracts.

Until the agreement is executed, the government’s contract is still with the original contractor. Invoices, payments and contract correspondence stay in that name, so plan the invoicing handoff around the agreement date and not the closing date.

Size status after the deal

Small business size status does not automatically survive an acquisition. FAR 52.219-28, Postaward Small Business Program Rerepresentation, requires the contractor to rerepresent its size status within 30 days after a novation agreement is executed, or within 30 days after a merger or acquisition that does not require a novation.

If a small software company is bought by a larger one, the combined company may no longer be small under the contract’s NAICS code. The contract does not end for that reason, but the agency generally can no longer count later options and orders toward its small business goals. If your federal pipeline depends on small business set-asides, model that change before you sign.

Registration, ownership and identifiers

A change of ownership also shows up in your registration data:

  • SAM.gov. Your SAM registration carries ownership details. FAR 52.204-17, Ownership or Control of Offeror, asks for the immediate and highest-level owner, and FAR 52.204-20, Predecessor of Offeror, asks about predecessors in the last three years. Update the record so the representations match the new structure.
  • UEI and CAGE. Your UEI and CAGE code belong to a specific legal entity. If the deal creates a new contracting entity, that entity needs its own registration and identifiers before it can be recognized as the contractor.
  • Contract vehicles. A GSA Schedule contract is novated or renamed through a modification with the GSA contracting officer, the same as any other contract.

What this means for a software company

  • Build the contract list early. Diligence should identify every federal contract, schedule and agreement by contracting entity, with its contracting office and remaining value. That list becomes the core of the submission.
  • Pick the deal structure knowing the federal consequence. An asset purchase usually means novation. A stock purchase usually does not. The choice affects how long the transition takes.
  • Expect the transferor to remain a guarantor. Sellers should know that the standard novation agreement keeps them responsible for the buyer’s performance.
  • Calendar the 30-day rerepresentation. It runs from the agreement date or the closing, and it is easy to miss during integration.
  • Keep performing. Recognition is discretionary, and the contracting officer looks at whether the new owner can deliver. A clean past performance record through the transition helps.
  • Read the current rule text. The FAR is being rewritten under the Revolutionary FAR Overhaul, and agencies have been adopting revised part text through class deviations. Confirm the section numbers in the version your contracting officer applies.

Where this fits

Federal contracts are tied to the entity the government chose. For a software company planning a sale, a merger or a rebrand, that means building a novation or change-of-name agreement, a size rerepresentation and a registration update into the deal timeline. Companies that plan for this keep their federal contracts through the transaction.

Score your company’s federal readiness to see how your registration and compliance profile look next to the other categories federal buyers review.

The CMMC brief

What the Phase 2 suspension changed and what it did not — the obligations that still bind, the assessment path a contract puts you on, the scoping decision that drives the cost, and the sequence that fits inside a pipeline. Sourced from the primary record.

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