Government and defense contracting carries a benchmark band of 4.5x – 7.5x adjusted EBITDA at a $3–5M-EBITDA control sale in our industry multiple table. It sits in the upper half of the nineteen sectors we track, and for a reason that is unusual: in GovCon, the quality of the contract matters more than the quality of the margin.
It is also the one sector on the list where who buys you can change what your revenue is worth — not what they will pay, but what the business itself will earn after the sale. That is a regulatory mechanic rather than a negotiating one, and it is the most important thing on this page.
Contract mix sets the band
Two contractors with identical revenue and identical EBITDA can be genuinely different assets:
- Firm-fixed-price work rewards efficiency and carries performance risk. A contractor with a track record of delivering FFP profitably is demonstrating something a buyer can underwrite.
- Cost-reimbursement work caps the upside but is far more predictable, and it brings the FAR cost principles into the buyer’s model in ways discussed below.
- Time-and-materials work sits in between and is the most exposed to labour-rate compression at recompete.
- Prime versus subcontract position may matter more than any of the above. A prime holds the customer relationship; a sub holds a relationship with a prime who is free to replace them or to bid the work themselves next cycle.
Backlog quality then modifies it: funded against unfunded, base years remaining against option years, and how much of it faces recompete inside the buyer’s hold period. A backlog number with no maturity profile attached tells a buyer nothing, and they will assume the worst.
The set-aside problem: why your buyer pool sets your price
If a meaningful share of your revenue comes through small business set-asides, the identity of your buyer directly affects the business’s future eligibility. This is governed by 13 CFR 125.12, and the details matter because they are widely misstated.
Recertification of size and small business program status is required within 30 calendar days of a merger, acquisition or sale resulting in a change in controlling interest (§125.12(a)). What follows a disqualifying recertification — one where the concern is no longer small — is more nuanced than the common summary suggests:
- On a single award, you keep your options. Under §125.12(e)(2)(iii)(A), a concern that submits a disqualifying recertification remains eligible to receive options. What it loses is the agency’s ability to count that option period toward its small business goals.
- On multiple award contracts, the future order flow stops. Under §125.12(e)(2)(ii)(B)(1), after the triggering event the concern is ineligible to submit an offer for a set-aside or reserved award, while remaining eligible for unrestricted awards.
Read those together and the valuation consequence is clear. Your existing contract does not evaporate on closing — but if your growth thesis rests on continued set-aside orders under multiple-award vehicles, that thesis does not survive a sale to a large buyer. And the loss of goaling credit quietly reduces an agency’s incentive to keep routing work your way.
For a small-business contractor, this narrows the buyer pool to other small businesses, or to a structure that does not produce a change in controlling interest at all. A narrower pool means less competitive tension, and less competitive tension shows up directly in the multiple. It is the single largest structural discount in the sector, and most owners discover it during diligence rather than before.
The FAR cost principle that changes what a deal can carry
There is a second regulatory fact that cuts the other way, and it is genuinely favourable for GovCon owners considering an internal transition.
Under FAR 31.205-20, interest on borrowings is unallowable — a contractor cannot recover the cost of ordinary acquisition debt through its contracts. But under FAR 31.205-6(q), costs of employee stock ownership plans are allowable subject to conditions, with measurement per CAS 9904.415.
The practical effect is that contributions and the related debt service tied to a qualified employee ownership plan can be allowable, reimbursable costs, where the interest on a conventional acquisition loan is not. On a cost-reimbursement base, that difference changes what an ownership transition can afford to carry — which is why this structure appears more often in GovCon than almost anywhere else. The mechanics are worked through here.
The allowability is conditional, not automatic, and the conditions are specific. It is worth real advice before it is worth a plan.
What the spread is worth
Two contractors, both $4M of adjusted EBITDA:
| Contractor A | Contractor B | |
|---|---|---|
| Position | Prime, multiple agencies | Sub, one agency over 25% |
| Backlog | Long periods of performance | Near-term recompetes |
| Set-aside reliance | Low | High |
| Owner role | Runs without the founder | Founder holds the relationships |
| Adjusted band | 5.6x – 9.3x | 3.6x – 5.9x |
| Enterprise value | $22.3M – $37.1M | $14.2M – $23.7M |
Midpoint to midpoint, Contractor A is worth roughly 56% more on identical earnings. The largest single component of that gap is not performance — it is the set-aside reliance, because it determines who is allowed to bid for the company.
What buyers diligence here that they do not elsewhere
- Contract-by-contract backlog, with funded and unfunded amounts, remaining option years and recompete dates.
- Set-aside and socioeconomic status across every vehicle, and what recertification would do to each.
- Novation exposure. An asset sale generally requires the government to recognise a successor in interest, and that is a process rather than a formality.
- Indirect rate structure and DCAA history — approved rates, open audits, and any questioned costs.
- Facility and personnel clearances, and whether they survive the transaction as structured.
- Organizational conflicts of interest the buyer’s other holdings might create.
Frequently asked questions
What multiple do government contractors sell for?
Our benchmark band is 4.5x to 7.5x adjusted EBITDA at $3–5M of earnings. Contract mix, prime versus subcontract position, and backlog maturity move a contractor within that band far more than margin does.
Will I lose my contracts if I sell my small business government contractor?
Not the contracts themselves. Under 13 CFR 125.12, recertification is required within 30 days of a change in controlling interest, and after a disqualifying recertification the concern still remains eligible to receive options on a single award — but it becomes ineligible to submit offers for set-aside or reserved awards under multiple award contracts, and the agency loses its small business goaling credit. The damage is to future order flow, not to existing work.
Why does a small business set-aside base reduce my multiple?
Because it narrows who can buy you. A large acquirer inherits a business whose set-aside order flow stops, so either they discount for it or they do not bid. Fewer bidders means less competitive tension, and that shows up directly in the price.
Is employee ownership really cheaper for a government contractor?
It can be, and the reason is in the FAR. Interest on ordinary acquisition borrowings is unallowable under FAR 31.205-20, while ESOP costs are allowable subject to conditions under FAR 31.205-6(q), measured per CAS 9904.415. On a cost-reimbursement base that changes what the transaction can carry. The allowability is conditional, so it needs specific advice rather than an assumption.
What should I fix before selling a GovCon business?
Move relationships from the founder to the organisation, extend backlog maturity where you can influence it, get indirect rates clean and audited, and understand precisely which revenue depends on status you would lose at closing. That last one determines your buyer pool, and your buyer pool determines your price.
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