Government contracts can be a valuable asset when buying or selling a business in Australia. Whether the contracts are with local councils, state departments, or federal agencies, they often provide stability, long-term revenue, and reputational credibility. However, government agreements are not always transferrable, and failure to manage the transition correctly can result in loss of value or termination of key contracts.
This article outlines the practical and legal considerations for buyers and sellers when government contracts are part of a business sale.
In Australia, businesses engage with government entities through a variety of contract types, including supply agreements, service contracts, maintenance tenders, and preferred supplier panels. These contracts are generally awarded through competitive procurement and are subject to strict rules around performance, compliance, and probity.
Unlike private sector agreements, most government contracts include clauses that restrict or condition assignment to a new owner. This means that any business sale must be planned carefully to avoid breaching contract terms.
Sellers should identify all current and pending government contracts and examine each for clauses relating to:
If any contract prohibits transfer or requires written consent from the agency, that step must be incorporated into the sale timeline and communicated to the buyer.
In most cases, government contracts cannot simply be "assigned" to a new business owner. Instead, the contract may need to be "novated," which is a legal process where the government agency signs a new agreement with the incoming owner, effectively replacing the seller. This process can take time and must be managed professionally.
Buyers should be cautious about any sale agreement that assumes automatic continuation of government work. If novation is required and the agency refuses, the buyer could inherit a business without its core revenue stream.
To reduce risk and delays, sellers should notify the relevant government contacts of their intent to sell as early as possible. Be transparent and proactive in seeking their guidance on the required process. Some government bodies have formal procedures for novation and will require:
Where possible, these steps should be initiated before the contract of sale is signed, or at least included as a condition precedent to settlement.
From a legal standpoint, both buyers and sellers should ensure that their lawyers and accountants conduct due diligence on:
Buyers should also assess whether the business relies too heavily on a single government contract. If so, they should consider how secure that revenue stream is, and whether alternative contracts or clients are in place to reduce risk.
Pros:
Cons:
Depending on the situation, the sale may be structured as a share sale (where the entity holding the contracts is sold intact) or an asset sale (where contracts must be novated). Share sales can simplify the process by avoiding the need for novation, but they come with additional risks and require full due diligence on company liabilities.
In either case, it is essential to include clauses in the contract of sale that protect the buyer from loss of contracts. These may include:
Government contracts can significantly enhance the value of a business, but they also add layers of complexity to a sale. Sellers must be transparent, buyers must be cautious, and both parties must plan carefully to ensure that these valuable contracts are preserved through the ownership transition.
If you are buying or selling a business with government contracts in place, speak with a qualified business broker and legal advisor early in the process to avoid surprises and safeguard the deal.
