Jeffrey Donenfeld

How To Sell Your Aerospace & Defense Business – Discussion and Notes

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Jeffrey Donenfeld
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Aerospace and SpaceTech startups are growing rapidly, and at some point, they become good candidates for a sale. This morning at Holland & Hart in Denver, the Colorado Space Business Roundtable hosted an interesting panel discussion on the topic.

My key takeaways from the discussion:

  • Be ready to sell at any moment.
  • Understand the nuances of selling stock, selling assets, contracts, etc.
  • Consider the implications of current government contracts in a sale.

Participants:

  • Carter Freeman, vcfo Denver’s Vice President – panel moderator
  • Mike Dill – Partner at Holland & Hart
  • Sarah Ehrhardt – Senior Wealth Strategist at PNC Private Bank
  • David Hollenbach – President and General Manager at DSoft Technology
  • Karri Palmetier – Founder at Palmetier Law
  • Adams Price – Investment Banker at Aptum Capital Advisors
Carter Freeman, Mike Dill, Sarah Ehrhardt, David Hollenbach, Karri Palmetier, and Adams Price discuss buying and selling aerospace, spacetech, and defense companies.

Additional notes, questions, and discussion points…1

General Summary:

The panel discussion, titled “How to Sell Your Aerospace and Defense Business,” gathered a group of seasoned professionals in law, investment banking, wealth management, and company leadership to discuss the critical considerations and strategies involved in selling an aerospace and defense company. They highlighted the importance of proper planning, from financial diligence to cultural alignment, emphasizing that preparing for a sale is a long-term process requiring clear objectives and thorough organization. They also discussed the complexities specific to government contractors, such as compliance with regulations, the novation process, and the handling of Small Business Innovation Research (SBIR) contracts.

Main Topics:

1. Strategic Planning and Timing for Selling:

  • Sellers must have a clear understanding of their goals and objectives, such as maximizing value or ensuring the company’s legacy.
  • The panel emphasized the importance of long-term planning, noting that preparing a business for sale can take up to two years, including steps like ensuring financial organization and assembling a team.
  • The right exit strategy must account for factors like employee retention, customer relationships, and timing to maximize valuation.

2. Financial and Legal Due Diligence:

  • Financial due diligence is critical in preparing for a sale, including getting a third-party analysis of earnings, liabilities, and cash flow.
  • Legal diligence, particularly for aerospace and defense companies, involves complex contracts and regulatory compliance issues. The panel discussed the need to have all documentation organized and easily accessible.
  • For government contractors, navigating the novation process for contracts can take up to 18 months, requiring advanced planning.

3. Importance of Cultural Fit and Management Team:

  • The alignment between company cultures is a significant factor in the success of mergers and acquisitions. The buyer must feel confident that the culture of the acquired company fits well with theirs.
  • Maintaining a strong, cohesive management team is critical, as often the leadership stays on after the sale to help with integration.

4. Government Contracts and Compliance:

  • Aerospace and defense businesses with government contracts face additional challenges, such as compliance with SBIR rules, export controls, and ownership regulations.
  • The panel explained the complexity of selling a company with government contracts, especially when dealing with classified contracts or SBIR-funded technology.
  • Sellers should prepare for potential delays due to government approval processes and ensure they understand how contracts will be affected by the sale.

5. Structuring the Sale:

  • Asset sales vs. stock sales: Buyers often prefer asset sales to limit liabilities, while sellers prefer stock sales for tax benefits. This structural decision significantly impacts the sale process.
  • Warranties and indemnities: Sellers can mitigate some risks through representations and warranties insurance, which covers unknown liabilities.
  • Running a competitive process: To achieve the best terms and valuation, sellers are encouraged to foster competition among multiple potential buyers.

Follow-Up Questions:

  1. Cultural Integration Post-Sale: What are the key steps in aligning company cultures during the integration phase after the acquisition, especially when the buyer is not local or has a different business structure?
  2. SBIR Contracts: How can a company mitigate the risks associated with SBIR contracts when selling to a larger business that may not be eligible for future phases of the contract?
  3. Regulatory Delays: Given the potential for long delays in novating government contracts, what contingency plans should sellers put in place to manage operations during the transition?
  4. Managing Financial Expectations: How should sellers handle a situation where their financial projections or performance changes during the due diligence period? What strategies can be used to avoid a deal falling through due to these changes?
  5. Competitive Sale Process: How can smaller aerospace companies ensure they maintain competitive pressure during the sale process, particularly in a market where larger buyers might dominate?

Additional Discussion Considerations:

  • Impact of AI on Due Diligence: As AI tools develop, there is a growing role for AI in streamlining contract reviews and diligence processes, though government contracts remain challenging. Sellers should stay updated on emerging AI solutions to improve efficiency during sale negotiations.
  • Tax Law Changes in 2026: Sellers should be aware of upcoming changes to tax laws that could significantly affect their net proceeds from the sale. The looming expiration of tax cuts in 2025 may influence decisions to accelerate the sale process to minimize tax liabilities.
  • Foreign Ownership Issues: With increasing scrutiny on foreign ownership and control, particularly in the aerospace and defense sectors, sellers need to assess potential buyers’ backgrounds carefully. They may need to navigate additional regulatory approvals, especially for businesses with sensitive technology.
  • Use of Representations and Warranties Insurance: As this insurance becomes more common in transactions, sellers can use it to reduce the amount held in escrow, thus improving cash flow post-sale while protecting against unknown liabilities.
  • Export Control and Compliance: Companies with export-controlled technology should plan for the additional time and cost of compliance reviews, especially when dealing with foreign buyers. A failure to secure the necessary export licenses early in the sale process can derail the deal.

In summary, selling an aerospace and defense business involves multifaceted planning across legal, financial, cultural, and regulatory domains. A proactive approach, supported by a skilled advisory team, can significantly improve the likelihood of a smooth and successful transaction.

  1. Summary, notes, questions, and discussion points generated with ChatGPT 4o, based on discussion transctiption made by iOS voice recorder. ↩︎