For defense technology companies contemplating a sale, understanding how to maximize value while navigating complex regulatory and compliance requirements is crucial for a successful transaction.
Corporate partner Steve Fisher, intellectual property partner David Hayes, and government contracts partner Zohra Tejani explored strategies for doing just that in their recent CLE webinar, “How to Prepare for a Sell-Side Deal in the Defense Industry.”
Here are some key considerations from their discussion to help defense tech companies prepare for and execute an optimal sale process:
Play the long game to drive value in sell-side transactions. Early preparation is essential for driving maximum value in defense tech transactions. Before beginning formal sale discussions, companies should conduct thorough internal due diligence with the help of qualified counsel to identify and address any potential issues related to regulatory compliance, government contracts, or intellectual property ownership.
A competitive bidding process often yields the best outcomes. Develop relationships with potential strategic buyers well before initiating a formal sale process. This allows buyers to become familiar with your technology, team, and value proposition while giving you insight into which acquirers might be the best fit.
Maximize leverage during negotiations. The term sheet stage represents a seller’s strongest negotiating position. While buyers often exert pressure to quickly sign a term sheet and enter exclusivity, this is precisely when sellers should push hardest on key deal terms. Critical areas to address include:
Establish clear timelines with buyers to maintain momentum. Try securing commitment to specific milestone dates, such as targeting announcements at major defense industry events. This creates natural pressure to keep the process moving and encourages reasonable behavior from buyers' legal teams.
Employee retention conditions require careful consideration. Buyers want assurance that key technical talent will remain post-closing. However, you should negotiate reasonable thresholds regarding:
Consider implementing strategic communication plans to maintain employee engagement throughout the process. Clear messaging about growth opportunities and retention incentives can help preserve team stability.
IP ownership and rights are particularly complex in defense tech transactions due to government funding implications. When technology is developed using federal funds, resulting IP may be subject to government rights that supersede standard commercial arrangements. The government may have varying levels of rights depending on funding sources:
SBIR/STTR participants face additional complexity. Companies participating in Small Business Innovation Research (SBIR) or Small Business Technology Transfer (STTR) programs must carefully track dates and terms of awards, consider implications for future Phase III awards, and understand the post-transaction impacts on their small-business size status.
Modular design requirements raise IP concerns. Recent Department of Defense requirements emphasize modular design with specified interface requirements. This can affect system design architecture, government rights to interface specifications, and data rights and disclosure obligations. To maximize value:
Working with experienced counsel is critical given the complex intersection of commercial IP rights, government contracts, and regulatory requirements. Assessing these issues early helps avoid surprises that could impact valuation or delay closing.
Successfully selling a defense tech company requires careful attention to multiple interconnected factors—from maintaining competitive tension among buyers to navigating complex regulatory and IP considerations. By working with counsel to understand these key elements and prepare thoroughly, companies can better position themselves for optimal transaction outcomes while meeting their strategic objectives.
Remember that this overview touches on major considerations, but specific situations may involve additional complexity requiring tailored legal guidance. Working with advisors experienced in defense tech M&A helps ensure all critical aspects are properly addressed throughout the transaction process.
Learn more about Fenwick’s defense and M&A capabilities, or register to watch any of our 2025 CLE webinars on-demand (self study credit available).