A private equity firm identifies an attractive government contractor. The company has strong margins, a healthy backlog, an experienced management team, and a significant amount of classified work. The buyer has reviewed the contracts, financials, employees, and customer relationships. The numbers work, and the deal model assumes the buyer can bring the company onto its broader platform after closing.
Then someone asks what happens to the company’s facility security clearance when the deal closes. If the buyer has foreign ownership or other foreign interests, there is another question: Does the transaction create a Foreign Ownership, Control, or Influence (FOCI) issue?
For some contractors, those are manageable diligence issues. But if a meaningful part of the company’s value comes from classified work, they can become deal issues rather quickly. A buyer may be able to live with an administrative delay or a slower than expected transition. It is much harder to deal with a problem that affects the target’s ability to perform a meaningful portion of the work the buyer thought it was acquiring.
As we discussed in Part 3 of this series, security clearances and FOCI belong on the diligence list whenever a target performs classified work. If classified revenue is a meaningful part of the deal, though, this deserves more than a box-checking exercise. What matters is whether the buyer can still realize the value tied to that clearance after closing.
The Clearance Does Not Simply Follow the Company
It is easy to think of a facility security clearance (FCL) as another asset of the target. The company has the clearance today, the clearance allows it to perform classified work, and the buyer assumes that it will continue after closing. But an FCL is not something the seller can simply transfer to the buyer. It is the Government’s determination that a particular legal entity is eligible to access classified information. An entity also needs to be sponsored based on a legitimate need for that access. So, the clearance is tied to the company that holds it and the circumstances surrounding that company.
Those circumstances can change in a deal. Under the National Industrial Security Program Operating Manual (NISPOM), changes in ownership or control, key management personnel, and material FOCI information are reportable changed conditions that can affect continued eligibility. That is why deal structure matters.
In a stock acquisition, the target usually remains the same legal entity and continues to hold its government contracts. But that does not mean the security analysis goes away. The company now has a new owner. Its parent structure, governance, management, or foreign interests may have changed. Depending on the structure, the new parent may need to be cleared or formally excluded from access to and influence over the subsidiary’s classified work.
An asset deal is different. If the cleared seller will no longer exist or will no longer perform the classified contracts, the buyer cannot simply acquire the seller’s FCL along with its employees, equipment, and contracts. The entity that will perform the classified work needs its own eligibility, and that may need to be in place before the seller disappears.
This becomes especially important if the contracts themselves also need to be novated. Novation deals with whether the Government will recognize a different legal entity as the successor contractor. The clearance process deals with whether the company performing the classified work is eligible to access the information it needs to do that work. FAR 42.1204 also requires evidence that applicable security-clearance requirements have been met as part of the novation process.
The issues are related but distinct: resolving the contract-transfer issue does not necessarily resolve the clearance issue, and vice versa. And as we discussed in Part 4, novation does not necessarily answer whether the buyer can use the target’s past performance in future competitions.
FOCI Is About More Than Foreign Ownership
FOCI is often described as a foreign-ownership issue. But that is a little too simple. Under the NISPOM, the question is whether a foreign interest has the direct or indirect power to affect the company’s management or operations in a way that could create a risk to classified information or classified-contract performance. That means the analysis is not limited to who owns what percentage of the stock.
This matters in private equity deals. The target may be a U.S. company, and the acquisition vehicle may be a U.S. company too. But there may still be foreign interests elsewhere in the structure. Foreign limited partners, co-investors, intermediate entities, lenders, and ultimate ownership can all matter depending on the rights involved.
The same is true of governance. Board appointment rights, consent and reserved-matter rights, management authority, and debt arrangements can matter because the analysis focuses on the power to influence management or operations, not merely the percentage of stock a foreign person holds.
That does not mean every foreign investor or foreign limited partner creates a FOCI problem. And a FOCI issue does not automatically mean the deal cannot happen.
If the transaction also requires review by the Committee on Foreign Investment in the United States (CFIUS), buyers should keep in mind that CFIUS and the Defense Counterintelligence and Security Agency (DCSA’s) FOCI review are separate processes. Getting through one does not take care of the other.
FOCI can often be addressed through mitigation. An existing cleared contractor that is working in good faith toward acceptable mitigation may, depending on the circumstances, keep its eligibility while that process plays out. But there are limits. DCSA will invalidate eligibility if the contractor is unable or unwilling to negotiate and implement acceptable mitigation, and it will revoke eligibility if the foreign-influence risk cannot be addressed.
There is also a significant difference between existing work and future work. A contractor whose eligibility has been invalidated cannot bid on or receive new classified contracts, although it may be able to continue existing classified work if the Government Contracting Activity agrees.
For a buyer, that distinction matters. The target may be able to keep performing its backlog while losing access, at least for a time, to the classified pipeline that helped support the purchase price. A similar distinction between existing work and future opportunities can arise when an acquisition triggers size recertification, as discussed in Part 1 of this series.
And even when mitigation works, it can come with tradeoffs. The buyer may have less flexibility in how it shares information, uses affiliate resources, or operates the business. Even where FOCI can be mitigated, buyers need to understand what the business will look like after those measures are in place.
When Security Requirements Affect How the Business Operates
Most buyers already have a fairly good idea of how they intend to run the acquired business after closing. They may want to consolidate facilities, move the target onto the parent’s IT systems, centralize administrative functions, share employees, or put the acquired company onto common systems. Those plans may make perfect sense from a business standpoint. For a cleared contractor subject to FOCI mitigation, however, some of those assumptions may need to change.
Depending on the circumstances, DCSA may require controls around electronic communications, affiliate operations, facilities, governance, or access to information. Those requirements can reach areas buyers often take for granted, including shared systems, centralized support functions, management reporting, and assistance from affiliated companies.
In some cases, the buyer may own the target at closing but still needs to keep certain systems, people, or facilities separate while security issues are worked through. Those costs may be temporary, but they are still important to track.
The Security Process Does Not Follow the Deal Calendar
Security issues also have their own timing. Early engagement matters, and sometimes it is required. When a cleared contractor begins negotiations for a merger, acquisition, or takeover by a foreign interest, the NISPOM requires notice at the start of those negotiations.
More generally, the parties should figure out early what is changing. Will the cleared entity survive? Who will own it? Which company will perform the classified contracts? Will the deal require novation, parent processing or exclusion, or FOCI mitigation?
There is no single end-to-end timeline that a buyer can safely rely on. DCSA has internal processing goals, but the actual timeline depends on the ownership structure, the companies involved, the classified work at issue, and any mitigation concerns that need to be addressed. That uncertainty can have real consequences even if everyone expects the deal to work in the end.
A delay may not wipe out the target’s classified revenue. But it can slow new opportunities, leave cleared employees underused, delay integration, or force the buyer to keep separate systems and functions in place longer than expected.
That can affect backlog, working capital, EBITDA, employee retention, earnouts, and financing assumptions. A buyer should understand the security process before those assumptions become hard to change.
Looking Ahead: FOCI May Reach Beyond Classified Work
FOCI review may soon reach beyond classified work. On May 7, 2026, DoD proposed a DFARS rule implementing Section 847 of the FY 2020 National Defense Authorization Act. The proposal would extend beneficial-ownership and FOCI review to many contractors and subcontractors working on unclassified DoD contracts over $5 million. It also specifically addresses mergers, acquisitions, and recapitalizations. See 91 Fed. Reg. 24,783 (May 7, 2026).
As of this writing, the rule remains a proposal. The comment period closed July 6, 2026, and no final rule has been issued. Its requirements therefore are not yet in force. But if something close to the proposal becomes final, the practical significance is pretty clear. FOCI diligence may no longer be something buyers think about only when they are acquiring a contractor with classified work.
The Clearance Question Is Really a Revenue Question
Buyers often focus on the level of clearance the target holds. In practice, what matters is how much of the company’s value depends on maintaining that clearance.
Two contractors can hold the same level of facility clearance and present very different risks to a buyer. One may have a diversified mix of classified and unclassified work across multiple customers and programs. Another may be heavily dependent on a small number of classified efforts. The clearance may be the same, but the risk is not.
That is why the security analysis needs to connect back to the financial assumptions. Which contracts require classified access? Which company performs them? Which facilities and employees matter? How much backlog depends on the clearance? How much of the growth story depends on winning more classified work? Those questions can reveal risk that is easy to miss in ordinary financial diligence. A company can have a perfectly valid FCL and still face significant concentration risk if a small number of programs, customers, facilities, or cleared employees account for a large portion of the business.
The risk is even more significant when the purchase price reflects expectations of future growth. If the target can keep performing its existing classified contracts but cannot pursue new classified opportunities for a period of time, today’s revenue may be fine while tomorrow’s revenue is not. That can change the math.
The Bottom Line
A facility clearance is not just another asset sitting on a government contractor’s balance sheet. It is tied to the company that holds it and to the ownership, control, and operating structure around that company.
FOCI does not automatically kill a deal, and in many cases it can be mitigated. The mitigation, however, may affect how the buyer governs the company, works with affiliates, operates the business, and realizes anticipated efficiencies. If classified work is an important part of the deal, the buyer needs to know whether it can own the company, operate it the way it expects, pursue the classified opportunities in the pipeline, and keep generating the revenue it is paying for.
That is why clearance and FOCI issues belong near the beginning of the deal, not after the purchase price and post-closing plan are already set.
What’s Next in The GovCon M&A Playbook:
In Part 6, we turn to another GovCon asset whose value can change when two companies combine: organizational conflicts of interest, and how an acquisition can limit the opportunities the combined company can pursue.
If your firm is evaluating a government contractor acquisition and classified work is an important part of the target’s value, clearance and FOCI issues are worth addressing early. Contact Sam Finnerty at sfinnerty@pilieromazza.com to discuss how these issues may affect your deal.
