The government contracting (GovCon) sector has long proven resilient through market cycles, but heading into 2025, dealmakers are approaching M&A with renewed caution. Federal budget uncertainty, political transitions, and changing regulatory landscapes are reshaping how both buyers and sellers think about the market.

Deep Water Point & Associates (DWPA) recently released its 2025 Federal M&A Outlook, highlighting the trends, risks, and opportunities shaping the year ahead. To add further insight, Matt Shaffer, Director of Transaction Advisory at DWPA, shared his real-time perspective on how GovCon executives should navigate what's shaping up to be a more selective M&A environment.

A Look Back: How 2024 Set the Tone

Before looking ahead, it's important to understand how 2024 laid the foundation for this year's government services market. M&A activity remained steady last year, with 126 completed GovCon deals, but the environment grew noticeably more cautious. Transaction volume held up, but deal values softened, especially for businesses with heavy small business set-aside exposure or less differentiated offerings.

DWPA’s advisory team advised 38 clients across 50 engagements, supporting $14 billion in closed transaction value in 2024. However, it noted a growing bifurcation: premium assets (especially in tech-driven sectors) still commanded strong attention, while more generalist firms faced longer processes and more pricing pressure.

Buyers in 2024 became more discerning, and that selectivity is only expected to sharpen in 2025.

2025 Outlook: A Cautious First Half, Then Opportunity

DWPA projects that overall M&A activity will moderate in early 2025 as buyers and sellers grapple with federal budget uncertainty, procurement delays, and the broader impacts of political transition. As Matt Shaffer explained:

But this isn't a long-term freeze. Rather, DWPA expects a wave of pent-up deals to hit later in the year once policy direction becomes clearer. According to Shaffer, many sellers are simply waiting for a more stable backdrop “There is a strong pipeline of companies poised to come to market once the policy and funding landscape feels more settled."

For now, firms should focus inward, improving operational efficiency, strengthening customer intimacy, and aligning closely with agency missions that will likely see investment under the new administration’s priorities.

Regulatory Shifts: Small Business Sellers Face Headwinds

New regulatory changes, particularly around small business size recertification post-acquisition, are also shifting how buyers evaluate GovCon firms. According to Shaffer:

In the past, small businesses often relied on their set-aside contracts to maintain premium valuations. Now, acquirers are scrutinizing the risk that comes with losing that small business status post-sale, leading to valuation pressure and tougher deal terms.

However, firms that have diversified beyond set-asides, leveraging OTAs, SBIRs, or winning full-and-open contracts, are still commanding strong attention. Firms that can show durability across different contract types and deep customer relationships will have a clear advantage.

Where Buyers Are Looking: Sector Focus for 2025

Not all sectors will experience the same levels of caution. DWPA anticipates defense technology, cybersecurity, and border security companies to remain highly attractive in 2025.

Shaffer pointed to several areas expected to drive the most interest:

Defense-related technology companies remain relatively insulated from broader federal budget cuts, while increased political attention on Customs and Border Protection (CBP) and Immigration and Customs Enforcement (ICE) is spurring additional buyer interest.

Advice for Smaller Contractors: Stand Out, Don’t Blend In

For smaller GovCon contractors, DWPA warns that the 2025 market will reward those who prove they can compete beyond small business set-asides. Shaffer's advice is clear:

Simply “testing the market” because a firm holds a socioeconomic status is unlikely to yield strong buyer interest in this environment. Instead, sellers must demonstrate competitive strength, customer pull-through, and mission-critical relevance.

Beyond 2025: Strategic Positioning for Future Growth

Looking beyond the short-term caution of 2025, DWPA expects strategic M&A activity to reaccelerate, but with new rules in place. As Shaffer outlined:

Winning in the next phase of GovCon M&A will be about scale, technology integration, and building a resilient position aligned with long-term federal mission needs, not just amassing contract vehicles.

Integration Will Matter More Than Ever

Even as firms close deals, integration risks are front of mind. Shaffer emphasized that success after close will increasingly separate strong acquirers from the rest:

He stressed the need to over-communicate with employees, align BD pipelines early, and set up a strong Integration Management Office (IMO) to avoid customer disruption and maximize deal value.

The Bottom Line

The federal M&A market in 2025 will not disappear, but it will demand sharper positioning, stronger operational readiness, and a clear mission-aligned story from sellers.

As DWPA’s analysis makes clear:
The firms that succeed will be those who focus now, position smartly, and move decisively once the policy landscape stabilizes later this year.

Read their full Report here → DWPA Federal Market M&A Update