The DIB Transition Accelerator: De-Risking M&A to Lower the Cost of Capital for Small Defense Businesses 

A Practitioner Recommendation for Mobilizing Private Capital
by Michael Dworkis

BENS brings practitioner perspectives from the business community to the nation’s most pressing security challenges. Through our Mobilizing Private Capital campaign, we’re translating that understanding into action. 

As the threat environment grows increasingly complex and appropriations remain unpredictable, senior national security leaders are intensifying efforts to attract private investment and address this imbalance. The challenge now is helping the rest of the ecosystem keep pace—ensuring that capital markets, industry, and the broader bureaucracy understand this shift, build the necessary connections, and adapt their practices to accelerate it. 

This campaign meets that challenge through a series of member-led recommendations. This recommendation comes from Michael Dworkis. Michael is the founder of Mission Support Partners, where he invests in and advises lower-middle-market businesses. He is also the co-founder of Stoic Holdings, a private investment firm, and previously invested with Scopia Capital Management and CSL Capital Management. Through his work, Michael has witnessed capable investors and viable defense businesses repeatedly fail to connect—not from capital scarcity, but from information asymmetry and compliance uncertainty. This recommendation explores these barriers and a path forward. 

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Establish a Defense Industrial Base Transition Accelerator to mobilize private capital for small defense business transitions by removing four critical barriers:

• Seller-side barriers: Latent compliance issues around CMMC, FOCI, and DFARS that go unaddressed before market
  
• Buyer-side barriers: Inability to distinguish fixable compliance issues from deal-breakers or assess program stability
  
• Intermediary barriers: Brokers lacking defense-specific expertise to credibly explain value and risk
  
• Economic barriers: Prohibitively expensive specialized diligence that destroys returns on small transactions

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The Opportunity

Small businesses form the backbone of the defense industrial base, accounting for more than 70 percent of its suppliers. Yet that foundation is eroding—from roughly 45,000 companies in 2011 to about 25,000 in 2020—and hundreds more face succession risks each year as owners retire.

The capital to reverse this trend already exists, and current market conditions create a unique opening. A national push to re-shore production and strengthen domestic manufacturing has generalist investors actively seeking U.S.-based companies with advanced technical capabilities.

Tier 2 and Tier 3 defense suppliers fit that profile precisely: family-run specialty manufacturers with decades of expertise in precision machining, advanced materials, and complex systems integration. Private equity firms collectively manage more than $2 trillion and already acquire comparable businesses in adjacent sectors.

Outside investors can do more than preserve what exists. Their operational and financial expertise can help modernize production systems, expand capacity, and scale these businesses. More importantly, they excel at identifying and developing commercial applications for specialized manufacturing capabilities—helping defense-focused suppliers diversify revenue streams beyond their current defense contracts.

This commercial diversification isn’t just good business—it serves national security. The defense and broader industrial bases are increasingly intertwined. Maintaining manufacturers who can serve both defense and commercial markets creates surge capacity when defense production must accelerate. Without successful ownership transitions during this unique window, these capabilities disappear from both supply chains. The challenge is helping outside investors navigate defense-specific complexities to unlock this potential.

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The Challenge

Capable investors and viable defense businesses repeatedly fail to connect—not from capital scarcity, but from systemic friction that breaks deals. What appear to be isolated problems are, in fact, interlocking barriers that reinforce one another, symptoms of a market failure that directly impacts the risk premium investors demand.

The first barrier is information asymmetry. Small DIB contractors often carry latent compliance issues around CMMC cybersecurity requirements, FOCI restrictions, and DFARS contracting rules. Many can’t clearly articulate their role in defense programs or provide visibility into future demand—information typically concentrated with the one or two Prime contractors they support. This customer concentration appears far more severe than typical businesses, creating concern for investors unfamiliar with the underlying program stability. When mid-market PE funds, independent sponsors, or individual investors encounter these issues during diligence, they face a choice: walk away or demand returns that kill the deal economics.

Prohibitive costs compound the problem. Specialist advisors who understand these complexities either concentrate on selling mid-market businesses to larger strategics and private equity firms, or charge fees that can be prohibitive for small transactions—hundreds of thousands of dollars in diligence costs can easily accumulate on deals under $10 million, significantly dragging returns.

Ineffective intermediation creates further friction. The business brokers representing many sellers lack defense expertise. They might attempt to explain compliance gaps, but without clear guidance on why and how a buyer can fix issues, their assurances ring hollow. Sellers, incentivized to minimize pre-sale costs and avoid ruffling feathers with key customers, simply market assets “as is” with claims that “it’s always worked this way.”

Not all small business exits represent market failure—post-Cold War consolidation and evolving technology have legitimately reshaped the DIB. The problem is that information asymmetry prevents investors from distinguishing viable suppliers with fixable compliance issues from businesses that should naturally wind down. This indiscriminate risk assessment means capable investors walk away from both.

The result of a failed sale process creates cascading harm: no fresh capital for growth, underlying compliance issues remain unaddressed, some small businesses simply wind down and exit, and everyone except the lawyers loses money in broken deals. Critical suppliers are left without succession options. The expertise to solve these problems exists within government program offices and specialized consultancies, but remains inaccessible at the price point and speed these transactions require.

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The Path Forward

Establish a DIB Transition Accelerator—a federally-sponsored resource center providing defense-specific expertise to facilitate small business M&A transactions. Four interconnected services would address the barriers identified above:

Pre-sale preparation service: Sellers can open files with the Accelerator to receive guidance on addressing compliance issues before marketing their business. This prevents sellers from going to market “as is” with latent CMMC, FOCI, or DFARS problems that break deals during diligence. Early intervention helps clean up fixable issues when correction costs are lowest.

Buyer support “hotline”: Provide contextual intelligence that reduces perceived risk without substituting for commercial diligence. Help investors understand whether customer concentration reflects genuine program risk or stable long-term relationships with Primes. Connect buyers with DoD program offices to validate contract positions and growth pathways, and clarify which compliance gaps are manageable versus deal-breakers.

Intermediary education: Equip the existing M&A advisor and business broker network with defense-specific knowledge through practical guides and training. Enable intermediaries to credibly explain why a CMMC gap is fixable or how a sole-source position creates value, rather than simply assuring buyers “it’s always worked this way.”

Best practices and tools development: Create standardized resources that make specialized expertise accessible at the price point small transactions require—playbooks for common compliance scenarios, templates for program stability analysis, and efficient connection protocols to DoD program offices.

The Senate’s FY26 NDAA establishes an Economic Defense Unit within DoD, explicitly chartered to leverage private capital and market actors and lead DoD outreach to private sector participants. This mission directly aligns with the DIB Transition Accelerator’s purpose. The program should be structured to sustain itself financially through modest transaction fees on completed deals—keeping initial access free or low-cost to encourage use while ensuring long-term viability without ongoing appropriations.

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Conclusion

The four services outlined above address distinct barriers, but their collective impact lies in how they reduce information asymmetry across the entire transaction lifecycle. Pre-sale preparation prevents problems from reaching the market. Buyer support provides clarity during diligence. Intermediary education equips brokers to facilitate rather than obstruct. Standardized tools make specialized expertise accessible at scale.

The result would be a measurable expansion of the investor pool—not by changing defense businesses themselves, but by making them understandable to the outside investors who already acquire manufacturing, technical services, and engineering companies in every other sector. Without this intervention, we leave critical suppliers with fewer succession options, lower valuations, and limited access to the capital and expertise needed to modernize and scale.

The DIB Transition Accelerator complements broader efforts to mobilize private capital for national security. Whether through novel financing mechanisms or streamlined acquisition pathways, these initiatives depend on investors being able to execute transactions confidently. By addressing the friction that breaks deals today, we expand the capital available to support critical suppliers tomorrow.

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Digital artwork created with the assistance of ChatGPT (OpenAI).