The Silent Succession Crisis: Mobilizing Private Capital to Preserve Critical Defense Suppliers

A Practitioner Recommendation for Mobilizing Private Capital by Chad Strader and Ned Sandlin

BENS brings practitioner perspectives from the business community to the nation’s most pressing security challenges. Through our Mobilizing Private Capital campaign, we translate private-sector experience into actionable national security insights. As the threat environment grows more complex and appropriations remain unpredictable, senior national security leaders are working to attract more private investment into the defense industrial base. That shift will only succeed if capital markets, industry, and government can connect more effectively and move faster. This campaign supports that effort through a series of member-led recommendations.

This recommendation comes from Chad Strader and Ned Sandlin of Red Arts Capital. Chad is Co-CEO and Managing Partner of Red Arts, which he co-founded in 2015, and has spent more than a decade acquiring and operating lower-middle-market supply chain and manufacturing businesses. Ned is an Operating Partner at Red Arts and a retired U.S. Air Force Colonel with 25 years of service, a PhD in Logistics, and deep expertise in defense supply chain operations. Together, they have spoken with more than a hundred precision machine shops and industrial suppliers over the last several years and have seen firsthand how baby boomer business owners with limited succession planning, and insufficient visibility into future demand are quietly eroding capabilities the defense industrial base cannot easily replace.

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Forestall the loss of critical defense suppliers as owner-operators retire through three interconnected actions:

• Unlock supplier-held data on demand and capacity: Create voluntary, confidentiality-protected pathways for lower-tier suppliers to share capacity, order history, and production data upward, helping illuminate fragility that no single program office can see today.
• Delegate communication authority to the right level: Push clear, unclassified engagement guidance down to the contracting and program-management level so routine dialogue with private investors can occur without senior-level intervention.
• Streamline the path for domestic succession investment: Reduce the transaction and compliance frictions that disproportionately stall small continuity deals, and ensure that small-business designation rules do not inadvertently block private capital from preserving lower-tier suppliers during ownership transition.

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The Opportunity  

The United States is home to approximately 16,600 machine shops (IBISWorld, 2026), a population that has declined roughly 0.8 percent annually over the past five years. Within that broader population, a meaningful subset of small, owner-operated precision manufacturers supports the nation’s space, defense, and advanced manufacturing sectors, collectively handling an estimated $40 to $50 billion in annual spend (Andreessen Horowitz, 2022). These businesses are not marginal. They hold specialized know-how, skilled workforces, long-standing customer relationships, and entrenched positions deep inside programs critical to national security.

Some are the only domestic source for a component on which a major defense system depends. Others are one of only two qualified producers, meaning the loss of one supplier can immediately place a large share of available supply at risk. These are productive, deeply embedded businesses that cannot be replaced quickly.

Yet most remain largely outside the field of view of private capital. Roughly 98 percent generate less than $10 million in annual revenue, most employ 50 or fewer people, and ownership is often concentrated in a single founder-operator. The average owner is approximately 60 years old; the average worker is approximately 55. A retirement wave is now moving through this segment, creating a narrow but important window for investors who understand both the value of these businesses and the consequences if they disappear.

That transition is part of a much larger national trend. McKinsey’s Institute for Economic Mobility estimates that by 2035, roughly six million small businesses will face ownership transitions as baby boomers retire, with more than one million viable candidates for sale representing up to $5 trillion in enterprise value. Defense suppliers are part of that wave, but they face additional barriers that make succession harder to execute and easier for outside investors to miss. In this segment, retirement, not insolvency or obsolescence, is often the true driver of supplier loss.

That matters because deterioration often begins before an owner formally exits. As retirement approaches, investment slows, equipment upgrades are deferred, and workforce development stalls. In many precision shops, the owner is also the primary sales engine, maintaining customer relationships, pursuing new work, and keeping revenue flowing. As owners begin to wind down, the business often starts to atrophy before any transaction occurs.

By the time an outside buyer arrives, the company may already be carrying years of underinvestment and a shrinking pipeline. Fresh capital can do more than preserve what remains. It can recapitalize operations, strengthen management, fund modernization, and restore commercial momentum that owners are understandably reluctant to maintain late in the company’s lifecycle.

The opportunity is not simply to finance acquisitions. It is to preserve critical industrial capability before it deteriorates or disappears.

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The Challenge

Capable investors and strategically important suppliers often fail to connect not because capital is unavailable, but because three interlocking barriers make succession deals difficult to underwrite, difficult to execute, or both.

The first barrier is supply chain visibility

For investors, the challenge is rarely finding niche companies or specialty manufacturers. The harder task is underwriting the durability of the demand that makes them viable businesses.

A lower-tier supplier often cannot explain the full programmatic context around its work: how that work maps to larger national security programs, how durable underlying demand is, or whether a short-term revenue disruption reflects normal government turbulence or a more structural business problem. From the outside, a business can look fragile even when the underlying need is real and enduring.

The information gap is structural. As the end customer, the Department of Defense (DOD) — designated the Department of War — is best positioned to understand macro demand: authorized quantities, program priorities, and long-term requirements. Lower-tier suppliers, by contrast, usually have the clearest view of their own capacity, production history, customer relationships, and the specific slice of demand they serve. Neither side holds a complete picture. Resilience depends on connecting the two.

That is especially important because supplier-held data is often where fragility becomes visible first. Niche, specialized manufacturers can offer insight into production constraints, surge limits, repeat order cadence, and dependence on a single customer or program. That is precisely the information needed to identify weak points before disruption occurs.

At the same time, many suppliers are understandably reluctant to share that information. Production data, customer relationships, and order history are often among a company’s most sensitive competitive assets. If shared carelessly, that information can be used against them. Any serious effort to unlock supplier-held data must therefore be voluntary, narrowly scoped, and backed by credible confidentiality protections.

The stakes are sharpened by concentration risk and appropriations volatility. Many small suppliers depend heavily on a single dominant program, so a continuing resolution or funding gap can quickly create cash-flow stress even when long-term demand has not fundamentally changed. That is often where fragility concentrates: not across the industrial base in the abstract, but in the smaller, specialized producers deep inside it.

The second barrier is a communication gap between government and private capital

The information investors need is rarely classified. It is simply not consistently shareable. Guidance on what can be discussed, with whom, and in what level of detail varies across the system, and similarly situated officials may approach these conversations differently even in unclassified settings. That inconsistency creates avoidable uncertainty for investors trying to evaluate succession opportunities in critical suppliers.

Investors evaluating a succession transaction need enough clarity to understand whether a supplier supports a real and durable requirement, whether a short-term revenue disruption is temporary or structural, and whether the business sits in a strategically important part of the supply chain.

When routine dialogue cannot happen, capital moves more cautiously. In investing, that added uncertainty may be enough to prevent a deal from closing.

Without clear guidance and delegated authority pushed to the right level in the organization, communication between government and private capital will remain episodic rather than systematic. That is a problem not only for investors, but for any effort to preserve fragile suppliers before they exit the market.

The third barrier is designation risk in succession transactions

For some lower-tier defense suppliers, the main issue is not finding a willing domestic buyer. It is that a change in ownership can alter the regulatory status on which a meaningful share of the business depends.

This problem is especially acute where a supplier’s economics are tied to small-business programs or 8(a)-linked work. In those cases, an acquisition by a larger private equity-backed platform can create immediate uncertainty around size status, program eligibility, and the durability of revenue streams that were central to the investment thesis.

The business itself may be unchanged. The same employees remain. The same machines run. The same parts ship. But if ownership change affects how the company is treated for purposes of small-business status, the impact on valuation can be significant.

That quickly becomes an investment problem. Buyers will ask early in diligence how much of the company’s revenue depends on protected status and what happens to that revenue after closing. If the answer is unclear, or if a material share of earnings must reasonably be treated as at risk, the buyer will discount the business accordingly. Sellers, meanwhile, usually value the company based on the revenue it currently has, not the revenue a new owner might lose. The result is a bid-ask gap that is often hard to bridge.

A narrow exception does exist. Where a supplier can demonstrate that it is the only qualified domestic source for a specific part or capability, DOD can grant a limited waiver allowing protected revenue to continue after acquisition. In practice, however, this is a very high bar and applies to only a small fraction of transactions. For most lower-tier precision manufacturers, ownership change still puts status-dependent revenue at risk.

This matters because many such suppliers are not easily interchangeable. They produce a specific part, to a specific standard, for a specific platform or program. In those cases, the issue is not just contractual. It is industrial. A framework designed to support small-business participation can, in practice, make it harder to preserve fragile but essential production capability during ownership transition.

That barrier matters even more because the broader 8(a) environment is now under active scrutiny. In January 2026, DOD announced a comprehensive review of contracts awarded under the SBA’s 8(a) Business Development Program, including a line-by-line examination of sole-source 8(a) contracts above $20 million, with smaller awards also subject to review. That review does not by itself establish that the 8(a) framework will change substantially. But it does heighten uncertainty around a framework that already complicates succession investment for some lower-tier suppliers. Any reforms should account for how ownership-change dynamics already deter continuity capital in fragile parts of the defense supply chain.

Taken together, these three barriers create a quiet but consequential market failure. Capital that could preserve and strengthen critical suppliers often does not move early enough, or with enough confidence, to protect the underlying capability. By the time a business formally reaches transition, that capability may already have eroded.

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The Path Forward

As noted in the introduction, the DOD has already articulated a more ambitious reform direction. The November 2025 Acquisition Transformation Strategy, together with related NDAA reforms, points toward a more flexible approach to rebuilding the defense industrial base: stabilizing demand, attracting private capital, broadening the supplier base, and moving faster through a less burdensome acquisition system.

The task now is to translate that direction into workable mechanisms for lower-tier supplier succession. In practice, that means helping private capital identify risk earlier, engage the right government stakeholders, and execute transactions before critical capability is lost.

Unlock supplier-held data as a strategic asset

The most important step is not simply to push more information down from DOD to investors. It is to create structured, voluntary pathways for suppliers to share what they already know upward.

These businesses often hold decades of production records, repeat order history, direct customer relationships, and hard-earned insight into where capacity is tight and where fragility is growing. That information is highly relevant to both investors and policymakers, but today it is rarely captured in a way that can be aggregated, protected, and used.

Simple mechanisms could help: voluntary data-sharing agreements, supplier reporting frameworks, or prime-facilitated demand anchoring that gives smaller manufacturers more visibility into expected demand. Whatever the mechanism, the design requirement is the same: suppliers will participate only if they have credible assurance that shared data will be protected and not used in ways that undermine their competitive position.

In parallel, the Manufacturing Extension Partnership network should be used as a practical early-warning node for ownership-transition risk, helping surface continuity challenges before a business reaches the point of failure. The working group on assessing supply chain fragility established under Section 1844(b)(2) of the FY2026 NDAA is a natural place to develop and test these mechanisms.

Delegate communication authority to the right level, and make clear what can be shared

Private capital cannot move confidently into succession situations if investors cannot have direct, substantive conversations with government stakeholders about program relevance, demand durability, and supply-chain priorities.

DoD should establish clear, unclassified communication protocols and push delegated engagement authority down to the contracting and program-management level. Where information is appropriate to share and directly relevant to industrial continuity, routine discussions with private investors should be able to occur without requiring senior-level intervention.

The collaborative forum established under Section 1844 of the FY2026 NDAA offers a natural venue for this kind of engagement. It is designed to bring together government, industry, academia, and nonprofit stakeholders to identify barriers to industrial-base health and develop recommendations, including financial incentives and business models that can attract private investment.

Used well, that forum could help surface the transaction-level frictions described here, problems that currently play out case by case and often remain difficult for policymakers to see until transactions stall and supplier continuity is already at risk.

Streamline the path for domestic succession investment, and account for the full cost of friction

The compliance regime should preserve security without treating every ownership transition as if it presents the same level of risk. For qualified domestic buyers with established track records, DOD and relevant agencies should pilot a more workable path built around buyer prequalification, parallel processing of reviews, and interim operating authority where appropriate.

The goal is not to reduce scrutiny. It is to reduce avoidable delay and uncertainty that disproportionately stall small transactions.

Succession-driven acquisitions of program-relevant suppliers should also be treated as a legitimate national security use case for Office of Strategic Capital tools, including loan guarantees and subordinated debt, that lower financing costs without displacing private buyers.

Policymakers should also account for the investment effects of small-business designation rules. Where ownership change jeopardizes status-dependent revenue, otherwise viable succession transactions can become difficult, or impossible, to finance. Reforms to 8(a) and related set-aside frameworks should therefore be evaluated not only for their program-integrity effects, but also for their downstream effects on succession capital and lower-tier industrial continuity.

The question is not whether to protect critical supply chain related businesses. It is whether the current framework inadvertently deters the very investment that could help preserve critical suppliers. Private capital can often move faster than government. Policy should create the conditions that allow it to do so in the national interest.

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Conclusion

The United States is rightly focused on scaling production, strengthening supply chains, and mobilizing private capital for national security. But a quieter problem sits beneath all three goals: the gradual disappearance of small, capable suppliers when aging owners step away and no viable transition path exists.

The core question is whether qualified investors can see enough of the supply chain picture, communicate openly enough with the right government stakeholders, move with enough speed, and acquire critical suppliers without triggering avoidable status-related risks that undermine the transaction itself.

This is not simply a dealmaking problem. It is a continuity problem. When those conditions are absent, underinvestment deepens, confidence erodes, and capability disappears, often before anyone realizes it is gone.

The building blocks to address this problem already exist. DOD is investing in supply-chain illumination, the Office of Strategic Capital is designed to crowd in private investment, and suppliers themselves hold data the rest of the ecosystem needs. What is missing is a framework that connects those pieces around a specific objective: preserving critical suppliers before predictable attrition becomes irreversible loss.

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