Business viability risks are the silent threat haunting defense procurement. In the first moments of a major project, leaders scrutinize technical specifications and security clearances—yet viability risks often go unnoticed. Viability risks are the danger that a vendor might fail to deliver or survive over the long term, whether due to financial collapse, leadership shortcomings, poor governance, or vulnerability to takeovers. In national security, we vet personnel and technology carefully, but we seldom ask: Will this contractor be operationally and strategically durable for the mission’s duration? Neglecting this question has real consequences—from program delays to foreign adversaries swooping in to acquire struggling suppliers. It’s an often-overlooked gap in vetting that could undermine even the best-laid defense plans.
Table of Contents
- A Cautionary Tale: When a Contractor Falters
- Why Traditional Vetting Falls Short
- Lessons from Venture Capital and Mergers & Acquisitions Due Diligence
- Key Factors in Assessing Business Viability Risks
- Integrating Investment-Style Vetting into Defense Procurement
- Conclusion: Toward a Durable and Secure Supply Chain
A Cautionary Tale: When a Contractor Falters
Imagine a small tech firm that was awarded a contract to develop an AI-driven analytics platform for the military. The company’s innovation beat out larger competitors, promising cutting-edge capability. But halfway through the project, they hit a wall: cost overruns and a cash crunch. Desperate, the startup considers a lifeline investment from an obscure overseas venture fund. Within months, the firm’s leadership quietly shifts as foreign investors gain influence. Critical timelines slip. Sensing trouble, the defense program office scrambles to respond.
In this fictional but all-too-plausible scenario, the technical solution wasn’t the problem—the viability risks for the business was the issue. The vendor’s financial fragility and openness to outside influence threaten to derail mission-critical projects.
Unfortunately, such scenarios are not just thought experiments. A recent Harvard study warns that the defense industry has become one of the most indebted sectors, with over 1,500 defense contractors acquired via debt-fueled private equity takeovers in two decades, creating a default risk time bomb. Such bankruptcies have already disrupted critical defense supply chains, jeopardizing national security. Likewise, foreign adversaries have taken note of struggling defense suppliers—U.S. counterintelligence officials caution that hostile actors use strategic investments to exploit vulnerable tech startups. These examples underscore how a contractor’s underlying stability can be as mission critical as its technology. Yet the government’s traditional vetting approaches rarely address the risks to business viability head-on.
Why Traditional Vetting Falls Short
In federal contracting, especially in defense, there is robust vetting for compliance and security—but gaps remain in assessing a contractor’s long-term viability. When awarding contracts, agencies perform responsibility determinations and review factors like past performance and basic financial credentials. However, these checks often amount to surface-level due diligence, such as verifying that the company isn’t barred, has adequate accounting systems, and can obtain a performance bond.
What’s missing is the kind of deep dive that uncovers whether the company is built to last. For example, current industrial security programs focus heavily on foreign ownership, control, or influence (FOCI) for classified work, and only recently have laws begun to extend FOCI mitigation to unclassified contractors. While this expansion under Section 847 of the 2020 NDAA is a positive step, it still centers on ownership ties, not a holistic picture of corporate health.
Other standard vetting tools also have limitations. Security clearance processes flag individuals’ financial troubles since personal debt can be coercion risks, but no equivalent rigor is applied to corporate financial stress and business viability in a systematic way. The result is that a company teetering on the edge of insolvency could win a sensitive contract if it technically qualifies, only for problems to emerge later.
Moreover, national security reviews tend to be event-driven. The Committee on Foreign Investment in the U.S. (CFIUS) will intervene if a foreign entity attempts to acquire a defense supplier, but CFIUS doesn’t review ongoing vendor relationships or minority investments that can still pose risks. This means if an adversary quietly takes a significant but non-controlling stake in a key supplier, it might slip past traditional oversight.
Our current vetting system has blind spots. It excels at checking security clearances and known compliance red flags, but it doesn’t fully interrogate a contractor’s operational and strategic durability. To close this gap, we can draw inspiration from an unlikely source: the private sector due diligence practices used in venture capital (VC) and mergers & acquisitions (M&A).
Lessons from Venture Capital and Mergers & Acquisitions Due Diligence
In the private sector, investors leave little to chance when evaluating a company’s viability. Before committing funds, venture capitalists perform exhaustive due diligence—the process of evaluating the risks, viability, foundation, and scalability of a business. Fewer than 1% of startups earn VC funding precisely because investors weed out those lacking solid fundamentals.
A VC firm considering a tech startup will scrutinize everything: the financial health (Does it have enough cash flow and reasonable debt levels?), the market outlook (Is there stable demand or too much reliance on one big customer?), the leadership team (Do founders have the right mix of vision and execution skills, without any red flags in their background?), and the governance structure (Are there sound controls and advisors in place to guide growth?). The goal is to spot weaknesses that could cause the venture to falter down the road. If risks are found, investors either walk away or impose conditions—for example, VCs often insist on bringing in seasoned executives to de-risk a venture before cutting a check. This proactive risk mitigation is essentially an investment-style vetting for viability.
M&A due diligence offers a similar playbook at a larger scale. When a company is acquiring another, such as a major defense firm buying a smaller subcontractor, the acquirer will deploy teams of experts to peel back the target’s layers. They review financial statements in detail, audit the contracts, assess legal liabilities, inspect intellectual property ownership, evaluate customer contracts, and much more. Every aspect of the target’s business—from real estate leases to pending litigation—is scrutinized to identify viability risks before a deal is struck.
For defense-focused acquisitions, this checklist expands further to include issues like government compliance, security clearances, export controls, and any FOCI concerns unique to the industry. The underlying principle is simple: no surprises after acquisition. Buyers want to ensure the company they’re about to rely and spend money on is exactly what it appears to be, with no hidden financial time-bombs or operational black holes.
These private-sector approaches stand in stark contrast to how government contracts are awarded. While a contracting officer might check basic indicators, they are not conducting a multi-week deep dive with a team of analysts as a private investor would. It’s understandable—acquisitions and investments involve risking one’s own capital, whereas government procurement relies on competition and trust in legal remedies if a contractor fails.
However, the stakes in national security are arguably even higher than in business. A venture capitalist might lose money if a startup fails; the Defense Department could lose precious time or capability if a contractor fails at a critical moment. Thus, there is a compelling case to borrow these rigorous due diligence frameworks and apply them, in tailored form, to vetting defense contractors for viability.
Key Factors in Assessing Business Viability Risks
When evaluating the long-term viability of a business, several key potential risk factors come into focus. These are the dimensions that both investors and national security officials should consider examining to gauge whether a company can endure challenges and remain a reliable partner. Below are some of the most critical factors, and why they matter.
Financial Stability
A contractor’s financial footing is the foundation of its viability. This means analyzing liquidity, debt load, profitability, and funding sources. In recent years, the defense sector has seen a surge of debt-driven buyouts—over 1,500 defense firms taken over by private equity via leveraged buyouts (LBOs) since the early 2000s. Such LBOs leave companies heavily indebted, significantly raising the risk of default or bankruptcy. At any moment, this debt time bomb could detonate, triggering cascading failures in the supply chain.
A viability assessment would flag a business with risks from precarious finances, such as high debt-to-equity ratios, negative cash flow, or dependence on continual infusions of capital. The goal is to ensure the company can weather the financial ups and downs of multi-year defense programs. If a firm is one economic downturn away from insolvency, that’s a security risk. By vetting financial stability, the government could require mitigation—guarantees, reserves, or bonding—before entrusting critical work to such a vendor.
Leadership Quality and Continuity
Just as venture capitalists prioritize the management team, defense officials should weigh the quality of a contractor’s leadership. This isn’t about prying into personalities—it’s about ensuring the company’s leaders have the integrity, expertise, and foresight to steer a complex project to completion. A brilliant technology idea can be derailed by poor management decisions or unethical conduct at the top. Conversely, strong leaders can pivot and adapt when challenges arise, keeping a company viable.
Consider how investors often assess whether founders are both visionary and execution-oriented; they know that a team that scales a business from 5 people to 500 needs different skills along the way. In the defense context, if a critical supplier is essentially a one-person genius with no succession plan, that’s a concern—what if that person leaves or falters under pressure? Likewise, a history of fraud or mismanagement in the leadership ranks would be an immediate red flag.
Vetting leadership quality might involve reviewing the track record of executives, stability of the management team, and whether the company has depth beyond its founders, such as a capable COO or CFO to handle growth. It’s about confidence that the people in charge can deliver as promised and won’t drive the company off a cliff.
Governance and Internal Controls
Governance maturity refers to the structures a company has to keep itself in check—board oversight, audit and compliance processes, and risk management practices. A startup in a garage might not have these, but any firm vying for national security contracts should.
Good governance is a predictor of resilience. It means the company can catch problems like financial irregularities or security concerns early and respond appropriately. Weak governance, on the other hand, might allow small issues to fester into crises.
An investment-style review of a contractor might ask: Does this company have a functioning board of directors, and are any independent voices present? Are there audits of financials and cybersecurity practices? Do they comply with standards such as ISO or meet frameworks like CMMC?
Essentially, governance is the immune system of a company. If it’s compromised or immature, the company is more likely to succumb to shocks, be they a lawsuit, a compliance violation, or turnover of key staff. For defense buyers, a contractor with strong governance is less likely to surprise you with a scandal or collapse. It also often correlates with ethical business conduct, which is important when classified or sensitive work is involved.
Customer Concentration and Market Resilience
Many small defense-oriented firms have one very large customer: the U.S. government or even a single DoD program. This customer concentration creates a double-edged sword. While it’s great to have a big contract, it means the company’s fate is tightly bound to one source of revenue. If that program gets delayed, scaled back, or cancelled, the business could be left high and dry, posing massive viability risks to the government.
Over-reliance on a limited customer pool is a classic business risk, yet it’s common in the defense industry due to the specialized nature of products. A viability assessment would examine how diversified a contractor’s revenue is. Do they have other commercial customers to cushion changes in U.S. defense spending? Or, if they are mostly serving one program, do they have a long-term contract in place that provides some stability?
The DoD’s own supply chain reports acknowledge that unstable procurement patterns have caused many smaller suppliers to exit the market. If a company builds a component only used in one jet and orders fluctuate wildly year to year, that company will struggle to survive.
Recognizing this, vetting for customer concentration might encourage strategies like developing products with dual uses for the defense and commercial sectors, or at least alert the DoD program managers that a particular contractor might need steady orders or bridge funding to remain viable. Business viability assessments are about avoiding the scenario where risks to a project delay work because the sole supplier went belly-up after a budget hiccup.
Susceptibility to Foreign Influence or Takeover
In the globalized economy, a struggling company can become prey for adversarial investors. This factor assesses how vulnerable a contractor is to coercion or strategic acquisition by foreign entities. Indicators include the company’s ownership structure and financing sources. Is there significant foreign ownership already? Have they been seeking capital aggressively, which might make them likely to accept funds from dubious sources? Do they operate in a technology area of known interest to foreign intelligence?
Small, innovative tech firms are at particular risk—if they can’t secure funding domestically, they may turn to overseas capital, sometimes unknowingly entangling with state-backed investors. The Department of Defense recognized this risk when it launched the Trusted Capital Marketplace program in 2021, explicitly to connect critical small contractors with safe investment money and limit their need to turn to foreign sources.
A viability review would flag companies that are at high risk for targeting by adversarial capital. For instance, if a vendor holds a patent in a cutting-edge radar technology but is cash-poor, one might predict foreign investors knocking at the door. By identifying such cases, the government can intervene early—perhaps by steering them toward vetted investors or by applying stricter FOCI mitigation measures.
Additionally, susceptibility isn’t just about formal ownership; it’s also about influence. A company deeply in debt might be coerced by creditors, or a business with key personnel overseas could be pressured by foreign governments. This factor overlaps with financial stability and leadership—if a CEO is heavily indebted personally, that’s a risk too.
The priority is ensuring that the contractor will not become a backdoor for espionage or suddenly fall under foreign control in the middle of a contract. As one cybersecurity bulletin warned, foreign actors intentionally structure investments via VC or private equity to evade detection by authorities like CFIUS. We need to catch those subtle vulnerabilities before they manifest as breaches or lost technologies.
Additional Factors
By examining these factors—and others like supply chain depth, workforce skills, and even geographic risks—defense agencies can build a comprehensive picture of contractor viability. This isn’t about burdening the procurement process with endless checks, but about prioritizing critical cases. Not every procurement needs an in-depth viability review; a commodity purchase from a stable Fortune 500 company poses little risk. The focus should be on those contractors that provide unique, mission-critical capabilities and lack a safety net of size or diversification. In those cases, an investment-style risk assessment is not just prudent but imperative.
Integrating Investment-Style Vetting into Defense Procurement
How can we practically incorporate these due diligence principles into the government’s procurement and partnership models? It requires a shift in mindset—treating critical contractors not just as providers of goods and services, but as strategic partners whose health is intertwined with national security.
Pre-Contract Viability Assessments
Before awarding major contracts, especially to non-traditional vendors or smaller businesses, the government could institute a viability review akin to an investor’s due diligence. This would involve a specialized team—pulling expertise from financial analysts, counterintelligence officials, and acquisition professionals—to evaluate the bidder’s stability. Such a team might produce a viability risk rating that becomes part of the source selection decision. For example, if two contractors are technically equal but one business carries significantly higher viability risks due to heavy debt or ownership opacity, that could tip the scale in award decisions.
Alternatively, if a high-risk firm truly has the only cutting-edge solution, the government might not simply turn them away, instead proceeding with eyes open and mitigation plans. Mitigations could include requiring a performance bond or reserve funding, setting up escrow accounts for critical intellectual property for if the company goes under, or structuring the contract in phases with go/no-go points contingent on the contractor meeting financial health metrics. Essentially, build guardrails if you must drive on a risky road.
Continuous Monitoring and Early Warning
Viability isn’t static; a company healthy today could struggle tomorrow. Thus, incorporating continuous monitoring into contractor oversight is key. The Defense Department could leverage existing entities like the Defense Contract Management Agency (DCMA) or the Defense Counterintelligence and Security Agency (DCSA) to track the financial and organizational well-being of key suppliers throughout the contract lifecycle.
This is analogous to how banks monitor the credit of borrowers, how investors keep an eye on portfolio companies, and how the DoD continuously vets for security clearances. If a contractor shows signs of distress—declining revenues, leadership exodus, or rumors of a takeover—an alert can be raised. Early warning systems might draw from open-source intelligence, required periodic disclosures by the contractor, and interagency info sharing.
Under the expanded Section 847 FOCI rules, contractors will have to disclose changes in foreign ownership during the life of a contract. We can broaden that concept: require a business working on critical programs to periodically update on key viability risks and indicators, with appropriate confidentiality controls.
Importantly, this isn’t meant to be punitive. If warning signs appear, the government can proactively engage—possibly assisting in finding a domestic investor or coordinating with other agencies to prevent an adversarial takeover attempt. It’s much easier to solve a problem at 20% severity than to respond to a full-blown collapse.
Integrating Due Diligence into Security Clearance and Facility Clearance Processes
Currently, when a company needs a facility clearance to handle classified information, DCSA examines its ownership for FOCI and basic integrity. This process could be expanded to include a viability risk assessment for companies seeking clearances on critical programs. The idea would be to make strategic durability a part of what it means to be a trustworthy contractor.
If an evaluation finds, for example, that a company is 80% funded by a particular venture capital source with ties to foreign entities, that should factor into whether and how they are cleared for sensitive work. Mitigation agreements like proxies or trusts used in FOCI cases could be employed in scenarios beyond classic foreign ownership—such as ring-fencing a particularly vital piece of technology within a failing company or ensuring continuity of supply through an agreement that kicks in if certain triggers are met. The CFIUS process offers templates here, since CFIUS sometimes approves deals contingent on mitigation measures such as excluding certain sensitive operations from the acquired company.
Likewise, national security contracts could include clauses that activate if a contractor undergoes a significant financial or ownership change, requiring notification and allowing the government to consent or set conditions. These would function much like change-of-control clauses in commercial contracts, but specifically tuned to security and viability concerns.
Partnership with Private Sector for Resilience
The government doesn’t have to do it all alone. One innovative approach is to partner with the private sector to bolster contractor viability. The aforementioned Trusted Capital Marketplace is a prime example: DoD acts as a facilitator to connect defense-oriented companies with vetted investors. Expanding this initiative can help address the funding side of viability—essentially making sure that critical tech firms have access to friendly capital before they are forced to seek it from potentially unfriendly sources.
Another partnership model could involve industry consortia or primes mentoring smaller companies on improving governance and scalability, similar to existing mentorship programs for small businesses but focused on internal robustness. Large defense primes, after all, have a vested interest in a healthy supply chain. We might see arrangements where a prime contractor mentors a fragile but important sub-contractor, providing expertise or even financial support in exchange for exclusive rights or joint ventures.
From the venture capital world, there’s also the idea of incubation: DoD could create a sandbox where promising startups get both funding and oversight early, so that by the time they’re fielding real contracts, they’ve been stress-tested. This echoes how certain intelligence community programs like In-Q-Tel invest in startups to nurture technologies for government use. We can extend that concept to investing in the organizational health of those startups.
Policy and Culture Changes
Incorporating investment-style vetting might also require some policy adjustments. Acquisition regulations could be updated to explicitly permit or mandate consideration of factors like financial stability and ownership structure as part of best value determinations. Right now, contracting officers might be unsure if they can legally factor in the risks of a company being bought by China if it’s not a concrete part of the solicitation. Clear guidance and policy would empower them to do so.
Additionally, a culture shift may be needed: program managers and requirement owners should internalize that choosing a vendor is not just about what service or widget they deliver, but about aligning with a partner who will stand by you through the program’s life. Training acquisition professionals in due diligence skills or empowering them with these experts will be important. This doesn’t mean turning them into investment bankers, but heightening awareness of red flags.
Over time, success stories where rigorous viability vetting helped mitigate risks to a business and avoided a disaster will reinforce the value of these approaches. The defense community already embraces rigorous testing for weapon systems; it’s time to apply a bit of that rigor to testing the industry base that builds those systems.
Conclusion: Toward a Durable and Secure Supply Chain
In the high-stakes realm of national defense, vetting contractors for security clearance is not enough—we must also vet for staying power. Business viability risks should move from the periphery to the center of acquisition strategy. We strengthen national security not only by what we acquire, but from whom we acquire and under what conditions. By borrowing due diligence practices from venture capital and M&A, the defense community can start identifying which vendors might crumble under pressure long before the cracks appear. It is a form of preventive maintenance on the supply chain: it’s far cheaper and safer to address fragility early than to scramble during a crisis.
The defense world is aware of these concerns. Policies are beginning to adapt, with expanded FOCI rules and programs like Trusted Capital. But there is room to go further. Imagine if five years from now, every major defense contract came with an assessment not just of technical risk but of corporate risk—a viability score that senior decisionmakers weigh in their approvals. We would likely see fewer surprise bankruptcies halting projects or dubious foreign partnerships raising alarms at the last minute. Instead, potential issues would be identified and mitigated as part of a larger plan.
Over time, this would even incentivize companies to build more durable business models. If contractors know that financial robustness, good governance, and transparency are evaluated, they have reason to shore up those areas—much as companies improve quality to win ISO certifications or tighten cybersecurity to meet CMMC requirements. In that sense, incorporating viability vetting is not a burden but a catalyst for a healthier defense industrial base.
Vetting for operational and strategic durability is about trust. It assures the government that a contractor is not only capable today, but will remain a trustworthy partner through uncertainty, adversity, and the temptations of foreign investments. We routinely ask if we can trust a person with classified information. It’s time we also asked if we could trust a company to be there when we need them most.
By adopting investment-style due diligence frameworks in our vetting, we can answer that question with far greater confidence. Corporate viability risk, once an overlooked gap, can be systematically managed and mitigated. The result will be a more resilient supply chain and a stronger alignment between America’s technological innovation and its long-term security interests.
In a world where the threats evolve rapidly—from cyber espionage to economic warfare—shoring up the weak links in our defense ecosystem is indispensable for staying ahead. The story of national security has always been one of adaptation, and now is the moment to adapt our vetting practices to ensure the defenders of our nation are themselves built on solid ground.
