Private equity investment in defense suppliers has surged in recent years, driven by growing defense budgets, reshoring trends, and the critical need to rebuild domestic manufacturing capacity. For small defense manufacturers, PE investment can provide the capital needed to scale operations, invest in technology, and pursue larger contracts. But attracting PE requires understanding what investors want.
Why PE Firms Are Interested in Defense
Market Fundamentals
$886 billion — DoD budget request for FY20263-5% annual growth — projected through 2030Long-term contracts — provide revenue predictabilityHigh barriers to entry — protect established playersGovernment-backed demand — is recession-resistant
The Reshoring Tailwind
Massive investment in domestic manufacturingSupply chain diversification away from ChinaCritical minerals and electronics reshoringNew facilities and capacity expansion needed
Consolidation Opportunity
Defense supply chain is highly fragmented300,000+ companies, mostly smallPE firms see roll-up opportunitiesPlatform acquisitions with add-on strategy
What PE Investors Look For
1. Recurring Revenue and Contract Backlog
What they want to see:
Multi-year contracts with funded obligationsGrowing contract backlogDiverse customer base (multiple primes and agencies)High contract renewal ratesRevenue visibility for 12-24 months
Red flags:
Dependence on a single contract or customerDeclining backlogShort-term contracts without renewal options
2. Defensible Market Position
What they want to see:
Specialized capabilities that are hard to replicateCertifications that create barriers to entry (AS9100D, CMMC, NADCAP)Proprietary processes or technologyStrong customer relationshipsNiche market leadership
Red flags:
Commodity products with many competitorsNo certifications or special qualificationsEasily replicable capabilities
3. Strong Management Team
What they want to see:
Experienced leadership with defense industry knowledgeDepth of management (not dependent on one person)Technical expertise in manufacturingTrack record of growth and operational excellenceWillingness to partner with PE (or clear succession plan)
Red flags:
Key-person dependencyNo succession planLimited management depth
4. Growth Potential
What they want to see:
Clear path to revenue growth (organic and acquisition)Addressable market larger than current revenueAbility to expand into adjacent capabilitiesCapacity for increased productionNew contract opportunities in pipeline
Red flags:
Mature market with limited growthCapacity constraints with no expansion planDeclining industry segment
5. Clean Financials
What they want to see:
Audited or audit-ready financial statementsDCAA-compliant accounting systemHealthy margins (EBITDA margins of 10-20%+)Consistent revenue growthManageable debt levelsClean tax history
Red flags:
Unaudited financialsInconsistent accounting practicesDeclining marginsExcessive debt
6. Operational Excellence
What they want to see:
Quality metrics (on-time delivery >95%, defect rates <1%)Efficient operations (lean manufacturing, automation)Modern equipment and technologyStrong safety recordEnvironmental compliance
Preparing for PE Investment
Phase 1: Financial Readiness (6-12 months before)
Engage a CPA firm for audit preparationImplement DCAA-compliant accountingClean up balance sheet (resolve old receivables, excess inventory)Document all contracts and backlogPrepare 3-year financial projections
Phase 2: Operational Readiness (3-6 months before)
Document all processes and proceduresEnsure certifications are currentAddress any quality or compliance issuesInvest in deferred maintenanceResolve any legal or regulatory issues
Phase 3: Market Readiness (1-3 months before)
Prepare a compelling investment memorandumDevelop a growth strategy presentationIdentify potential add-on acquisition targetsPrepare management team for due diligenceEngage an investment banker or M&A advisor
Valuation Expectations
Defense Manufacturing Multiples (2026)
| Revenue Range | Typical EBITDA Multiple |
|--------------|----------------------|
| $5-15 million | 5-7x EBITDA |
| $15-50 million | 7-10x EBITDA |
| $50-100 million | 9-12x EBITDA |
| $100+ million | 10-14x EBITDA |
Premium Factors
Higher multiples for companies with:
Sole-source or limited-competition contractsCritical defense capabilitiesStrong IP or proprietary technologyCMMC Level 2+ certificationCleared facility and personnelGrowing backlog
Types of PE Investment
Majority Buyout
PE firm acquires controlling interest (51-100%)Owner may retain minority stakePE provides growth capital and strategic supportTypical hold period: 3-7 years
Growth Equity
PE firm takes minority stake (20-49%)Owner retains controlCapital used for specific growth initiativesLess dilution but less capital
Recapitalization
PE firm provides capital to refinance existing debtOwner takes some money off the tableBusiness continues with new capital structureReduced personal risk for owner
Conclusion
Private equity investment can be transformative for small defense manufacturers, providing the capital and strategic support needed to scale. The key is to prepare your business to meet investor expectations: clean financials, strong operations, defensible market position, and clear growth potential. Start preparing now—the PE firms are actively looking.
Ready to Take the Next Step?
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
Schedule a free introductory session to learn how we can accelerate your path to government contracting success.
Whether you're a small manufacturer seeking defense contracts, a government buyer looking for qualified suppliers, or a business owner pursuing CMMC certification, KDM & Associates and the V+KDM Consortium are here to help.
Join the KDM Consortium Platform today:
[Register as a Supplier (SME)](/register?type=sme) — Get matched with government contract opportunities, access capacity-building resources, and connect with prime contractors.[Register as a Government Buyer](/register?type=buyer) — Discover qualified, defense-ready small businesses and streamline your procurement process.
*Schedule a free introductory session to learn how we can accelerate your path to government contracting success.*
