Navigating the Maze - Maximizing Value in Selling Your 8(a) Government Contractor
While the Small Business Administration 8(a) Program can provide business owners with numerous benefits, selling an 8(a) contractor can be difficult. However, the notion that an 8(a) contractor cannot be sold is false. Working with advisors with experience selling 8(a) contractors can allow owners of 8(a) contractors to successfully sell their business.
What is an 8(a) Contractor??
An 8(a) contractor is a business that has been certified to do business with the government or other government contractors under the US. Small Business Administration 8(a) Business Development Program. You can learn more at www.sba.gov .
Program Overview
Sections 7(j)(10) and 8(a) of the Small Business Act (15 U.S.C. §§ 636(j)(10) and 637(a)) authorizes the U.S. Small Business Administration (SBA) to establish a business development program, which is known as the 8(a) Business Development program. The 8(a) program is a robust nine-year program created to help firms owned and controlled by socially and economically disadvantaged individuals.
Businesses that participate in the program receive training and technical assistance designed to strengthen their ability to compete effectively in the American economy. Also eligible to participate in the 8(a) program are small businesses owned by Alaska Native corporations, Community Development Corporations, Indian tribes, and Native Hawaiian organizations. Small business development is accomplished by providing various forms of management, technical, financial, and procurement assistance.
SBA partners with federal agencies to promote maximum utilization of 8(a) program participants to ensure equitable access to contracting opportunities in the federal marketplace. Once certified, 8(a) program participants are eligible to receive federal contracting preferences and receive training and technical assistance designed to strengthen their ability to compete effectively in the American economy.
Program Benefits
The 8(a) program can be a valuable tool for experienced socially and economically disadvantaged small business owners, who have already been in business for at least two years or more, and are interested in expanding their footprint in the federal marketplace.?
The 8(a) program offers unique and valuable business assistance. The 8(a) certification does not guarantee contract awards but it is a dynamic tool to pursue and capture new opportunities from the government.
Certified firms in the 8(a) program can:
The 8(a) certification qualifies your business as eligible to compete for the program’s sole-source and competitive set-aside contracts. The government authorizes sole-source contracts to 8(a) participants for up to $7 million for acquisitions assigned manufacturing North American Industry Classification System (NAICS) codes and $4.5 million for all other acquisitions.?
Entity-owned 8(a) program participants are eligible for sole-source contracts above these thresholds, but the Department of Defense requires approval of a formal justification if the 8(a) sole-source contract exceeds $100 million; all other federal agencies require approval for sole-source 8(a) contract actions that exceed $25 million. 8(a) program participants are eligible to compete for contract awards under other socio-economic programs or small business set-asides they qualify for.
Program Qualifications
To qualify for the 8(a) program, businesses must meet the following eligibility criteria:
8(a) certification lasts for a maximum of nine years. The first four years are considered a development stage and the last five years are considered a transitional stage. Continuation in the program is dependent on staying in compliance with program requirements.
The federal government fully defines who qualifies for the 8(a) program — including what counts as being socially and economically disadvantaged — in Title 13 Part 124 of the Code of Federal Regulations .
Getting certified as an 8(a) small business
Participation in the 8(a) program is one-time-only for firms and individuals with the exception of entity-owned firms. Alaska Native corporations, Tribal-owned Native Hawaiian organizations, and Community Development Corporations may have multiple 8(a) firms. Some firms may be eligible for the 8(a) program, but they may not be ready to contract with the federal government.
Businesses interested in applying for 8(a) certification can get a preliminary assessment of whether the 8(a) program is right for them by using the Am I Eligible? tool on SBA’s Certify website.
Before you can participate in the 8(a) program you must be certified by SBA.?
Visit the application website at certify.sba.gov to access checklist tools, training, and information that provide guidance prior to applying.
Review the Application Tips for Success Guide and meet with your local SBA District Office or an APEX Accelerator (formerly Procurement Technical Assistance Center) counselor to help determine if you’re ready to apply and prepare.
To apply for the 8(a) program, follow these steps:
Visit the Knowledge Base to find helpful resources, including the application guide, to assist with gathering necessary documentation as well as completing and submitting the application.
If your application is determined incomplete, SBA will notify you in writing through certify.sba.gov. Once SBA has determined the application is complete, SBA has 90 days to process the application and render a decision. Once certified, your profile in SAM and Dynamic Small Business Search will show your approval date and exit date for the 8(a) program.
Contracting Officers?
As a contracting officer, you’re allowed to use set-aside contracts for small disadvantaged businesses. You can find the dollar thresholds for mandatory competition and the procedures for requesting a waiver in 13 CFR 124.506 .
You can award a competitive 8(a) set-aside contract if:
You can award a sole-source 8(a) contract if:
Both the SBA’s regulations and the FAR require you to consider socio-economic programs first for set-aside contracts worth above $250,000. There is no order of preference among the programs.
You must document the rationale you used to make your decision in the contract file. Include information about your research and documentation of the winning contractor’s certification in the System for Award Management (SAM).
If a requirement has been accepted by SBA under the 8(a) program, it must remain in the 8(a) program unless the Associate Administrator of the Office of Business Development agrees to its release. You can read more about releasing a requirement in 13 CFR 124.504 .
How To Find 8(a) Program Contractors
As part of your market research, you can find 8(a) program-certified businesses using the SBA’s Dynamic Small Business Search (DSBS) .
Additionally, you can:
Consider using language in your sources sought announcement that specifically encourages targeted 8(a) small businesses to respond, along with the other federal small business categories if applicable. Ask only for key pieces of information you need to make the set-aside determination and include a page limit to make it easier for interested businesses to respond.
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You must contact your local district office to verify a business’ 8(a) eligibility.
Challenges Faced When Selling an 8(a) Government Contractor
Limited Number of Buyers
The main reason 8(a) contractors are not sold as frequently or for as much money as their private sector counterparts is the limited pool of buyers that can purchase an 8(a) contractor. It is important to keep in mind that the limited pool of buyers only applies if an 8(a) contractor receives a significant portion of its revenue from 8(a) set-aside contracts rather than “free and open” contracts. The buying pool for 8(a) contractors working on multiple 8(a) set-aside contracts is smaller because 8(a) set-aside contracts can only be transferred to other 8(a) contractors, making other 8(a) contractors the only willing and able buyers.?
Given the nature of the 8(a) Program, most 8(a) contractors are small and less likely to be in a buying mode, which limits the buying pool even further. Due to the limited buying pool, valuing an 8(a) contractor can be tricky, so it is important to speak with a certified valuation analyst with experience valuing 8(a) contractors. Finding potential buyers can be difficult, but there are buyers out there. Working with advisors who know how to find and attract potential buyers is crucial.
Buyers are limited to those that who are socially and economically disadvantaged (SDB) and that are considered to be a Service-Disabled Veteran-Owned Small Businesses (SDVOSBs), Veteran-Owned Small Businesses (VOSBs), Minority Business Enterprise (MBE), Women-Owned Small Business (WOSB), Disadvantaged Business Enterprise (DBE) and others certification that may help them compete such as certified as a HUBZone small business. This limits buyers to those that only qualify for these certifications and that are familiar with the process.?
"Finding a qualified buyer for an 8(a) contract is like searching for a needle in a haystack of qualifications and synergistic incentives. The specific parameters set on the max limit of income and asset requirements in combination with having the minimum capital needed to purchase the business makes it a difficult needle to find along with must have requirement to be qualified as a socially and economically disadvantaged (SDB), and/or Minority Business Enterprise (MBE), creates a complex maze. Add to that the necessity for industry-specific knowledge, experience, and entrepreneurial spirit, and you have a challenging endeavor. But for those strategic buyers who align their goals with 8(a) companies, willing to invest and support their growth, the potential for an attractive return awaits, making the journey well worth the pursuit."
The Waiver Process & Risk of Novation
When selling 8(a) contractors primarily engaged in 8(a) set-aside contracts, the process of transferring the 8(a) contracts can present significant complications. Novation, the transfer of SBA-designated contracts to a new business, is a necessary step in the acquisition. However, in the case of 8(a) contracts, an additional challenge arises due to the automatic termination of these contracts upon a change in ownership. To overcome this hurdle, a "waiver" must be obtained from the SBA prior to closing the sale.
The SBA waiver process introduces complexity and time delays, which both the buyer and the seller must anticipate. In order to streamline the SBA waiver process, it is crucial for advisors involved to possess a solid understanding of its requirements. The rules and regulations governing the SBA waiver process can be found in Section 13CFR124.515 of the Code of Federal Regulations .
According to this section, the SBA Administrator has the authority to waive the automatic termination of 8(a) contracts if requested to do so by the 8(a) contractor. However, the waiver can only be granted if the acquiring firm would otherwise be eligible to receive the award directly as an 8(a) contractor. The selling entity is responsible for submitting the waiver request to their SBA Administrator (Contracting Officer) and managing all communication with the government regarding the waiver.
The waiver request must include various items, including evidence that the buyer's 8(a) status is in good standing and that they have the capability to assume and fulfill all obligations of the 8(a) contracts for which termination is being waived.
Furthermore, the specific government entity that initially awarded the 8(a) contract must also approve the waiver. It is important for the selling entity to ensure that the government entity is aware of the waiver submission and, if possible, obtain verbal confirmation of their willingness to approve the waiver.
The duration of the waiver process can vary significantly, ranging from a few weeks to a few months. The timeline heavily depends on the relationship between the selling entity and their Contracting Officer, as well as the officer's experience with the waiver process.
Navigating the waiver process and the risk of novation requires careful attention and thorough communication with both the SBA and the relevant government entity. By understanding the regulatory requirements and diligently managing the waiver submission, buyers and sellers of 8(a) contractors can mitigate potential delays and ensure a smoother transition of ownership.
The Need For Experienced Advisors
Complex rules regarding the sale of 8(a) contractors and, more specifically, the transfer of 8(a) contracts means that there are fewer advisors familiar with the sale of 8(a) contractors. The lack of advisors (merger and acquisition advisors, certified valuation analysts, CPAs, attorneys) with knowledge of the subject and experience working with 8(a) contractors creates a void of information for owners of 8(a) contractors; they frequently do not know with whom to speak regarding the sale of their 8(a) contractor.
Selling any business can be a daunting task and is one of the most important decisions in the life of a business owner. Understanding the added complexities of selling an 8(a) contractor can mean the difference between a successful sale and an unsuccessful one. In order to successfully sell an 8(a) contractor, it is important that the owner of an 8(a) contractor with 8(a) set-aside contracts consults with experienced advisors, such as the Mergers & Acquisitions team who have dealt with the challenges outlined above.
Control Conflicts - 51% Rule & Voting Rights?
Private equity firms may hesitate to acquire an 8(a) contract due to the 51% equity requirement, the controlling interest and voting rights given to the certified individual who qualifies the business as the operator. Here are a few reasons why this might be a deterrent for private equity firms:
Limited control and decision-making: The 51% equity roll means that the certified individual has majority ownership and control over the company. Private equity firms typically invest with the intention of actively managing and influencing the strategic direction of the business. However, in an 8(a) contract scenario, their ability to make significant decisions and implement their preferred strategies may be limited.
Reduced return on investment potential: Private equity firms aim to maximize their returns within a specific time frame. The constraints imposed by the 51% equity roll and the certified individual's absolute control may limit the firm's ability to optimize operations, make necessary changes, or pursue alternative exit strategies. This can hinder the potential for achieving the desired return on investment.
Lack of flexibility in governance structure: Private equity firms often seek to align the governance structure with their investment strategy. However, the 51% equity roll and the accompanying control and voting rights granted to the certified individual might impede the firm's ability to implement its desired governance framework. This can create challenges in aligning incentives, implementing performance metrics, or participating in strategic decision-making.
Potential conflicts of interest: In an 8(a) contract, the certified individual holds significant control and decision-making power, which may give rise to conflicts of interest. Private equity firms typically seek to align the interests of management and shareholders. However, the potential conflicts arising from the 51% equity roll could make it difficult to navigate these conflicts and protect the interests of the firm and its investors.
Constraints for Strategic Acquirers and Private Equity Firms
Strategic acquirers and private equity firms seeking to acquire small-business government contractors with attractive niches or technologies often encounter constraints related to small business affiliation rules. These rules can impact the eligibility of the target companies for small business set-aside contracts, adding complexity to the acquisition process.
One significant issue revolves around the continuing eligibility of target companies for small business set-aside contracts. The Court of Federal Claims addressed this matter in the HWI Gear, Inc. v. United States bid protest, offering insight into how the Small Business Administration's (SBA) new recertification requirement affects buyers and their small business targets with pending bids and proposals.
According to the new requirement in 13 C.F.R. § 121.404, small business offerors must recertify their size status within 30 days "of a merger, sale, or acquisition, where contract novation is not required," as well as when "the merger, sale, or acquisition occurs after offer but prior to award." This regulation introduces additional considerations for acquirers, who must assess eligibility under new ownership before obtaining awards following the acquisition's completion.
The HWI Gear case involved a Department of the Army procurement set aside for 100% small businesses. Mechanix Wear, LLC (Mechanix), the offeror, self-certified as small under the relevant North American Industry Classification System code. However, before the award, Gryphon Investors acquired Mechanix, leading to a change in its corporate structure from a standard corporation to a limited liability company.
The court held that Mechanix's failure to recertify its size status, and the agency's failure to require such recertification, violated FAR 52.219-28, which mandates recertification within 30 days after a merger or acquisition that does not require novation. The court emphasized that the Army explicitly applied the recertification directive to the procurement, imposing obligations on both the offeror and the contracting officer to address changes in size status resulting from the acquisition.
The case highlights several recommended actions for small businesses and potential buyers. First, careful attention should be given to the wording of solicitations. If the FAR provision is incorporated into the solicitation rather than merely referenced, it carries greater weight and imposes stricter obligations.
Second, it is essential to notify the contracting officer of any changes in corporate structure, even if they appear to be mere conversions from one legal entity type to another. The duty of inquiry on the contracting officer may be triggered, especially if the solicitation explicitly includes the small business recertification requirement.
Under the revised 13 C.F.R. § 121.404(g), it is now incumbent on target companies and their acquirers to notify the contracting officer of any changes that could impact the pending bids or proposals. This includes changes in corporate structure and small business status. However, such notification does not eliminate the risk of bid protests, particularly if the changes materially affect the offeror's proposal or ability to perform the contract, rendering the former small business ineligible for award.
Change in Corporate Structure?
The case of HWI Gear, Inc. v. United States bid protest sheds light on the importance of properly addressing changes in corporate structure and recertification of size status when it comes to small business government contractors.
It underscores the importance of diligence in understanding the wording of solicitations and incorporating the necessary recertification directives. Private equity firms and strategic acquirers should be aware that even seemingly minor changes in corporate structure, such as converting from a corporation to an LLC, can have significant ramifications.
For small-business government contractors participating in the 8(a) program, the impact of corporate structure changes on their eligibility for small business set-aside contracts can be particularly critical. The SBA's affiliation rules, which determine size status, need to be carefully considered to ensure continued eligibility following an acquisition.
Affiliations and Identity-of-Interest
When acquiring an 8(a) government contractor, it is crucial to be aware of the potential issues that can arise with affiliations and identity-of-interest. Affiliations refer to relationships between two or more businesses where one has the power to control or influence the other. These relationships can have significant implications for the eligibility and continued participation of the 8(a) contractor in the program.
According to sources problems with affiliations can arise in various ways.
To navigate these potential pitfalls, it is essential to conduct thorough due diligence and seek legal guidance to ensure compliance with the SBA's affiliation rules. Understanding the intricacies of affiliations and identity-of-interest and proactively addressing any potential issues can help mitigate risks and ensure a smooth acquisition process for both the buyer and the 8(a) government contractor.
3 Past Affiliation Violations Cases
These cases illustrate some of the legal challenges and controversies that have arisen in the context of 8(a) contracting involving Native American owed companies. It is important to note that each case is unique and specific to its circumstances. Government contracting regulations, including those related to affiliations and identity-of-interest, are complex, and strict compliance is necessary to maintain the integrity of the program and ensure fair competition.
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