Contracting Advice: 8(a) Applications

Is Your Company Considering Applying For The SBA’s 8(a) Program?

As a federal contractor, you may be aware of the SBA’s 8(a) program, which is a 9-year program designed to assist companies where the majority owner(s) are both socially disadvantaged (minorities and/or women), and economically disadvantaged (have a net worth under $250k); who have been in business for two years and can demonstrate their potential for success.  Obtaining your company’s 8(a) certification can grant you the ability to receive sole source awards up to $4,000,000, and enable you to compete for those opportunities that are set-aside for 8(a) companies only.

Most importantly, the 8(a) program allows you the opportunity to joint venture with a large business that can serve as your mentor, and allow you to compete for even larger and more complex solicitations that you may not be able to compete for utilizing your company’s resources, capacity, and past performance alone.

In order to receive the 8(a) certification, vendors must submit both an electronic application, and a hard copy application in order to be considered for the 8a program.  In order to increase the probability of your company’s application being accepted by the SBA, I wanted to provide you with a few tips and pieces of advice:

POTENTIAL FOR SUCCESS:  While you can apply for a 1 year waiver, the SBA generally requires that companies be in business for at least two years (having two years of tax returns).  While there is no set revenue threshold that must be met during each of those two years, I would recommend that you shoot for around $70,000 at a minimum, with both years showing a profit and net gain at the end of the year.  Additionally, the SBA would like to see that your firm derives revenue from multiple sources by seeing that your firm does not overly rely or depend on 1 specific contract or 1 specific customer to sustain the company’s operations (you will have to submit a list of client revenue sources for your company during the last three years).

Finally in terms of being able to determine that your company can execute contracts from a financial standpoint, the SBA will examine your financial statements (profit and loss statements and balance sheets) in order to conclude whether or not your firm has sufficient working capital to maintain positive cash flow.

OUTSIDE EMPLOYMENT:  If the majority owner has outside employment, you’ll have to justify that the outside employment (second job) does not conflict with the owner’s ability to devote 40+ hours a week to the potential 8a firm. If you’ve received a W2 from another company from the last two years, you’ll have to write a justification explaining how many hours you work at this second job, along with the nature of that work.

From my experience, the SBA takes exception in most instances where the majority owner makes more money from their outside employment than from their own company.  If your outside employment is not necessary, consider terminating that employment prior to applying for the 8(a) program.

AFFILIATION:  If the majority owner(s) own other companies as well, the SBA will require the applicant to complete a form 355 (determination of size status) to determine if your potential 8a firm will still qualify as a small business by calculating the annual revenue and number of employees of all owned firms and comparing them against the size standard of the applicant firm’s primary NAICS code.  Be prepared to provide tax returns for the past three years along with all other tax forms for each of these companies.

MARRIAGE:  If the majority owner(s) are married and reside in the State of Texas, you will have to include a transmutation agreement in your 8(a) application as Texas is a community property state.  Additionally, make sure that you split the value of the assets in half for married individuals as well on the SBA Form 413 (personal financial statement) where the assets are in the names of both individuals.

COMPANY DOCUMENTS:  If your firm is a Limited Liability Company, make sure that you have a Certificate of Formation, and a complete Operating Agreement outlining the owners, their ownership percentage, their titles, etc.  If your firm has had any ownership changes, make sure those changes are reflected as an amendment to your firm’s Operating Agreement.  If your firm is a Corporation, make sure that you have your Articles of Incorporation, a complete set of company By-Laws outlining the owners, their ownership percentage, their titles, etc., stock certificates for all owners reflecting their shares, and an up to date stock register.

If your firm has had any ownership changes, make sure that those changes are reflected as an amendment to your firm’s By-Laws (with accompanying corporate minutes) , as well as cancelling any previous stock certificates and issuing new stock certificates as applicable (along with updating the company’s stock register).

QUALIFICATIONS:  The SBA wants to ensure that the majority owner(s) have the requisite experience and education to manage the day to day operations of the firm.  The SBA makes this determination by examining the resumes of the owners in the company.  In this regard, it would be preferable for the majority owner to be licensed or to possess specific certifications (as applicable to their industry).

Whenever the majority owner does not have an industry specific license or certification where it is required to conduct business (ie electrician’s license), you will have the burden of proving that the majority owner truly manages the applicant firm (this becomes even harder to do when the married spouse possesses the required license or certification).

COMPENSATION: Last but not least, the SBA wants to determine that the person holding the highest ranking position in the company is also the highest compensated in terms of salary.  The SBA will verify this information by requesting payroll records for previous years for all W-2 employees, and by requesting all W2s and 1099s for the past three years.  If the majority owner is not the highest compensated individual, be prepared to write an explanation or justification as to why this is the case.

By adhering to these tips and providing this additional requested documentation, I believe that you will put your company in position to successfully apply for and obtain the 8a certification for your company.  If needed, Sams Contracting Consulting and Training can assist with helping you to prepare your 8(a) application, or to review your 8(a) application prior to submission to resolve any issues that may lead to the package being rejected or returned!