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8(a) Application Mistakes to Avoid

In the following webinar, we explore common mistakes that companies should avoid when preparing their 8(a) applications. We’ve included a transcript of the webinar introduction, followed by the video for anyone looking to take a deeper dive into 8(a) application errors.

Thank you, Jennifer and thank you all for joining us. My name is Chris Shiplett. I am a lawyer and the founder of Randolph Law. We specialize in federal contract law, including in three broad areas: socioeconomic disadvantaged small business programs that the SBA runs such as 8(a), HUBZone, WOSB, and Veteran-owned small business, as well as disputes with the federal government. This time of year, most disputes are bid protests, but we also do contract disputes and just your day-to-day legal needs for government contractors.

Today, I’m going to talk specifically about how to avoid pitfalls in the 8(a) application process. Very briefly, let’s talk about what the 8(a) process is. Now, I’m assuming in this presentation that you have a basic familiarity with what the 8(a) program is, so I’m really just going to hit the highlights that are relevant to avoiding the pitfalls in applying for that program.

The 8(a) program is very important and can be, after you have been accepted into the program, a very lucrative program for minority-owned small businesses. Most importantly, the application process is a creature of regulation. The entire program is a creature of regulation and so the entire process and the key to avoiding the pitfalls that can come up in that process is understanding what the regulations require and what the regulations allow.

When you download or take this presentation home, copy this next part where it says the regulations can be found at 13 CFR Part 124. As you or your company are beginning to prepare an 8(a) application, read those regulations which is something that I will say several times throughout this webinar. Read those regulations.

Let me give you a little bit of an example of some of the pitfalls you might run into. This is not an exhaustive example, but these particular pitfalls, I think, really tell the story of how to avoid pitfalls in general because each of these is tied to a regulatory component.

One pitfalls might be that your company hasn’t been in existence for two years. That is a regulatory requirement. It’s not a past performance requirement or anything like that. It’s simply that the entity in which the application is being submitted must have been formed more than two years before the 8(a) application.

Click below to watch the 8(a) pitfall presentation in full and learn about several more common mistakes that can derail 8(a) applications and contact us directly if you are in need of support for your 8(a) application. 

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Avoiding Pitfalls in the 8(a) Application Process

I was recently invited to present a webinar on pitfalls in the 8(a) application process for Jennifer Schaus and her government contracts consulting firm, Jennifer Schaus & Associates.
Here’s the full video:

 

Here’s a link to the powerpoint presentation.

Trimming out everything else, the key take away is to read, re-read, and then read again the SBA requirements for the 8(a) program, you can find them here.
While you are reading them, take notes on every specific item that is required. Here’s a very basic checklist of questions you should ask yourself:

1) Am I a member of one of the defined minority groups? How do I know?

For example, we get inquiries from folks who say “well, my grandmother was native american, does that count?” No, it does not. You must be an enrolled member of a Native American Indian Tribe to be considered Native American Indian. Each tribe has its own criteria for enrollment, and you have to match that criteria.

2) Is my annual income under $250,000?

Look at your taxes. What’s the top line. If you file taxes jointly with your spouse, does he or she contribute in some way to the business, whether working or guaranteeing a loan or name on a lease? If yes, it’s your joint income, if no, it’s yours alone.

3) Is my net worth under $250,000?

Your house doesn’t count, and your equity in the business doesn’t count. Your retirement accounts don’t count, unless you’re over 59 1/2. Everything else counts. Your bank accounts, other businesses, vacation house, car. Everything.

4) Have I been in business over two years?

This is a yes / no. When was your business registered with the state. Count two years past that. While there are waivers available to businesses that have not been in business for two years, they are very difficult to get.

5) Am I ready to collect all the documents necessary?

I’d say the average 8(a) application if printed out would run to about 1,000 pages. Be prepared, you will be asked for everything, and you must provide everything.
These are just some of the things you’ll need to be prepared for. Review the video, read the slides, go to the SBA website. When you’re ready, give us a call and we might be able to help you out.
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A Graceful Exit: Planning Now For 8(a) Graduation

The regulations governing the 8(a) program mandate (i) that 8(a) contracts are generally non-assignable, and (ii) if the ownership of an 8(a) contract holder, even an 8(a) graduate, changes such that the control of the company has changed, any 8(a) contracts the company holds are subject to termination.

This causes problems if your 8(a) graduation exit strategy is “graduate and sell.” Generally, the rule of thumb for business advisors advising buyers and sellers in the government contracts space is “no more than 25% of revenue from 8(a) contracts.”  This means that the value of an 8(a) company is dramatically lowered in the market, sometimes to zero. Even if your graduation strategy is “graduate and grow” or “graduate and maintain,” you can run in to problems if your nine year past focus, and your past performance and team expertise has been in winning 8(a) contracts. In fact, any post-graduate plan other than “graduate and retire someplace nice” requires careful up-front planning from day 1 of your certification in the 8(a) program. Nine years goes by a lot faster than you think.

With that in mind, here are a few strategies you can use to try to minimize the disruption your graduation will inevitably bring, and maximize your company’s value

  1. Use your first 8(a) contract wins to create a “war chest” for going after non-8(a) work

You are limited as the 8(a) owner in how much you can withdraw from the company in compensation. For successful 8(a)s, this can become a problem. By way of example, a $20M in revenue IT company could at a 10% margin generate 2M in profit. But the qualified owner can’t withdraw more than $350K per year (averaged over 3 years and considering the owner’s salary as well).[*] When searching for what to do with potentially excess profit, consider using that profit to fund development of non-8(a) business, whether full-and-open, small business, or state or commercial. You’re going to have to start sometime, why not start from day 1.

2. Look for other certifications that aren’t time-limited, such as Women-Owned Small Businesses (WOSB) or Service-Disabled Veteran-Owned Small Business (SDVOSB) without expiration.

While these certifications are, like the 8(a) certification, size and owner limited, if you’re not looking to sell, they can be a good maintenance and growth vehicle. Of course, you have to qualify for each of these programs and since they are owner limited, they may have similar difficulties for you if your exit strategy is “graduate and sell.” The WOSB federal contract program is designed to provide greater access to federal contracting opportunities for WOSBs and economically-disadvantaged women-owned small businesses (EDWOSBs) by allowing contracting officers to set aside specific contracts for certified firms in an effort to achieve their statutory goal of five percent of federal contracting dollars being awarded to women-owned small businesses. The SDVOSB procurement program helps provide acquisitions for exclusive competition among service-disabled veteran-owned small business concerns, and to make sole source awards to service-disabled veteran-owned small business concerns if certain conditions are met.

3. Pursue 8(a) Indefinite Delivery Indefinite Quantity (IDIQ) contracts.

IDIQ contacts, depending on the contract language, may allow graduated 8(a)s to remain eligible for 8(a) task orders sourced through the contract vehicle. GSA STARS II is a great example of a contract like this.[†]  This can allow you to continue to receive 8(a) set aside work – as a task order under the IDIQ – beyond your graduation date. In the end, this only delays the inevitable, but if that delay means the difference between getting a full-and-open BD team together and closing up shop and going home, any little bit helps.

These are just a couple of examples of ways in which you can begin looking for non-8(a) work. It may seem counter-intuitive to get this wonderful certification and then immediately try to get work that doesn’t require it, but remember, it’s only 9 years. As Ferris Bueller  said, in a different context, “life moves pretty fast.”

[*]It’s actually more complicated than that, but the point is as you grow you may be unable to distribute all of your company’s profits without potentially losing your 8(a) status.

[†] Mandatory disclaimer, this isn’t legal advice, but this is based on my experience assisting a STARS II holder. If your experience was different, don’t come tell me I’m wrong, and certainly don’t file a CDA claim in the CBCA or ASBCA or anywhere claiming some lawyer told you your company shouldn’t have been kicked of an IDIQ for graduating 8(a). I’m just reporting an example.

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Answers to The Most Common 8(a) Questions

We get calls all the time from people and companies interested in registering for the Federal 8(a) Business Development program. Here are some of the most common questions about the 8(a) program. These are just some of the things you have to think about when looking to get 8(a) Certified, but they are some of the most common issues that come up with our clients and potential clients.

1. Can I get an 8(a) if I just started my business

By regulation, yes, but as a practical matter, no. By regulation you can file an 8(a) application immediately on starting a new business. But there is generally a requirement that demands two years of business history. You can request a waiver of that requirement, but in our experience those waivers are rarely if ever granted. We generally recommend that you file after two years of business. Waiting out the two years means you don’t have to request a waiver, which vastly simplifies the process. It also means you can address other issues you might have if you file right when you start the business. For example, the “full time working” for the 8(a) requirement, and the “more than one client” requirement.

2. My firm has one client, can I get my 8(a)?

No. You have to have no more than 70% of your revenue from any single client. SBA will accept evidence that you are soon going to have more than one client if you’ve just signed a contract for your second client, but generally, you should have two clients.

That also means that if you have just set up your consulting company, and you’re working for your former employer, you won’t meet this requirement. The 8(a) program is designed for companies, not for consultants who have decided it would be better to consult as a 1099. If you want to be 8(a) registered, go find more work, stop working on-site as a direct bill, and develop your business. It will be easier for you to successfully register as an 8(a), and you will be more successful in general as you develop your federal contracting business.

3. Does my husband’s / wife’s salary count towards my annual income?

Maybe. Does your spouse work in the 8(a) or has your spouse contributed to the 8(a)’s development, either as an officer, a director, a landlord, a client, or an employee? If so, your spouse’s salary may count towards your annual income. If not, it likely won’t.

4. I’m working full-time and have just started this business, can I get 8(a) certified?

No. You have to be working full-time for the 8(a), and while there are occasionally cases that suggest that your full-time 8(a) work could, maybe, not be 9-5, the general rule is that you have to work 9-5 for the 8(a) certified company.

This relates back to the question about having more than one client and the “I just set up the business” question. The 8(a) program is designed for small but growing businesses, not for consultants and not for startups. You’re better off focusing on growing your business so you can quit your full-time job and join that business, then applying for 8(a).

5. Does an 8(a) Certification mean I will get money from the Federal Government?

I’m surprised that we sometimes get this question. The answer is a resounding “No.” The 8(a) program is not a grant or a loan program. It is a certification program that will make your business more competitive in seeking out and winning federal contracts. BUT, being 8(a) certified doesn’t mean you get any contracts. It means that you should go out and find work, go out and develop business, and apply to win the contracts that you are entitled to compete for as a result of your certification status.

 

For more information about becoming 8(a) certified, contact us today.