It’s Not Just About Being Disadvantaged: An Overview of the SBA’s Potential for Success Requirement for 8(a) Program Entry

by PilieroMazza PLLC
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Gaining entry to the Small Business Administration’s (“SBA”) 8(a) Business Development Program (the “8(a) Program”) is not just about proving a social and economic disadvantage. If you are a small business owner thinking about applying to the 8(a) Program, there is another eligibility requirement you need to understand: potential for success.

A business applying for 8(a) status must possess reasonable prospects for success competing in the private sector before it can be admitted to the 8(a) Program. What does that mean? For starters, a firm must be able to show that it has conducted business within its primary industry for a full two-year period immediately prior to the date of its 8(a) application. This is commonly known as the “two-year rule” and can be satisfied through the submission of income tax returns showing that the firm has been generating revenues for a full two years.

A firm without such an operating history can request a waiver of the two-year rule. To do so successfully, the firm must satisfy five conditions, one of which is that the firm has a successful record of contract performance (public or private) in its primary industry.  From a practical standpoint, this means that a newly-organized company is unlikely to meet the “potential for success” requirement, which falls in line with the SBA’s position that the 8(a) Program is not designed for start-up firms.

Even assuming your small business can satisfy the two-year rule or, in the alternative, the conditions of the waiver, the show is not over in terms of proving potential for success. Indeed, in determining whether an applicant concern satisfies the “potential for success” requirement, the SBA also examines, among other things, the firm’s access to credit and capital, the firm’s record of contract performance, the technical and managerial experience of the firm’s managers, and the firm’s financial capacity. Regarding the manager experience and financial factors, it is important that you know what information the SBA is going to request and why.

In evaluating managerial and technical experience, the SBA is largely concerned with the experience and expertise of the disadvantaged owner(s). In this regard, the SBA will critique the disadvantaged owner’s résumé to determine (at least, in their view) whether he or she possesses the professional and educational background, in addition to any relevant licenses and certifications, needed to successfully run the business. The SBA examines financial capacity by looking at a firm’s financial statements (e.g., balance sheets and income statements) for both current and prior years. In doing so, the SBA pays particular attention to the company’s working capital, net worth and net income.  The presence of significant downward trends is likely going to raise a red flag and could result in your small business being denied admission to the 8(a) Program.

Lastly, an applicant that is denied 8(a) certification for failure to demonstrate the potential to succeed can submit a request for reconsideration of its application. If, however, the SBA denies your request for reconsideration due to a lack of potential for success, you cannot appeal to the SBA’s Office of Hearings and Appeals (“OHA”), as a denial of 8(a) Program admission can only be appealed to OHA if it is based solely on a negative finding of social disadvantage, economic disadvantage, ownership, control, or any combination thereof.

In sum, demonstrating potential for success is a critical component of an 8(a) application. Therefore, ensuring a firm meets this eligibility requirement is critical to the chances of getting 8(a) certified.

Gaining entry to the Small Business Administration’s (“SBA”) 8(a) Business Development Program (the “8(a) Program”) is not just about proving a social and economic disadvantage. If you are a small business owner thinking about applying to the 8(a) Program, there is another eligibility requirement you need to understand: potential for success.

A business applying for 8(a) status must possess reasonable prospects for success competing in the private sector before it can be admitted to the 8(a) Program. What does that mean? For starters, a firm must be able to show that it has conducted business within its primary industry for a full two-year period immediately prior to the date of its 8(a) application. This is commonly known as the “two-year rule” and can be satisfied through the submission of income tax returns showing that the firm has been generating revenues for a full two years.

A firm without such an operating history can request a waiver of the two-year rule. To do so successfully, the firm must satisfy five conditions, one of which is that the firm has a successful record of contract performance (public or private) in its primary industry.  From a practical standpoint, this means that a newly-organized company is unlikely to meet the “potential for success” requirement, which falls in line with the SBA’s position that the 8(a) Program is not designed for start-up firms.

Even assuming your small business can satisfy the two-year rule or, in the alternative, the conditions of the waiver, the show is not over in terms of proving potential for success. Indeed, in determining whether an applicant concern satisfies the “potential for success” requirement, the SBA also examines, among other things, the firm’s access to credit and capital, the firm’s record of contract performance, the technical and managerial experience of the firm’s managers, and the firm’s financial capacity. Regarding the manager experience and financial factors, it is important that you know what information the SBA is going to request and why.

In evaluating managerial and technical experience, the SBA is largely concerned with the experience and expertise of the disadvantaged owner(s). In this regard, the SBA will critique the disadvantaged owner’s résumé to determine (at least, in their view) whether he or she possesses the professional and educational background, in addition to any relevant licenses and certifications, needed to successfully run the business. The SBA examines financial capacity by looking at a firm’s financial statements (e.g., balance sheets and income statements) for both current and prior years. In doing so, the SBA pays particular attention to the company’s working capital, net worth and net income.  The presence of significant downward trends is likely going to raise a red flag and could result in your small business being denied admission to the 8(a) Program.

Lastly, an applicant that is denied 8(a) certification for failure to demonstrate the potential to succeed can submit a request for reconsideration of its application. If, however, the SBA denies your request for reconsideration due to a lack of potential for success, you cannot appeal to the SBA’s Office of Hearings and Appeals (“OHA”), as a denial of 8(a) Program admission can only be appealed to OHA if it is based solely on a negative finding of social disadvantage, economic disadvantage, ownership, control, or any combination thereof.

In sum, demonstrating potential for success is a critical component of an 8(a) application. Therefore, ensuring a firm meets this eligibility requirement is critical to the chances of getting 8(a) certified. - See more at: http://www.pilieromazza.com/blog/its-not-just-about-being-disadvantaged-an-overview-of-the-sbas-potential-for-success-requirement-for-8a-program-entry#sthash.EXJRfzUu.dpuf

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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