“Vets to Ventures” features legal topics for service members transitioning to the private sector. In the fifth article of our monthly series, Adams and Reese attorneys
Sean Buckley and Carter Pope address the critical nature of succession planning
for businesses with specialized federal certification.

Succession planning is critical to all businesses to ensure smooth and continuous operations after important people move on to new opportunities, retire, or pass away.

A succession plan or continuity plan, in the case of a veteran-owned business that carries a special certification, license, or designation, such as SDVOSB (Service-Disabled Veteran-Owned Small Business) or VOSB (Veteran-Owned Small Business), is particularly critical because there are specific guidelines for continued business operations.

In today’s uncertain business climate, banks, lenders, insurance brokers, and bonding companies are becoming increasingly concerned with succession planning and have asked clients to prepare and provide continuity plans. Such is the case of a recent client when a bonding company was concerned that the business lacked the proper continuity plan and thus could lose its certification in the event of the owner’s death or incapacity.

Requirements for Veteran Owners to Qualify for Specialized Federal Certification

Both SDVOSBs and VOSBs are certified by the U.S. Small Business Administration, and there are several eligibility requirements that veteran-owned businesses must qualify for to earn these specialized designations.

For example, the business must be at least 51% owned by a Veteran or Service-Disabled Veteran (“SDV”); the daily business operations must be controlled by one or more veterans or service-disabled veterans; and qualify as a small business according to the SBA’s size standards.

The term “veteran” means an individual who served in the active military, naval, or air service, and who was discharged or released under conditions other than dishonorable. The term “service-connected” means, with respect to disability or death, that such disability was incurred or aggravated, or that the death resulted from a disability incurred or aggravated, in line of duty in the active military, naval, or air service.

A veteran with a disability rating, from 0 to 100%, is eligible to self-represent as a service-disabled veteran for federal contracting purposes. If veterans qualify for and are eligible for SDVOSB or VOSB status, the certification is attractive to veteran entrepreneurs because of the advantages within government contracting opportunities.

The federal government aims to award certain percentages of all federal contracting dollars to SDVOSBs and VOSBs each year. As a result, competition is limited for certain federal contract opportunities to businesses that participate in these specially designated programs. The SBA offers resources specifically for SDVOSBs and VOSBs, including training, counseling, mentoring, and assistance with special loan programs. Many large companies and organizations also look to do business with companies of federal veteran certifications and designations.

Succession Planning Critical to Specialized Federal Certification Renewal

SDVOSB and VOSB certifications are valid for three (3) years, and then the certification must be renewed. Owners are required to notify the Center for Verification (“CVE”), established by the Department of Veterans Affairs, within 30 days of a “material change” in eligibility, such as change of business structure, addition or removal of board members, amendments to organization documents, or ownership change.

The VA is not the only entity interested in understanding the continued business operations of a VOSB or SDVOSB in the event of a “material change,” as financial institutions can also ask if successors possess the business knowledge or acumen to make the necessary and time-sensitive business decisions in the event of the death or incapacity of an owner or manager.

Can the lack of a succession plan result in the business ceasing operations? Unfortunately, yes.

The management structure of each company should consider and determine whether its governing documents (i.e. bylaws, operating agreement, etc.) allow for a transition of managerial power. If not, the company should consider amendments to its governing documents, or resolutions, implementing a transition and continuity plan to ensure that death or incapacity of an officer or director does not leave a gap in the company’s decision-making capabilities.  

In the event of the owner’s death or incapacity, the business would likely no longer be owned and controlled by a qualifying service-disabled veteran, requiring CVE notification. As a result, the business may lose its certification. While this alone may not require the business to cease operations, it can prevent the business from acquiring new SDVOSB or VOSB set-aside contracts or extending its current contracts. (38 C.F.R. § 74.3).

Failing to comply with SDVOSB or VOSB certification requirements, including timely notification of a material change, gives rise to severe penalties, including suspension and debarment, preventing it from applying for government contracts.

There may be exceptions which allow the business certification to “pass” to other persons, but these exceptions are based on specific factors which may impact each SDV’s business differently and should be carefully considered as part of a comprehensive succession plan. Alternatively, the business may continue to operate without certification, or may consider taking steps to apply for recertification. These options should be considered as part of a comprehensive succession plan.

Why Should a Business Execute Succession Planning?

Just like it is never too early to prepare a will, it is never too early as an owner to have a business continuity strategy. It should be top of mind for any company, and an owner cannot just assume that the business passes onto family upon death or incapacity.

The advantages of succession planning include:

• Smooth transitions: Provides smooth handover of leadership when the owner or a key employee retires, becomes incapacitated, or leaves the company unexpectedly. Without a plan, the business can be thrown into disarray.
• Preserving business value: Safeguards company's value, identifying and grooming successors, minimizing disruption, and maintaining customer and investor confidence.
• Motivating workforce: Demonstrates company’s commitment and employee growth.
• Preparing for the unexpected: Helps the business navigate unforeseen circumstances, ensuring its continued operation and growth even if a key leader departs unexpectedly.
• Knowledge Transfer: Facilitates the transfer of institutional knowledge and skills from outgoing leaders to their successors. This ensures critical business practices and customer relationships are maintained.