It is no doubt that the SBA’s 8(a) Business Development Program is a first-class program: there is a reason that some of us around here tend to say that it is one of the most important of federal government contracting programs. And in the past year, there has been a flurry of activity surrounding the 8(a) Program. For the most part, this uptick in activity has had to do with the requirement that all applicants prove they are socially disadvantaged in light of the the Ultima decision that we’ve discussed on the blog. As you may know, applicants must also prove that they are economically disadvantaged, though the requirements to qualify as such are a little more objective. But then there is the requirement that the applicant firm must be able to prove that it has the potential for success. Today we take a closer look at the potential for success requirement’s two year business revenue rule, and delve into whether there is any way around it.

Potential for Success: A Mile High View

If you are new here, I’ve included a short primer on potential for success to bring you up to speed. You can also go here to read more in-depth about it.

SBA requires that 8(a) Program applicants demonstrate “reasonable prospects for success in competing in the private sector if admitted to the 8(a) BD program,” which is reasonable in light of the additional benefits 8(a) Program participants receive. Benefits like business development assistance and priority on many federal contracting opportunities. Makes sense, right? The SBA wants to make sure your business has a chance at making it before it will let you take advantage of the 8(a) Program benefits for up to nine years. Therefore, by looking at a number of criteria, the SBA evaluates the applicant’s potential for success. And, because this is arguably the most important of SBA’s socioeconomic programs, the program that every federal contractor wants a piece of, that isn’t always an easy thing to do.

Two Years in Business Rule

Turning to the two-years in business rule, it requires the applicant to demonstrate that it has “been in business in its primary industry classification for at least two full years immediately prior to the date of its 8(a) BD application[.]” To demonstrate this, the applicant must submit its income tax returns for the prior five tax years (if possible), two of which must show “operating revenues in the primary industry in which the applicant is seeking 8(a) BD certification.” Essentially, SBA is looking at whether you have been in business for at least two years, in your primary NAICS code identified on your 8(a) application, and whether you have generated revenues in that amount of time for that NAICS code.

Two years in business is relatively easy to demonstrate, but the NAICS code and revenue requirements have potential to cause problems. You want to make sure that your primary NAICS code identified on your tax returns matches your primary industry identified in your 8(a) application, as experience has shown is it far easier to have it correct from the get-go than to have to field any number of questions from SBA reviewers about why the two don’t match up. Additionally, revenue is straight forward: there either was revenue in those two years or there was not. Does this mean that not having revenue in those two years is an automatic disqualification? Will you be denied if your NAICs codes don’t match? Will applicants that have been in business less than two years be immediately denied? Is there a minimum amount of revenue? The answer to those questions is every attorney’s favorite response: it depends.

Waiver

There is a waiver for the two-years in business rule, but it’s not very often that such a waiver is granted. It is entirely understandable that a business that is eligible for the 8(a) Program in every other way would want to get into the program without waiting the two years. But the bar to get over to be granted a waiver is very high and contains five separate conditions, each of which must be met to qualify. Those conditions are:

(i) The individual or individuals upon whom eligibility is based have substantial business management experience;

(ii) The applicant has demonstrated technical experience to carry out its business plan with a substantial likelihood for success if admitted to the 8(a) BD program;

(iii) The applicant has adequate capital to sustain its operations and carry out its business plan as a Participant;

(iv) The applicant has a record of successful performance on contracts from governmental or nongovernmental sources in its primary industry category; and

(v) The applicant has, or can demonstrate its ability to timely obtain, the personnel, facilities, equipment, and any other requirements needed to perform contracts as a Participant.

Seems easy, right? Not so fast. This waiver doesn’t allow the applicant to just check off each of the boxes. Instead, it must be able to provide evidence that it meets the requirements. That means

• evidence of current and completed “governmental and nongovernmental” contracts (including letters of reference or past performance reports) to establish its history of successful contract performance.
• Information demonstrating performance of work in the industry in which it is seeking 8(a) certification.
• Bank statements.
• Letters of recommendation.
• Documents showing availability of capital.

Generally, the more documentation you have that can account for each of the five requirements, the better your chances of receiving a waiver.

That said, SBA doesn’t hand out such waivers all willy-nilly. It can be incredibly difficult to have a waiver request granted. Unfortunately, denial of an 8(a) applicant because of a lack of potential for success is not a denial reason that can be appealed per 13 C.F.R. § 124.206. This means there is little information publicly available due to a lack of decisions that often come from appeals, which is where we would look to determine the finer details of waivers, such as what is “adequate capital to sustain its operations” and what amount of experience is considered “demonstrated technical experience to carry out its business plan,” are unknown. And SBA doesn’t release numbers on how many waivers it grants. But SBA officials have said that granting waivers is something that SBA does only in rare circumstances.

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Moral of the story: requesting a waiver of the two year business revenue rule can be a valid path towards 8(a) Program participation if you are able to meet the five requirements for a waiver and have plenty of evidence to back it up, but it is by no means an easy one. Regardless, it might be worth a try. After all, the worst that can happen is a denial and, although you cannot appeal on account of potential for success, you can always re-apply 90 days later.

Need legal assistance with applying to or navigating the SBA’s 8(a) Program or another government contracting legal matter? Email us or give us a call at 785-200-8919.

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The post 8(a) Program’s Two Years in Business Rule: Requirement or Suggestion? first appeared on SmallGovCon - Government Contracts Law Blog.