Many new firms are interested in joining the 8a Certification program in order to take advantage of Federal Sole Source and Set-aside Contracts. The average 8a firm does over 4 million dollars per year in federal revenue. So for a startup business obtaining the 8a certification can yield a potential bonanza for the firm.
There are five major categories a business and its owner must meet in order to become 8a certified. 1. Social Disadvantage, 2. Economically Disadvantaged, 3. Potential to Successfully Complete Federal Contracts, 4 No Control Issues Present, and 5. Good Moral Character. This article deals with the qualifications #3, The Potential to Successfully Complete Federal Contracts.
An 8a firm in order to prove it has the ability to successfully complete federal contracts has several tests applied to it. The most challenging for a new firm is the two-years in business requirement. A firm must have been conducting business for two-years before being admitted into the 8a program. The SBA will grand a waiver to firms and in this article I am going to go over three scenarios as to how the SBA will view an applicant under the given set of conditions.
When does a company need a two-year waiver for 8(a) certification?
The two basic factors for whether a two-year waiver is required:
1. Has the applicant concern been in business for 2-years as evidenced by two tax returns that both complete a full twelve month tax cycle?
2. Has the applicant concern generated business in the primary NAICS code for the preceding two-years?
Both conditions must be met.
Sometimes it can be unclear as to whether or not you need to complete a two-year waiver. The following are case study examples for when a firm should present a two-year waiver and when one is not required.
Questions to SBA:
Do you use any sort of guideline for the amount of revenue a company should have before attempting a two-year waiver, $50,000? $250,000? This is assuming all other conditions are met?
Answer:
Yes, we look at the revenues (there is no set amount because it depends on the industry) but we also look at where/who the contracts / the revenues are coming from (more than 1 or 2 sources).
Scenario I
Year 1 – $0 sales
Year 2 – $189,000
Year 3 – $369,000
Year 4 May – The owner finally quits his other employment and starts devoting full-time to the business. Total sales for the business are $457,000 in year 4.
Year 5 January – application time
NO Waiver Required
The two-year waiver is not required because the firm has generated revenues for the last 2-years. However; the SBA will look at the owner’ management experience to confirm potential of success.
Scenario II
Year 1 – $100,000 sales
Year 2 – $500,000 sales
Year 3 – $0 sales
Year 4 – January new owner purchases the business $200,000 in sales
Year 5 – January (application point)
YES Waiver is Required
The two-year waiver will be required in this scenario. Because the firm did not generate revenue for the last two-years in its primary NAICS code.
Scenario III
Year 1 – $250,000 in sales owner 1 (40%), owner 2 (30%), owner 3 (30%) – owner 1 is president and signs all contracts, is highest paid, and is in control of the business decisions.
Year 2 – $500,000 in sales
Year 3 – $500,000 in sales
Year 4 – $500,000 in sales
Year 5 December – owner 1 buys out owner 2 and becomes 70% owner. $500,000 in sales.
Year 6 January – (application time)
NO Waiver Required
A two-year waiver is not required because the firm has been in existence for more than two-years. In this scenario the SBA will review the legal documents closely. The documents will have to indicate that the owner has been the President (highest officer) for some time and that owner 1 has been signing contracts on behalf of the company for some time. The SBA will also look at all potential control issues closely to be sure there is no one else has control over owner.
When a two-year waiver is required what is generally a winning scenario?
1. Generally the SBA likes to see at least $150,000 in sales from the firms inception.
2. At least 1 tax return with revenue and a profit on that return.
3. The business owner must have some degree of business experience and acumen.
4. The 51% or more owner must be working full-time for the business.
The 8a certification is one of the best ways for a small business to grow with federal contracts. If your firm has the ability to obtain this certification it is highly recommended that you conduct an analysis as to the sales potential for your firm.