15 8(a) Application Killers

Spending the time upfront to ensure that your firm meets all of the eligibility requirements for 8(a) Certification can save you countless hours of frustration, the expense of putting the application together incorrectly and the difference between obtaining formal 8(a) Certification or not.

Below are just 15 of the 8(a) Application “Killers”. These will immediately tell you whether you have an issue that may prevent you from qualifying for 8(a) Certification.

1. The applicant (51% of more owner) must be a US Citizen when they apply.

2. The applicant must devote full time to the business concern that is applying for 8(a) Certification when they apply. This means the applicant must work at least 40 hours per week in the business concern without any outside employment.

3. The applicant must hold the highest management position within the business concern. Generally this is the CEO, President or Managing Member.

4. The applicant must be able to demonstrate that they are the highest compensated. Generally the SBA will deny your 8a application if you cannot demonstrate the applicant currently is the highest compensated or there is a very good reason why they have elected not to be.

5 The applicant must have an adjusted net worth of less than $250,000 at the time they apply. Adjusted net worth = Personal Assets – Personal liabilities – (Equity in primary residence + value of ownership interest in business concern + IRA/401(k) or Other Retirement Accounts subject to a penalty for early withdrawal). To determine if your adjusted net worth is lower than $250,000 use our adjusted net worth calculator.

6. The applicant’s AGI (Adjusted Gross Income) cannot be more than $250,000 averaged over the last three tax years.

7. The applicant must generally hold all licenses or professional certifications required to operate the business concern. If they do not, another equity owner cannot be the holder of the required licenses.

8. If the applicant has ownership in another business concern, other than the business concern that is applying for 8(a) Certification, the SBA may very well likely determine that you do not devote full time and therefore deny your 8(a) application. The only exception would be for ownership in an LLC for holding, managing and protecting real estate. There are ways to solve this issue and they vary depending on your unique condition.

9. The applicant cannot be on probation or parole. If the applicant has been arrested in the past it does not automatically deny them unless they were convicted of a specific crime. Having an arrest, regardless of how long ago, will severely delay the review of your 8a Application by at least 90 days.

10. The business concern must have been in business for 2 full years with evidence of reasonable revenues on its last two tax returns in the industry it is seeking 8(a) Certification for.  If it has not, you must seek a waiver and meet the 5 conditions set by the SBA to overcome this condition. Click here for detailed information on each of the 5 conditions.

11. The business concern and the applicant cannot have any delinquent tax filings or have any unpaid Federal, State or local obligations at the time of application. This condition can be overcome by filing the proper extension for delinquent taxes or by providing evidence of a current re-payment arrangement for unpaid Federal, State or local obligations.

12. The business concern must be at least 51% directly owned by the applicant and must be defined as a “Small Business” by the Federal Government. Your primary NAICS code, gross sales and sometimes the number of employees define your size standard that the SBA will base its determination on.. The business concern must also be a for-profit business and cannot be classified as a broker or be a subsidiary of another business concern.

13. The business concern’s current financial statements must exhibit positive net income, positive net equity and sufficient working capital at the time of 8(a) application submission.

14. The business concern must not earn more than 70% of its total revenue with one single client, within the last 12 months. This does not apply to a business concern if its direct billing client is a Federal or State Government.

15. The applicant or business concern cannot have previously participated as an 8(a) participant. The applicant cannot have any immediate family members who are current or previous participants in the 8(a) Program that are or were affiliated.

These are just 15 of the “Killers” that can potentially prevent your 8(a) Certification application from being successful. There are additional “Killers” and other areas that you should be concerned with prior to making the decision on whether you fully qualify for 8(a) Certification. If you have additional questions or would like to discuss your specific business situation, please call us at 813-333-5800 or visit www.cloveer.com.

Cloveer, Inc. pre-qualifies all of its full service clients prior to preparing their 8(a Certification Application. With over 2,000 successful clients to date. Read some of our testimonials.

Do you meet the SBA 8(a) Program Economic Disadvantage Qualifications?

Do you meet the SBA 8(a) Program Economic Disadvantage Qualifications?

One of the many requirements to become SBA 8a Certified is to be deemed to be economically disadvantaged at the time of your 8a Application submission. In order to meet this requirement you must:

1. The applicant(s) for 8a Certification  must have an adjusted net worth of less than $250,000 at the time of their application submission.

Adjusted Net Worth = Personal Assets – Liabilities – [Equity in primary residence + ownership interest in business + IRA/Other Retirement Accounts subject to a penalty for early withdrawal]. All assets jointly held are split 50/50. If you are unsure what you Adjusted Net Worth is, use the Cloveer Adjusted Net Worth Calculator  to determine if you are below the $250K limit. The online calculator offers specific advice and tips on determining some of the required amounts that must be  reported to the SBA.

Tip: You will be required to submit supporting statements for all assets and liabilities so make sure that you provide amounts that can be corroborated by the SBA.

There  may be ways to reduce your adjusted net worth below the regulatory limit.  Please contact us for specific advice on your situation.

2. The applicant(s) for 8a Certification cannot have more than $4,000,000 in total assets at the time of their application submission.

Total Assets = All Personal assets – IRA/Other Retirement Accounts subject to a penalty for early withdrawal.

3. The applicant(s) for 8a Certification cannot have an Adjusted Gross Income (AGI) of more than $250,000, averaged over the last three tax years.

AGI = Your total income – any federal taxes you paid on behalf of the corporation or LLC (from distributions taken) – any income attributed to your corporation or LLC  that is not distributed to you and essentially re-invested in the corporation or LLC.

If you are unsure if you meet this eligibility requirement, please contact us for a detailed review.

4. The applicant(s) for 8a Certification must be able to produce a narrative statement of economic disadvantage that details at least one specific instance of actual or perceived prejudice or bias that can be directly attributed back to their distinguishing feature (Race, Ethnicity, Culture, Handicap, Gender, etc).

Updated (August 29, 2016). As of August 24, 2016 you are no longer required to prepare and provide a Narrative Statement of Economic Disadvantage to the SBA as part of your 8(a) Application. If you are not a member of one of the SBA designated groups, you still must submit a Social Disadvantage Narrative though

Here is the link to the Federal Register Rule that goes into effect on August 24, 2016 regarding the Narrative Statement of Economic Disadvantage.

https://www.federalregister.gov/articles/2016/07/25/2016-16399/small-business-mentor-protg-programs

Specifically, within it under item: 8(a) BD Application Processing (13 CFR 124.202, 124.203, 124.104(b), and 124.108(a))

In addition, SBA’s regulations provide that each individual claiming economic disadvantage must describe such economic disadvantage in a narrative statement, and must submit personal financial information to SBA. SBA believes that the written narrative on economic disadvantage is an unnecessary burden imposed on applicants to the 8(a) BD program. SBA’s determination as to whether an individual qualifies as economically disadvantaged is based solely on an analysis of objective financial data relating to the individual’s net worth, income and total assets. As such, this final rule eliminates the requirement that each individual claiming economic disadvantage must submit a narrative statement in support of his or her claim of economic disadvantage.

View our sample economic and social narratives of disadvantage. They are actual narratives that have been approved by the SBA. The names have been changed to protect the identity of the individuals but will give you a good idea of the level of specificity that must be provided with your narrative.

Can 8a Contracts be Protested?

The size status of the apparent successful offeror for competitive 8a procurement may be protested.

The size status of the participant for a sole source 8a procurement may not be protested by another 8a participant or any other business.

The eligibility of a 8a participant for a sole source or competitive 8a procurement cannot be challenged by another 8a participant or any other business.

An 8a participant cannot appeal the SBA’s determination not to award it a specific 8a contract because the concern lacks an element of responsibility or is ineligible for the contract other than to request a formal size determination where SBA cannot verify it to be small.

The NAICS code assigned to a sole source 8a procurement may not be challenged by another 8a participant or any other business. In connection with a competitive 8a procurement, any business concern who has been adversely affected by a NAICS code designation may appeal the designation to the SBA’s Office of Hearings and Appeals.

For more information on the SBA 8a Program, visit cloveer.com

How does the SBA review the business concern’s tax returns during the 8a Application review process?

The SBA will verify the following:

a. Have you provided complete copies of the business concern’s Federal business tax returns for the last three years. If the business concern is a sole proprietor, you must submit the Schedule C for the last three years?

– 1120 or 1120s for Corporations

– 1065 for Multiple Member LLCs

– Schedule C for Sole Proprietors or Single Member LLCs

DO NOT SUBMIT COPIES OF THE BUSINESS CONCERNS STATE TAX RETURNS

b. Have all schedules and additional statements that are mentioned within the business tax returns been included?

c. Do you have any questionable items on the schedules or statements that require additional explanations? If so, we suggest you address these items within your 8a Application paperwork to be provided.

d. Do the tax returns indicate that the business concern has been operating in its primary industry (NAICS) code for at least the last two years? Your tax return should identify the six digit NAICS code which is identified as your primary NAICS code on your 8a Application paperwork. If the NAICS code identified on the tax return is different than the primary NAICS code identified on your 8a Application paperwork you must include a NAICS code explanation letter within your 8a Application.

e. Does the business tax information correspond with the financial statements (Balance Sheet and Income Statement) included within your 8a Application paperwork?

f. Can the salaries, wages and distributions of the 8a applicant, officers or partners be verified?

g. Does the percentage of ownership identified on the tax returns correspond with the 8a Application paperwork?

h. If the business concern has elected to be treated as an S-Corporation, have you provided copies of all K-1s.

i. Have you included copies of the cancelled check, bank statement or IRS account balance transcript to show payment for all amounts indicated on the “Amount Owed” line of the tax return?

j. What trend do the tax returns show? (i.e. downward trend in income, substantial gain in income, etc.) If the business concern’s tax returns show a significant downward trend or increase in sales you should be prepared to respond to potential SBA questions as to why?

View the related article on “How does the SBA review the Individual’s tax returns during the 8a Application review process?

 

Unconditional Ownership Requirements for 8a Certification

The business concern that is applying for 8a Program Certification must be at least 51% unconditionally and directly owned by one or more economically and socially disadvantaged individuals who are US citizens.

Unconditional ownership is defined as ownership that is not subject to conditions precedent, conditions subsequent, executory agreements, voting agreements, restrictions on or assignments of voting rights or other arrangements causing or potentially causing ownership to go to another (other than after death or incapacity).

As stated above, ownership must be direct and cannot be owned by another business entity or by a trust that is in turn owned and controlled by one or more economically and socially disadvantaged individuals.  However, in the case of ownership by a trust, such as a living trust, ownership will be treated as direct where the trust is revocable, and the disadvantaged individual is the grantor, a trustee, and the sole current beneficiary of the trust.

In the case of a Partnership, at least 51% of every class of partnership interest must be unconditionally owned by one or more of disadvantaged individuals.

In the case of a Limited Liability Company, at least 51% of each class of member interest must be unconditionally owned by one or more of disadvantaged individuals.

In the case of a Corporation, at least 51% of every class of voting stock outstanding and 51% of the aggregate of all stock outstanding must be unconditionally owned by one or more of disadvantaged individuals.

The SBA will disregard any unexercised stock options or similar agreements held by the disadvantaged individuals. However, any unexercised stock options or similar agreements held by anyone other than a disadvantaged individual will be treated as exercised.

The pledge or encumbrance of stock or other ownership interest as collateral, including seller financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the disadvantaged persons retain control absent violations of the terms.

These are just a few of the requirements that must be met to ensure unconditional ownership. Please contact Cloveer.com to discuss your unique business circumstances to ensure you meet all unconditional ownership requirements.

How does the SBA determine if an 8a applicant business concern is defined as a Small Business?

The 8a applicant business concern must define their primary North American Industry Classification System (NAICS) code with the 8a Application paperwork. The primary NAICS code is the six digit code in which the business concern earned its largest segment of annual receipts or total income, in the most recently completed fiscal or taxable year.

For example, a business concern that earned its largest segment of total income engaged in commercial or institutional building construction would have a primary NAICS code of 236220.

To begin determining if the business concern is defined as a Small Business, the SBA will lookup the size standard for the NAICS code.

For example, the size standard threshold for NAICS code 236220 is $33.5M.

The SBA will then add the amounts reported on the business concerns “Gross Receipts or Sales” line of their business tax return for the last three taxable years and determine its three year total income.

Finally, the SBA will take the three year total income and divide this amount by three to determine its three year average total income.  The three year average income amount is the amount used to determine if the business concern is below the size standard threshold for their primary NAICS code.

In our example, if the business concern’s three year average income is less than $33.5M, the business concern will be classified by the SBA as a “Small Business”.

*Important*

When the SBA examines the size of the business concern they will look for any possible issues involving affiliation. Affiliation arises when the business concern controls another firm or another firm controls the business concern. It can also arise when one individual has the power to control both the business concern and another firm (e.g. this individual owns more than one firm) or there are identical or substantially identical business or economic interests, such as family members, persons with common investments or firms that are economically dependent through contractual or other relationships. The SBA will also consider ownership, management, previous relationships with or ties to another firm, and contractual relationships in determining whether affiliation exists.

If you suspect that you may possibly have an affiliation with another firm, contact Cloveer for further assistance.

How to write an Executive Summary for your 8a Business Plan

The Executive Summary is the most important section of your 8a business plan. It provides a concise overview of the entire plan along with a history of your company. This section describes the fundamental elements of your business, as well as what business you are in, why you are in it, and what you hope to accomplish. For example, describe your business in terms of where it has come from, where it is now, where you want it to go, and how you plan to get it there.  This section is important because it explains why you think your business idea will be successful.  This is a complete summary of your 8a business plan and should be the last section you write. After you’ve completed all the other details of your plan, you’ll be better able to summarize it.  1 to 2 pages is an appropriate length for the executive summary.

Here are some important elements to include in your Executive Summary:

  • The Mission Statement – The mission statement briefly explains the thrust of your business. It could be two words, two sentences, a paragraph, or even a single image. It should be as direct and focused as possible, and it should leave the reader with a clear picture of what your business is all about.
  • Date business began
  • Names of founders and the functions they perform
  • Number of employees
  • Location of business including branches or subsidiaries
  • Description of plant or facilities
  • Primary industry and NAICS code
  • Products manufactured/services rendered
  • Summary of company growth since the beginning, including financial or market highlights
  • Summary of future plans

With the exception of the mission statement, all of the information in the Executive Summary should be brief since the details will be provided further along in the plan.

For newly certified 8a companies, Cloveer provides professional assistance in preparing SBA acceptable 8a Business Plans.

What is an 8a Participation Agreement?

Every company that becomes 8a Certified with the SBA must sign a participation agreement.  The agreement is the same for all companies and by signing it, you are agreeing to abide by the 8(a) BD regulations, 13 C.F.R. § 124, which can be found at http://www.access.gpo.gov/nara/cfr/waisidx_07/13cfr124_07.html.

In addition, you will be agreeing to submit financial statements and tax returns on an annual basis.  For companies with gross annual receipts between $1M and $5M the financials must be reviewed by an independent qualified public accountant.  For companies with gross annual receipts over $5M, the financials must be audited by an independent qualified public accountant.

The participation agreement also provides a list of 26 items that will cause termination from the program. Three examples of occurrences that can cause termination of your company from the 8a program are:

  1. Failure by the concern to obtain prior written approval from SBA for any changes in ownership, business structure, management, or control.  Hiring a key officer without prior approval is an example of this.
  2. Failure by the concern to obtain prior SBA approval of any management agreement, joint venture agreement or other agreement relative to the performance of a section 8(a) subcontract.
  3. Failure by the concern to provide SBA with Annual Update reports as required.

An actual Participation Agreement including the complete list of conditions and causes for termination is available for viewing.  For expert assistance with maintaining 8a program compliance and annual reporting requirements, contact Cloveer.

The 8a Business Plan

The 8a Business Plan

Development of the 8a Business Plan

Each newly certified 8a Participant must develop a comprehensive business plan setting forth its business targets, objectives, and goals. Although the 8a Business Plan is not required to be completed and submitted as part of a Participant’s 8a Application submission, it must be submitted to the SBA servicing office as soon as possible after 8a program admission. Typically the 8a Business Plan must be submitted within 30 days from the date of its 8a program admission or from its attendance at mandatory SBA 8a program orientation. The 8a Participant will not be eligible for 8a program benefits, including 8a contracts, until its 8a business plan is approved.

Failure to provide an 8a Business Plan in a timely manner and receive approval can result in early termination by the SBA.

The 8a business plan must address all 52 of the SBA Form 1010c questions and contain the following information:

(1)    A detailed description of any products currently being produced and any services currently being performed by the concern, as well as any future plans to enter into one or more new markets;

(2)    The applicant’s designation of its primary industry classification, as defined in § 124.3;

(3)    An analysis of market potential, competitive environment, and the concern’s prospects for profitable operations during and after its participation in the 8a BD program;

(4)    An analysis of the concern’s strengths and weaknesses, with particular attention on ways to correct any financial, managerial, technical, or work force conditions which could impede the concern from receiving and performing non-8a contracts;

(5)    Specific targets, objectives, and goals for the business development of the concern during the next two years;

(6)    Estimates of both 8a and non-8a contract awards that will be needed to meet its targets, objectives and goals; and

(7) Such other information as SBA may require.

Updating the 8a Business Plan

Each 8a Participant must annually review its business plan with its assigned Business Opportunity

Specialist (BOS), and modify the plan as appropriate. The 8a Participant must submit a modified plan and updated information to its BOS within thirty 30 days after the close of each program year. It also must submit a capability statement describing its current contract performance capabilities as part of its updated 8a business plan.

As part of the annual review of its 8a business plan, each 8a Participant must annually forecast in writing its needs for contract awards for the next program year.

For companies needing assistance in the development or updating of their 8a Business Plan, please visit http://www.cloveer.com/.