The regulations governing the 8(a) program mandate (i) that 8(a) contracts are generally non-assignable, and (ii) if the ownership of an 8(a) contract holder, even an 8(a) graduate, changes such that the control of the company has changed, any 8(a) contracts the company holds are subject to termination.
This causes problems if your 8(a) graduation exit strategy is “graduate and sell.” Generally, the rule of thumb for business advisors advising buyers and sellers in the government contracts space is “no more than 25% of revenue from 8(a) contracts.” This means that the value of an 8(a) company is dramatically lowered in the market, sometimes to zero. Even if your graduation strategy is “graduate and grow” or “graduate and maintain,” you can run in to problems if your nine year past focus, and your past performance and team expertise has been in winning 8(a) contracts. In fact, any post-graduate plan other than “graduate and retire someplace nice” requires careful up-front planning from day 1 of your certification in the 8(a) program. Nine years goes by a lot faster than you think.
With that in mind, here are a few strategies you can use to try to minimize the disruption your graduation will inevitably bring, and maximize your company’s value
- Use your first 8(a) contract wins to create a “war chest” for going after non-8(a) work
You are limited as the 8(a) owner in how much you can withdraw from the company in compensation. For successful 8(a)s, this can become a problem. By way of example, a $20M in revenue IT company could at a 10% margin generate 2M in profit. But the qualified owner can’t withdraw more than $350K per year (averaged over 3 years and considering the owner’s salary as well).[*] When searching for what to do with potentially excess profit, consider using that profit to fund development of non-8(a) business, whether full-and-open, small business, or state or commercial. You’re going to have to start sometime, why not start from day 1.
2. Look for other certifications that aren’t time-limited, such as Women-Owned Small Businesses (WOSB) or Service-Disabled Veteran-Owned Small Business (SDVOSB) without expiration.
While these certifications are, like the 8(a) certification, size and owner limited, if you’re not looking to sell, they can be a good maintenance and growth vehicle. Of course, you have to qualify for each of these programs and since they are owner limited, they may have similar difficulties for you if your exit strategy is “graduate and sell.” The WOSB federal contract program is designed to provide greater access to federal contracting opportunities for WOSBs and economically-disadvantaged women-owned small businesses (EDWOSBs) by allowing contracting officers to set aside specific contracts for certified firms in an effort to achieve their statutory goal of five percent of federal contracting dollars being awarded to women-owned small businesses. The SDVOSB procurement program helps provide acquisitions for exclusive competition among service-disabled veteran-owned small business concerns, and to make sole source awards to service-disabled veteran-owned small business concerns if certain conditions are met.
3. Pursue 8(a) Indefinite Delivery Indefinite Quantity (IDIQ) contracts.
IDIQ contacts, depending on the contract language, may allow graduated 8(a)s to remain eligible for 8(a) task orders sourced through the contract vehicle. GSA STARS II is a great example of a contract like this.[†] This can allow you to continue to receive 8(a) set aside work – as a task order under the IDIQ – beyond your graduation date. In the end, this only delays the inevitable, but if that delay means the difference between getting a full-and-open BD team together and closing up shop and going home, any little bit helps.
These are just a couple of examples of ways in which you can begin looking for non-8(a) work. It may seem counter-intuitive to get this wonderful certification and then immediately try to get work that doesn’t require it, but remember, it’s only 9 years. As Ferris Bueller said, in a different context, “life moves pretty fast.”
[*]It’s actually more complicated than that, but the point is as you grow you may be unable to distribute all of your company’s profits without potentially losing your 8(a) status.
[†] Mandatory disclaimer, this isn’t legal advice, but this is based on my experience assisting a STARS II holder. If your experience was different, don’t come tell me I’m wrong, and certainly don’t file a CDA claim in the CBCA or ASBCA or anywhere claiming some lawyer told you your company shouldn’t have been kicked of an IDIQ for graduating 8(a). I’m just reporting an example.