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The Small Business Administration's "Potential for Success" Requirement

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SBA 8(a) Business Development Program regulations state that "an applicant concern"—a business applying for 8(a) status—must possess reasonable prospects for success competing in the private sector before it can be admitted into the 8(a) federal contracting program.

In order to demonstrate that the company possesses the required "potential for success", an applicant firm must meet several basic criteria :

a. Two-Year Rule. The SBA uses an applicant's length of time in business as one means of measuring its potential for success. Because many young businesses fail before they reach 2 years of age, the SBA uses the "2 or more years in business" metric as an indicator that an 8(a) applicant firm will continue to survive and succeed within the 8(a) program if they have already survived 2 years in business.

b. Revenues over past two years. A firm must show it has been conducting business within its primary industry for at least two full years. An applicant firm can satisfy this requirement by submitting copies of federal tax returns to prove it generated revenues within its primary industry during the two most recent years prior to the date of its 8(a) application. If you only possess one year of business tax returns, you must submit a waiver request.

c. Contracts within primary industry. A firm must prove to the SBA that it has generated revenues through multiple contracts (typically 3 or more contracts from different customers, none of which should account for 70% or more of total revenue), within its primary industry / primary line of business. The SBA will want to see signed and executed copies of contracts, as well as invoices and bank records, check copies or other documentation proving customer payments have been received. The SBA wants to see a successful record of performance before granting a company 8(a) status.

d. Expertise within primary industry. The SBA will examine the technical and managerial experience of the firm's owners and managers to ensure that the individuals in control of the company are capable of running it successfully. The SBA will place the most weight upon the technical and management experience of the socially and economically disadvantaged applicant(s).

e. Finances. The SBA will assess the firm's financial condition by taking a look at its current and recent financial statements, including its balance sheet, profit and loss statement (sometimes referred to as the "income statement"), Aging of Accounts Payable and Aging of Accounts Receivable. The SBA will also take into account the company's access to future credit and capital. In other words, the SBA will ask about the firm's loans, lines of credit, cash reserves and any other financial assets it might have. The SBA understands how hard it is for disadvantaged companies to access credit and capital, but the SBA still wants to assess any resources you might have available to help ensure the success and viability of your company over the long term.

f. Licensing. The SBA will want to examine all of your company and employee licenses to make sure you are in compliance with state and federal laws for licensing. Before submitting your 8(a) application or waiver request, check online at http://www.business.qov to determine all of the licenses your company needs to operate legally in its state.

 

WAIVER CRITERIA FOR BYPASSING THE TWO-YEAR RULE

If your firm has not been in business for two or more years, it can still satisfy the SBA's "potential for success" requirement and gain entry into the SBA 8(a) program if it qualifies for a waiver of the Two-Year Rule.

The Small Business Administration, unfortunately, does not provide extensive written guidance regarding how a length of time in business waiver request should be written.

The five waiver criteria—as specifically stated by the SBA, using their own language—are as follows:

1. The individual or individuals upon whom eligibility is based must have substantial business management experience. 2. The applicant firm must demonstrate the technical experience to carry out its business plan with a substantial likelihood for success. 3. The applicant firm must have adequate capital to sustain its operations and carry out its business plan. 4. The applicant firm must have a record of successful performance on contracts from governmental or non-governmental sources in its primary industry category. 5. The applicant firm must have, or must be able to demonstrate that it has, the ability to timely obtain the personnel, facilities, equipment and any other requirements needed to perform on contracts if it is admitted to the 8(a) program.

 

DESCRIBE YOUR BUSINESS MANAGEMENT EXPERIENCE

According to the SBA, a length of time in business waiver request can only be granted to a firm in which "the individual or individuals upon whom eligibility is based have substantial business management experience."

In other words, the socially and economically disadvantaged owner or owners of the firm must possess substantial business management experience, both in their current role as a business owner, as well as in prior jobs or leadership roles (such as during a stint in the military, clergy, a trade group, an academic institution, a non-profit group or another organization.)

The SBA does not quantify what it means by "substantial”. We have found that a good general rule of thumb is that the more detailed information you can provide to the SBA to prove the disadvantaged owner's management expertise, the better.

Many of the waiver requests typically provide about one and a half pages or more of detail about management experience.

In your waiver request document, address each of the following business management topics to prove to the SBA that each disadvantaged owner (or owner) is completely capable of successfully running and growing the business over the long term:

Current Responsibilities: Discuss or list all of the current business management functions and responsibilities handled by each disadvantaged owner of the company.

Past Experience: Discuss all relevant experience in management stemming from previous employment, activity within the military and/or involvement in other leadership organizations (such as the clergy, non-profit charities or industry trade groups, among others.)

Degrees: List any and all academic degrees earned, regardless of the subject matter. Graduation from a community college, university or other academic institution demonstrates to the SBA your ability to manage projects and deadlines, successfully complete tasks and deliverables, and continuously expand your knowledge, skills and abilities.

Other academic accomplishments: Even if you have not graduated from a college, list any relevant academic or business training coursework you have completed. For example, perhaps you took a "Business 101" course in college or completed a Dale Carnegie public speaking class sponsored by your previous employer.

Professional Certifications: List any relevant professional certifications you have attained in your career and explain how possession of each certification makes you a more skilled, educated business owner. You should also provide the SBA with detail on when and where each certification was earned.

Awards and commendations: If you have ever received any business or leadership awards or commendations from an industry trade group, a past employer, the military or any other organization, be sure to list them all. Attach copies if possible.

Publications: If you have ever been published in a business magazine, an industry trade group publication, a prominent online blog or any other significant public forum, mention this experience because it shows that you are a respected expert in your field. Attach copies if possible.

Specific Project Experience: Have you ever managed an extremely large, complicated or highly technical project? Provide a paragraph or two about the challenges you faced during the project and detail the tools, techniques and/or strategies you used to overcome each challenge. Even if you experienced a failure or struggles along the way, you learned valuable lessons from the experience that made you a stronger, more effective manager. If you feel comfortable doing so, take a negative project management experience and describe to the SBA how this negative experience taught you more about how to successfully manage and operate a business.

Address any and all knowledge, skills, and abilities you possess in the areas of leadership and management; fiscal responsibility and budgeting; supervision of staff and human resources; scheduling, execution and management of projects; customer relationship building and customer service; sales, marketing, and business development; inventory control and logistics; and any related disciplines. Provide the SBA with any and all evidence of expertise you possess that will positively affect the growth and development of your business.

As proof of your abilities, include any relevant attachments such as a detailed chronological resume; copies of any training certificates, professional licenses or other documents evidencing your past performance; reference letters from happy clients that specifically refer to you by name; copies of positive performance reviews from past jobs; copies of any awards or commendations you received; copies of articles or studies you have published; or any other documentation that illustrates your business management acumen.

Many hardworking business owners are modest and often embarrassed about "selling themselves," but in this case that is exactly what they are looking for. You need to "sell yourself" to the SBA and provide them with convincing evidence that you are an excellent business manager, despite any adversity you might have faced. Even if your business is very small or has experienced difficulty growing, the SBA still wants to hear that you are managing the business in a logical and competent way, and that the business is under control. In other words, the SBA wants to know that an experienced captain is steering the ship and setting its course.

 

DESCRIBE YOUR TECHNICAL EXPERTISE

According to the SBA, "The applicant firm must demonstrate the technical experience to carry out its business plan with a substantial likelihood for success."

In other words, the SBA wants to ensure you and your employees possess the necessary skills and abilities to succeed within your primary industry.

For example, if you operate a construction company, the SBA will want you to prove in your waiver request that you have performed successfully on past construction contracts, acquired the necessary professional and occupational licenses to operate legally in your state, and accumulated the technical know-how required to succeed on future construction contracts. Aim to write a page or more describing how you and your company are technically adept. This section of your waiver request (which typically can range from 1 to 3 pages in length) should address the following topics:

Core competencies: Describe your company's primary line of business and the expertise of your key employees in detail. Tell the SBA what your primary North American Industrial Classification System (NAICS) code is if you know it. Describe all relevant technical and professional knowledge, skills, abilities and capabilities.

Licenses and Certifications: List all relevant professional and technical licenses and certifications held by the company and its employees.

Advanced Degrees: If company owners, officers, directors or key managers have successfully completed their associate's degrees, bachelors' degrees, master's degrees or doctorates. Be sure to mention these achievements in this section of the waiver request. (If a degree is from a dramatically different and unrelated field—e.g., a construction worker with a culinary arts degree—you can still name the category of degree attained—e.g., associate's degree— without naming the field in which it was earned).

10 Other Training and Schooling: If company owners, officers, directors or key managers have successfully completed any technical or professional courses, training sessions, or continuing education credits or seminars, list these credentials in this section of the waiver request as well.

Past Experience at Other Companies: The technical capability section of the waiver request can certainly reference technical skills that officers, managers and employees have attained in past positions. Provide the SBA with a brief explanation if the technical experience cited does not appear to be directly related to your company's primary industry. For example, an Information Technology project manager who served as a Navy pilot in the past can relate his or her experiences with flight planning to his or her current role as a manager who schedules, manages and plans projects.

Other Technical Expertise: Include any other examples or evidence of technical expertise that you feel are relevant to your primary industry.

The technical experience of your company does not need to reside in or be represented by only one owner or only one individual on your team. However, the SBA will certainly place the most emphasis on the technical capabilities of the disadvantaged owner(s).

If the disadvantaged business owner possesses a great deal of business management experience yet limited technical experience, explain to the SBA in the waiver request how the owner locates, hires and manages people with the requisite technical skills to accomplish the company's business goals. Include information about the availability of qualified labor in your region and explain the contingency plans you have to replace individual employees that hold special licenses, should the need arise to do so. The key is to show the SBA how the disadvantaged business owner ultimately controls and manages all technical aspects of the company (without undue reliance on any other individuals).

 

ADEQUATE CAPITAL TO SUSTAIN YOUR OPERATIONS

According to the SBA, to be admitted into the 8(a) program early, "the applicant firm must have adequate capital to sustain its operations and carry out its business plan."

Although the 8(a) Business Development Program is intended to assist socially and economically disadvantaged individuals who have diminished financial resources as compared to advantaged business owners, an applicant firm must nonetheless demonstrate to the SBA in its waiver request document that it possesses sufficient access to capital and credit to maintain its business operations. In other words, the SBA wants to know that your company has enough cash and credit available to survive for a long period of time. The SBA does not want to admit unstable, badly managed or collapsing companies into the 8(a) program. Even if your company is a small micro-business with transactions of less than $100,000 of business per year, you still want to prove to the SBA that you have enough capital, cash and credit to remain stable.

Cash flow is often the most difficult management challenge for any small business owner, but careful cash flow management is absolutely essential for any 8(a) applicant that wants a waiver to join the 8(a) program early. Because you are asking the SBA to waive its two years in business rule for you, it is important to emphasize your ability to manage your cash flow carefully, while reliably meeting your routine payroll and operating expense obligations.

You should also explain to the SBA in your waiver request how your business will cope should it encounter unexpected delayed or inconsistent payments from customers. Even if you don't need one—or cannot imagine a future scenario under which you might need one—try to obtain a business line of credit from your local bank now. This will demonstrate to the SBA that you have access to credit in case of a delayed or contested payment from a customer. Even a small credit line of $5,000 or $10,000 will help. Under the current economic climate, it is far easier to obtain a credit line in advance of needing it than it is to obtain one when you are "cash poor". You do not need to use this line of credit, just hold it in reserve in case of a business emergency.

In addition to company lines of credit and company credit cards, address any other sources of cash, credit or capital you might have access to for business purposes, including, but not limited to: Loans from banks or investors, credit that has been extended to you by suppliers or vendors, personal credit cards in your name and financial assistance from family members or friends. For example, if your brother has pledged a maximum of $5,000 of cash to you in case of an emergency, have him write, sign and date a one-page statement declaring that he is willing to lend you $5,000 for business purposes only, should you ever need it. Your brother does not need to give you any funds at this time, his letter is documentation of cash that is available to your company. Include retirement funds such as IRAs and 401 Ks. Most people are reluctant to withdraw retirement assets before retiring, but when faced with a business emergency, many business owners temporarily borrow money from their own retirement accounts to help their business, then return the cash to their retirement accounts (along with interest) when the emergency is over. Finally, also include cash reserves available in your corporate checking, and even your personal checking and savings accounts. Any other assets available to you in case of a business emergency should be included as well.

The SBA is not concerned with your future earning potential but rather the capital, cash and credit you and your company possess now. Although the SBA understands that your company is applying for 8(a) status because it is small and disadvantaged, it will not grant you a waiver of the length of time in business rule unless you can demonstrate relative financial stability now.

Instead of discussing future prospects, your writing in this section of your waiver request should focus on revenue and profits from the active contracts you currently possess; the status of your current financial statements (including your profit and loss sheet, balance sheet, and aging of accounts payable and receivable) and the financial resources at your disposal, should the need arise to bridge gaps in payments from customers.

On a final note, the length of this section of your waiver document will vary based upon how many financial resources you have at your disposal to describe, aim to be as detailed as possible in your descriptions of each one of them.

 

A RECORD OF SUCCESSFUL PERFORMANCE WITHIN YOUR PRIMARY INDUSTRY

According to the SBA, "the applicant firm must have a record of successful performance on contracts from governmental or non-governmental sources in its primary industry category' in order to be admitted into the 8(a) program early.

The Small Business Administration will closely examine your company's past performance history on contracts within its primary North American Industrial Classification System, or NAICS, code (sometimes pronounced "nix code")—its primary industry category—as well as the personal work history of each owner and principal of the firm.

If you are uncertain about which NAICS code best represents your primary industry or primary line of business, go to the main NAICS website, which is: http://www.census.gov/eos/www/naics/

The NAICS website contains various tools to help you narrow down and identify which code best represents the majority of your business transactions. The SBA will primarily evaluate your performance on contracts within your primary industry from the most recent year, however, you can make reference to contracts performed at any point during your company's time in operation.

The SBA allows you to conduct business within any NAICS code, however, when evaluating your company for a length of time in business waiver, the SBA will only assess your company's performance within its primary NAICS code.

Inside your waiver request document, provide the SBA with either a table that summarizes your company's contract experience, or a series of paragraphs providing a detailed summary of each major project your firm has executed. You can also provide (as attachments) full copies of signed, executed contracts and/or reference letters from satisfied clients as examples of your previous work. Be sure to list and highlight your most notable clients, including your biggest and/or most profitable client, the client you have worked with the longest, any federal, state or local governments you have performed work for, as well as any other prominent customers.

The SBA will review all of this information to seek tangible evidence that your company has successfully executed three or more contracts on time and within budget.

Has your company won any industry awards, been featured in a newspaper or magazine article or released any press releases? If yes, attach examples of these achievements to the waiver request as well.

Your goal should be to present the SBA with as much data and evidence possible about your company's successful past performance within its primary industry, to prove to the SBA that your firm is a stable, trustworthy company that is capable of future success within the 8(a) program. As previously mentioned, you can also mention work your company performed in other industries, but the SBA will not place as much weight on that information.

In addition to recent past work performed by the company, you can also tie in your personal work history and the personal work history of other socially and economically disadvantaged owner(s), if it is relevant and within the same industry.

For example, if your current company specializes in logistics management services, and you used to work as an independent consultant in that same field until you launched your new S-Corporation six months ago, you can discuss your personal contract experience as a consultant in the waiver request. You can explain to the SBA why you decided to upgrade from your independent consultant or sole proprietorship status, into a formal corporation, while emphasizing that you have worked in this industry a long time, where you have been continuously working with the same base of customers, thus already possess a successful track record in this field that will ensure the success of your company.

Include any other evidence available to prove to the SBA that your company has a history of performing on time and within budget.

The overall length of this section will vary depending upon how much contract experience your company possesses.

 

PERSONNEL, FACILITIES, EQUIPMENT AND OTHER RESOURCES

According to the SBA, "The applicant firm must have, or must be able to demonstrate that it has, the ability to timely obtain the personnel, facilities, equipment, and any other requirements needed to perform on contracts if it is admitted to the 8(a) program.

In other words, the SBA wants to know that your company possesses enough resources now—or possesses the ability to locate and acquire enough resources later—to survive a 9-year-long tenure in the 8(a) program. The SBA will only admit your company into the 8(a) program early if you have enough resources available to handle an influx of new government contracting opportunities. In this section of your waiver request, which will vary in length based upon the number and type of resources your company has at its disposal, provide the SBA with a detailed accounting of all of the key resources your company possesses now that will help ensure its future success within the 8(a) program.

In terms of personnel, describe your current staff members and the specific skills and abilities they bring to your company, attaching resumes if you can.

Describe your office or facility, even if you run a home-based business. Include the positive attributes of your facilities, such as low overhead expenses or geographic proximity to your clients.

List the equipment your company owns or leases, and don't forget assets such as company cars, laptops or desktop computers, printers, fax machines, telephone systems, etc. Explain how the resources you currently possess are sufficient for the day-to-day operations of your company.

In addition to addressing resources you already have in your possession, thoroughly explain how you would go about obtaining additional resources, should you suddenly need to do so in response to a new federal contracting opportunity. Describe how you would scale up your business and/or your staff to handle such a new opportunity.

Explain to the SBA how you would finance the acquisition of new resources such as hiring new staff members or buying or renting more equipment. Be sure to briefly reiterate information from the capital and credit section of the waiver request about any sources of capital and/or credit your company has available to finance these expenditures.

Discuss the impact of scaling up your operations on your overhead, profit margins, cash flow and other factors. If you operate a home-based business, explain how and when you expect your incoming contract revenue to make it viable for you to upgrade to a leased or owned office space that can house more employees. Describe the availability of qualified personnel and other resources in your geographic area. Is everything you need located nearby, or will you need to go further to attract the required personnel and purchase specialized equipment?

The SBA needs assurance that you have the resources necessary to be a viable, stable business, and that you have a growth plan and processes in place to manage a large incoming federal contract, should you win a large bid after gaining admittance into the 8(a) program.

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