Many startups are interested in joining the 8a certification program to take advantage of federal reserve and single source contracts. The average 8th company earns more than $ 4 million per year in federal revenue. So for a startup, getting 8a certification can create a potential bonanza for the business.
There are five main categories that a business and its owner must meet to obtain 8a certification. 1. Social disadvantage, 2. Economic disadvantage, 3. Potential to successfully complete federal contracts, 4 No control problems present, and 5. Good moral character. This article is about n. 3, The potential to successfully complete federal contracts.
A company 8a to demonstrate that it has the ability to successfully complete federal contracts, various tests are applied. The biggest challenge for a new company is the requirement of two years in business. A company must have been conducting business for two years before being admitted to the 8a program. The SBA will grant an exemption to businesses and in this article I am going to go over three scenarios on how the SBA will consider an applicant under the given set of conditions.
When does a business need a two-year exemption for 8 (a) certification?
The two basic factors in determining whether a two-year exemption is required:
1. Has the applicant concern been in business for 2 years as evidenced by two tax returns that complete a full twelve month tax cycle?
2. Has the applicant’s concern generated business in the primary NAICS code in the past two years?
Both conditions must be met.
Sometimes it may not be clear whether or not it is necessary to complete a two-year waiver. The following are sample case studies of when a business must file a two-year waiver and when it is not required.
Questions for the SBA:
Do you use some kind of guideline for the amount of income a business should have before attempting a two-year exemption, $ 50,000? $ 250,000? Is this assuming all other conditions are met?
Answer:
Yes, we look at the revenue (there is no fixed amount because it depends on the industry) but we also look at where / who the contracts / revenue comes from (more than 1 or 2 sources).
Scenario I
Year 1 – $ 0 sales
Year 2 – $ 189,000
Year 3 – $ 369,000
Year May 4: The owner finally quits his other job and begins to dedicate himself to the business full time. The company’s total sales are $ 457,000 in year 4.
Year January 5 – application time
NO waiver required
The two-year exemption is not necessary because the business has generated income for the past two years. However; The SBA will review the owner’s management experience to confirm potential for success.
Scenario II
Year 1: $ 100,000 sales
Year 2 – $ 500,000 in sales
Year 3 – $ 0 sales
Year 4: January New Owner Buys Business $ 200,000 in Sales
Year 5 – January (application point)
YES Exemption required
In this scenario, the two-year exemption will be required. Because the company did not generate revenue for the last two years in its primary NAICS code.
Stage 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 the highest paid, and has control of decisions commercial.
Year 2 – $ 500,000 in sales
Year 3 – $ 500,000 in sales
Year 4 – $ 500,000 in sales
Year December 5 – Owner 1 buys Owner 2 and becomes 70% owner. $ 500,000 in sales.
Year January 6 – (application time)
NO waiver required
A two-year exemption is not required because the business has been in existence for more than two years. In this scenario, the SBA will closely review the legal documents. The documents should indicate that the owner has been the president (highest official) for some time and that owner 1 has been signing contracts on behalf of the business for some time. The SBA will also closely examine all potential control issues to make sure no one else has control over the 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 since the start of the business.
2. At least 1 income tax return and a profit on that return.
3. The business owner must have some degree of experience and business acumen.
4. The owner of 51% or more 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 business has the ability to obtain this certification, it is strongly recommended that you conduct a sales potential analysis for your business.
