Experts say it’s the best of both worlds: the combined resources, stability, and experience of large, established firms with the innovation, focus, and energy of small, emerging businesses. Such partnerships, which form within the mentor-protégé program of the Small Business Administration, are considered a win-win for both sides. Now, a final ruling will make them more widely available.
Last month, the Small Business Administration (SBA) released a much-anticipated Final Rule, greatly expanding its mentor-protégé program. Beginning August 24, 2016, all small businesses, not just 8(a) small businesses, will be able to participate in this program which fosters private-sector relationships. Significant benefits are available to potential protégés and mentors alike, and this ruling will likely lead to a groundswell of mentor-protégé joint ventures across all categories of small businesses. Here’s what you need to know.
According to the SBA website, the mentor-protégé program is "designed to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance to protégé firms and to improve the protégé firms' ability to successfully compete for federal contracts." Under the program, mentors provide protégés with technical and management assistance, financial assistance through loans and investments, subcontracts that serve as developmental assistance, help in performing prime contracts through joint venture arrangements, and trade education. Mentor-protégé joint ventures benefit from numerous competitive advantages, including the ability to rely on the combined capabilities, resources, and experience of two companies as the prime contractor.
Historically, and in its current form, the mentor-protégé program has been limited to 8(a) small business concerns. That is, assistance has been limited to firms that are owned and controlled at least 51% by socially and economically disadvantaged individuals. The SBA's final rule expands the mentor-protégé program to become more “universal”, making it available to service disabled veteran-owned small businesses, HUBZone small businesses, women-owned small businesses, and non-disadvantaged small businesses. All small businesses will be part of the same program (except for those in the 8(a) mentor-protégé program, which will be kept separate from the new program), and the rules of participation will be consistent among the different types of small businesses.
Under the new rule, any small business can form a joint venture (JV) with any larger, for-profit mentor business that demonstrates a commitment and ability to assist small businesses. Such a JV may compete for any type of small business contract for which the protégé firm qualifies. The mentor can also be a small business itself, as long as it can demonstrate its ability to assist the protégé.
As in the current program, the new ruling allows the mentor contractor to own up to a 40% equity share in the protégé without triggering affiliation and jeopardizing the size status of the small business. Mentor businesses may also perform 60% of any awarded contracts. The protégé company thus gains the benefit of a mentor’s experience and expertise, as well as the past performance record of the mentor. As a result, a protégé may be able to compete for larger, more complex contracts than it on its own. Moreover, contracts awarded under the general small business mentor-protégé joint venture program will qualify as awards to the small business category of the protégé for the life of that contract (except long-term contracts -- recertification is required after year five).
A few other things to consider:
- Businesses seeking to enter into a JV must first be approved under the SBA's mentor-protégé program. The JV must then be approved by the SBA before the joint venture can begin.
- Mentor-protégé JV agreements must be in writing. The agreement must set forth an assessment of the protégé's needs and provide a detailed description of the assistance the mentor commits to provide.
- Mentor-protégé agreements are limited to an initial term of three years, with an option to extend for three additional years (for a total of six years).
- The SBA has the ability to terminate the mentor-protégé agreement at any time.
- A small business can be both a mentor and protégé at the same time, as long as the second relationship will not compete with or otherwise conflict with the first mentor-protégé relationship.
- There is no requirement that a separate legal entity be formed. However, if a separate legal entity is formed, it must not be filled with its own separate workers.
- Performance by the mentor and the protégé is required to occur at the subcontract level.
- The JV's project manager is not required to be a protégé employee at the time of proposal submission, as long as a letter of intent is submitted stating that the project manager will become an employee of the protégé. The project manager cannot be employed by the mentor and then become an employee of the protégé.
Given the benefits, it is no surprise that the expansion will likely lead to a rush of mentor-protégé applications. The SBA has estimated that about 2,000 new small businesses will seek to take advantage of the expanded mentor-protégé program, teaming up with large businesses on about $2 billion in contracts per year. While this will create additional opportunities for numerous businesses -- large and small -- it may also make it difficult for small businesses who are not in a mentor-protégé relationship to successfully compete for set-aside contracts.
If you are interested in participating in the new expanded mentor-protégé program, you should start working on establishing mentor-protégé relationships and preparing mentor-protégé agreements now so they are ready on Aug. 24. Doing so will give you a tremendous head start by allowing you to submit your application and agreement for approval as soon as the program goes into effect.