Evaluating Risks When Losing DBE / Veteran-Owned Business Status
October 24, 2024
by a searcher from University of Chicago in Philadelphia, PA, USA
Hi all,
As a fund that is not qualified for any DBE designation, I wanted to see whether any of you have acquired a DBE, lost the designation, and then operated the business as a non-DBE and what the outcome was. I've looked a few sectors and companies where DBE status has been relevant for contract bidding and I have a sense of how I would approach the evaluation. It would be great to get your thoughts on evaluation, whether this is a deal breaker for you, and how this affects your structure and bidding. Also, if there are third-party consultants that support this evaluation, it would be helpful if you could name them in this thread.
The following is from a pre-LOI CIM I wrote earlier this year which laid out my thoughts on evaluating the impact of the lost WBE status if we were to proceed with the acquisition. In this case, the company was a subcontractor to prime contractors, and the prime contractors were responsible for allocating a portion of their work to DBEs to meet state requirements. The company was a WBE, but it only made up very small piece of total contract value and therefore didn't move the needle in terms of helping the prime contractor reach their DBE target. I'm happy to give further context to the deal if it is helpful. Hope this is useful for those of you looking at acquiring DBEs.
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[Company] obtained woman business enterprise (“WBE”) status as a qualifying woman-owned business. The owners of [Company] believe that this status has not made any material impact on the Company’s revenue opportunities. Under the disadvantaged business enterprise (“DBE”) program's requirements, prime contractors are required to allocate a portion of total contract value to DBE-certified businesses. [Company Owner] believes that DBEs need to make up 3-13% of total contract value; however, this is anecdotal and will need to be evaluated further in due diligence. Upon acquisition, [Company] would lose its WBE status, which could present a risk that certain contracts could be lost. However, Carnyx believes this risk is relatively limited:
• DBE standards often apply to large, multimillion dollar projects with many tasks in the project scope. This means that there are many areas where non-DBE subcontractors could be replaced with DBE if a higher percentage of such contracts is required. If [Company]’s loss of the DBE status puts a prime contractor below the DBE requirement, a range of other subcontractors – presumably those with lower work quality and history with the prime contractor – would be at risk of losing their contract.
• [Company's service] generally makes up a small percentage of total contract price (often low six figures or high five figures), so the loss of [Company]’s status may not, in many cases, impact the total contract composition such that incremental DBEs subcontractors need to be hired. Furthermore, larger subcontractors may be more likely to be targeted for replacement given their higher weighting in the total contract value.
• Contracts carrying a DBE goal are required to be awarded to a bidder who has made a good faith effort to meet the contract goal, which includes those that were unable to meet the target. [Company] suggests that under the state's DBE program, if hiring a DBE would cost more money than a non-DBE, prime contractors can hire the less expensive, non-DBE subcontractor.
Given the above points, we believe that there would be limited instances in which [Company] would be at risk of losing a contract. This scenario would involve: i) contracts in which [Company]’s loss of WBE status brings the total project DBE composition below the threshold, ii) [Company] is the weakest non-WBE in the remaining non-DBE contractors###-###-#### %) and is selected to be replaced, iii) the prime contractor is able to replace [Company] (i.e., does not fail its good faith effort search for an alternative subcontractor). Evaluating this risk will be a critical part of post-LOI due diligence.
from United States Air Force Academy in Enid, OK, USA
I started by asking questions about how long the term of the existing contracts were, whether there was any language in the subprime contract regarding loss of the DBE status, and whether there were competent competitors providing the same service who were DBE (thus making an educated guess as to whether the prime would consider renewing the contract and fulfilling the DBE percentage in a different section of the overall prime contract).
Then, I tried to get an idea of how strong of a factor the DBE was in getting the originally awarded contract. This had to do more with the types of contracts typically awarded to DBEs. I used usaspending to look at the company, then find small businesses that provided services to the same agency using the same NAICs code. Once I had a list of those, I looked at those contracts to see if they were mostly all awarded with DBE criteria. That would give me a good idea of whether I needed to retain that DBE in order to win contracts in that category or if the small business's expertise in their niche would be enough to win on it's own. This is harder to do with business who primarily fill subcontract roles since usaspending doesn't have as much data on them. However, I still think it would be reasonable to infer based on what is in usaspending.
I ultimately decided not to pursue the DBEs that I looked at with a particular DBE that I could not maintain because I suspected that I would not be able to win new contracts withou the DBE. Best of luck.
from University of Virginia in Charlottesville, VA, USA
They have one contract that accounts for <5% of revenue???Yeah, maybe you are ok and can eat the loss.
80% of their revenue is tied to the company being women owned? Yeah, sorry, you aren't going to get around that.
I see this question a lot on here in some permutation (I am a veteran and see it often with veteran-owned businesses). The hard reality is you are not going to get around contracts that tied to a certain status.
The best I can recommend if you think this is a good business and have a good relationship with the seller is to find a woman searcher and pass it to her and offer to invest as minority owner.