8(a) Potential for Success
2 Years in Business
As part of a firm’s 8(a) Application the SBA must determine that a firm is ready and will be successful if admitted into the program. Research from the U.S. Bureau of Labor Statistics suggests that most failures of American startups will occur in the first two year of their existence. The U.S. Bureau of Labor Statistics numbers show 1/3 of all businesses will fail within the first two years whereas other publications like Bloomberg show this number to be as high as 80%. Therefore the SBA’s logic for the two year requirement in business is that 1.) An undercapitalized or unhealthy firm might not be able to complete the federal contracts they are awarded and 2.) The SBA may actually put an 8(a) firm out of business by having an undercapitalized firm attempting to perform on a large federal contract.
The SBA does provide for a “two year waiver of business” when specific requirements are met. The owner of the firm must have a strong resume in the industry, at least 1 tax return for the business with revenue on it, as well as in most cases worked or preformed on a federal contract.
If the business changes entity types for example from a sole proprietorship to a corporation the SBA does not consider this to be a reformation of the firm and the start date from the date when the original sole proprietorship began doing work is used.
The SBA will also test to see whether or not the owner is working fulltime for the 8(a) applicant concern. W2 income in the owner’s name in the past 6 months even minimal in nature can cause a denial of the 8(a) application and careful consideration should be taken to properly explain these amounts to the SBA.
In order for a firm to be accepted into the 8(a) program the firm has to not be deemed to be economically dependent upon one single client for the majority of its work. The SBA conducts a test on the firms billing for the past 12 months and makes sure one client is not weighted at 70% or above. An amount over this amount would cause a denial. This rule can be difficult for the IT and consulting industries because firms that is relatively young often times are based upon a single customer for the majority of their billing.
Profitability/Positive Net Worth
In order for the firm to become 8(a) certified the firm must currently be profitable and have a positive net worth, meaning have a positive balance for overall profitability from the firm’s inception. The SBA will not take into consideration contracts that have been awarded or promised for future income.
There are other variable that the SBA takes into consideration such as access to capital, however if these for major areas are without issue generally speaking arguments can be made to the SBA that will override other concerns they may have regarding the application.