buying a business with a certification (woman/minority/veteran/etc)

June 30, 2021

by a searcher from University of Massachusetts Amherst - Isenberg School of Management in New York, NY, USA

I've come across this hurdle a number of times, a great business that gets a good percentage of their revenue as a benefit from qualifying for one or more certification groups such as women owned, minority, disadvantaged, etc., that I would not qualify for. I am looking at one now in particular, which happens to be veteran owned and the owner suggested staying on as a 51% partner. I was hoping to use SBA financing, so that would be off the table if the owner stayed on.

Are there any other traditional lenders, that would lend on cash flow?
Has anyone else purchased a business and lost the certification and was successful?

I guess I could potentially value the business based on revenue that was not related to holding this certification--would an owner take a discount due to the fact they might have a hard time finding a buyer that fits the same certification profile as themselves?

Thanks!

Reply by an investor
from The University of Chicago in Louisville, KY, USA

There are other requirements to keep the socioeconomic status other than ownership percentage. For example, the person qualifying for the status must also be the highest paid executive in the company. Some designations (i.e. veteran owned) allow the new buyer to grandfather existing contracts at the same status for the remainder of the life of the current contract before losing the status. Some other designations (i.e. Service-Disabled, 8a) probably do NOT allow for this or require an approval that is hard or uncertain to get. Also consider that the federal regulations for re-certifying small businesses after an acquisition got more strict last year. For example, if you win a contract that the seller has bid in the first 120 days after acquiring, you have to re-certify that the new owner (you) still meets the same socioeconomic status as when the bid was submitted. Previously the pipeline was basically grandfathered to the new owner, but this was changed last year. Lastly, if the seller would accept a valuation based on non-set-aside contracts he/she could sell to anyone, so there will be more competition if the contracts are of any value. Hope that helps and if you need advice feel free to contact me redacted

Reply by a searcher
from Georgetown University in District of Columbia, USA

I've run into a similar issue in the past. It was a woman owned business in a construction waste management company. After talking to professionals within the industry in the state, I learned that there had been a big push to increase participation rates of woman/minority companies within the construction industry and that construction companies were targeting waste management as one of the expense items to boost rates. I eventually decided not to pursue the opportunity because it would have been too difficult to parse out what percentage of revenue this materially affected.

So my advice (and not really answering your question, just opining on the topic) is to understand how much of revenue is tied to the veteran status of the owner, and if it's too difficult to parse then don't spend much time evaluating the company. Taking a minority share of the business seems risky since you don't control the company and your exit opportunities are likely limited.

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