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The New Small Business Mentor-Protégé Program is here – or is it?

Posted by David Rose | Jul 25, 2016 | 0 Comments

SBA's Stated Purpose of the Small Business Mentor-Protégé Program

SBA prefaced their program with the Program's purpose stated (or quoted) below:

The small business 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.  This assistance may include technical and/or management assistance; financial assistance in the form of equity investments and/or loans; subcontracts (either from the mentor to the protégé or from the protégé to the mentor); trade education; and/or assistance in performing prime contracts with the Government through joint venture arrangements.  Mentors are encouraged to provide assistance relating to the performance of contracts set aside or reserved for small business so that protégé firms may more fully develop their capabilities.

How Does a Business Qualify to be a Mentor

To begin with, “any concern that demonstrates a commitment and the ability to assist small business concerns may act as a mentor and receive benefits” from the mentor-protégé program.  Mentors may be large or small businesses.

To qualify, a prospective mentor must demonstrate that it is capable of meeting its commitments to the protégé.  The SBA will evaluate a prospective mentor's financial health, including the mentor's tax returns, audited financial statements, and/or SEC filings (for publicly traded companies).  A mentor must “[p]possess good character” and cannot appear on the government's list of debarred or suspended contractors.  This pretty much aligns with the 8(a) mentor protégé program requirements. Once approved, a mentor must “annually certify that it continues to possess good character and a favorable financial position.”

Again, the same limitations as the 8(a) program apply. A mentor is limited to one protégé at a time.  However, “SBA may authorize a concern to mentor more than one protégé at a time where it can demonstrate that the additional mentor-protégé relationship will not adversely affect the development of either protégé (e.g., the second firm may not be a competitor of the first firm).  While mentors may, with SBA's approval, have more than one protégé, “under no circumstances will a mentor be permitted to have more than three proteges at one time.”  

The SBA gave a good explanation as to their reasoning behind this limitation. Obviously, a very large business could take disproportionate advantage of the program if no limitations were set and obtain quite an advantage, if one believes there are significant advantages to large business participation in the program. Below is an excerpt from the regulation:

SBA continues to believe that there must be a limit on the number of firms that one business, particularly one that is other than small, can mentor.  Although SBA believes that the small business mentor-protégé program will certainly afford business development to many small businesses, SBA remains concerned about large businesses benefiting disproportionately.  If one firm could be a mentor for an unlimited number (or even a larger number) of protégés, that firm would receive benefits from the mentor-protégé program through joint ventures and possible stock ownership far beyond the benefits to be derived by any individual protégé.

SBA also clarified that the three-protégé limit is an aggregate of protégés under both programs, the small business mentor-protégé program and the separate 8(a) mentor-protégé program.  For example and to illustrate, if a mentor already has one protégé under the 8(a) mentor-protégé program, the mentor would be limited to a two additional protégés under the small business mentor-protégé program or one of each under each adding up to a total of three.

Also, if an 8(a) firm is about to graduate, it may transfer its 8(a) mentor protégé agreement from the 8(a) program to the Small Business Mentor-protégé Program without going through the entire process. The idea is that if they are merely graduating due to the passage of 8 years, they should not be penalized for being a graduating 8(a). Of course they would still have to qualify as small.

Qualification as a Protégé

To qualify as a protégé, a company “must qualify as small for the size standard corresponding to its primary NAICS code or identify that it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code.” This is a departure from the 8(a) program where the protégé was expected to be in the developmental stage or half the size for its primary NAICS code, never have received an 8(a) contract, and have more than 6 months left in the program. The SBA opened the door to partial large businesses by stating that if the prospective protégé is not a small business in its primary NAICS code, “the firm must demonstrate how the mentor-protégé relationship is a logical business progression for the firm and will further develop or expand current capabilities.”  Further, “SBA will not approve a mentor-protégé relationship in a secondary NAICS code in which the firm has no prior experience.” As many will recall, this harkens back to when many firms in the late 1990s and early 2000s changed from 236220 (now $36.5 Million) to 562910 (now 750 employees).

As with the 8(a) program, a protégé ordinarily will have no more than one mentor at a time, although the SBA may approve a second mentor where certain conditions are met.  In no case will the SBA approve a protégé to have more than two mentors at the same time.

The Written M/P Agreement is required

Following the 8(a) program, “[t]he mentor and protégé firms must enter into a written agreement setting forth an assessment of the protégé's needs and providing a detailed description and timeline for the delivery of the assistance the mentor commits to provide to address those needs…”

An interesting twist requires the protégé and mentor to address the protégé's business plan where the new regulation states, “address how the assistance to be provided through the agreement will help the protégé firm meet its goals as defined in its business plan.”   8(a) firms are required to provide a 1010(c) business plan with their 8(a) application and update it annually as part of their requirements to participate in the business development program. The SBA does not have this level of detail in the other small business areas.

Other requirements similar to the 8(a) program include:, the mentor-protégé agreement must provide that the mentor will provide assistance to the protégé for at least one year, and, the agreement must also provide “that either the protégé or the mentor may terminate the agreement with 30 days advance notice to the other party and to SBA”, the written mentor-protégé agreement must be approved by the SBA before it takes effect, the SBA “must approve all changes to a mentor-protégé agreement in advance, and any changes made to the agreement must be provided in writing.”  

The SBA debated how to administer the program but in the end it determined it would set up a separate office to administer al but the 8(a) mentor protégé program. In the final rule it states that it will “establish a separate unit within the Office of Business Development whose sole function would be to process mentor-protégé applications and review MPAs and the assistance provided under them once approved.”  If this office becomes overwhelmed with applications (a concern a number of commenters raised in response to the proposed rule), SBA could consider using “open enrollment periods” in which mentor-protégé applications would be accepted.  It remains to be seen if the office will become overwhelmed to the point of actually establishing open enrollment terms or allow for fair processing of all applications.

How Long Does a Mentor-Protégé Agreement Remain Effective

A mentor-protégé agreement “may not exceed three years, but may be extended for a second three years.”  The SBA's intent here is to limit to six years, the length of time that two companies can be involved in a small business mentor-protégé relationship. The SBA's reasoning was succinctly put below:

The mentor-protégé program should be a boost to a small business's development that enables the small business to independently perform larger and more complex contracts in the future.  It should not be a crutch that prevents small businesses from seeking and performing those larger and more complex contracts on their own.  

What Are the Annual Reporting Requirements for the Program?

The protégés must make annual reports to the SBA.  Within 30 days of the first year of the approval of the mentor-protégé agreement, the protégé must make a report concerning the previous year, including a detailed list of assistance provided by the mentor, and federal contracts awarded to the mentor-protégé as joint venturers.  A narrative must also be submitted by the protégé describing the success that has been made in addressing the developmental needs of the protégé and addressing any problems encountered.

The Mentor Protégé Agreement automatically renews unless SBA rescinds the agreement in writing after the annual review.

The Big Advantage - Joint Venturing

Just like with the 8(a) program, the small business mentor-protégé program specifies the mentor and protégé may form joint ventures and compete for set-aside contracts:

A mentor and protégé may joint venture as a small business for any government prime contract or subcontract, provided the protégé qualifies as small for the procurement.  Such a joint venture may seek any type of small business contract (i.e., small business set-aside, 8(a), HUB Zone, SDVOS, or WOSB) for which the protégé firm qualifies (e.g., a protégé firm that qualifies as a WOSB could seek a WOSB set-aside as a joint venture with its SBA-approved mentor).

However, this is where the whole program runs astray, in my opinion. Recently a case was decided by the Small Business Administration's Office of Hearing and Appeals. OHA's decision in EKCG, LLC, SBA No. VET-255 (2016) involved a Department of Justice solicitation for information security services.  The solicitation was issued as a total Service Disabled Veteran Owned Small Business set-aside under NAICS code 541519 (Other Computer Related Services).

The SBA's Director of Government Contracting held that, under 13 C.F.R. 125.15(b), all parties to a SDVOSB joint venture must be small businesses.  The D/GC rejected the argument that EKCG's status as an approved 8(a) mentor-protégé joint venture exempted it from this requirement.  The D/GC issued a decision finding EKCG to be ineligible for award of the DOJ SDVOSB set-aside contract.

EKCG filed an appeal with OHA.  EKCG argued, in part, that the SBA's size and 8(a) Program regulations (specifically, 13 C.F.R. 121.103(h) and 13 C.F.R. 124.520(d)) permit a mentor and protégé to joint venture as a small business for any procurement so long as the protégé qualifies as a small business.  EKCG argued that it was contrary to these regulations for the D/GC to insist that an SDVOSB joint venture be comprised exclusively of small businesses, where the joint venture is an SBA-approved 8(a) mentor-protégé joint venture.

OHA disagreed.  It wrote that a “close reading” of 13 C.F.R. 121.103(h) and 13 C.F.R. 124.520(d) “demonstrates that the regulations grant mentor-protégé joint ventures an exception to affiliation for size purposes, but do  not indicate that a mentor and protégé also are exempt from other program-specific requirements.”  OHA continued:

Neither S 121.103(h) nor S 124.520(d) states that mentor-protégé joint ventures are exempt from program-specific requirements if the mentor and protégé choose to compete for procurements under such programs.  Similarly, there is no indication in the SDVO joint venture regulation itself–or in the corresponding regulations pertaining to HUBZone joint ventures and WOSB joint ventures–that the rules are not applicable to mentor-protégé joint ventures.  I therefore find no basis to conclude that a mentor and protégé are excused from program-specific regulations, in addition to enjoying an exception from affiliation.

This obviously does not comport with the ruling in the final rule of how SBA interprets their regulations above and repeated below:

A mentor and protégé may joint venture as a small business for any government prime contract or subcontract, provided the protégé qualifies as small for the procurement.  Such a joint venture may seek any type of small business contract (i.e., small business set-aside, 8(a), HUB Zone, SDVOS, or WOSB) for which the protégé firm qualifies (e.g., a protégé firm that qualifies as a WOSB could seek a WOSB set-aside as a joint venture with its SBA-approved mentor).

The judge got it wrong and had he been right, it would have impacted an astronomical number of 8(a) Joint Ventures that could have been challenged both in the past and in the future. It only remains to be seen what will happen with the confusion created by this judge.

Do Firms in the New Small Business Mentor-Protégé Program Receive the Affiliation Exception

Yes. As is the case under the 8(a) mentor-protégé program, the small business mentor-protégé program provides an exception to affiliation.  The new regulation mirrors the 8(a) program in stating “no determination of affiliation or control may be found between a protégé firm and its mentor based solely on the mentor-protégé agreement or any assistance provided pursuant to the agreement.”  It does say; however, “affiliation may be found for other reasons.”

The Future

The rule states that SBA's new small business mentor-protégé program will become effective 30 days from today (July 25).  The Act authorizing the original Mentor Protégé Program was passed in 2010. It may happen. It remains to be seen. If you want to know more, call me. This is very exciting. Either way – IT IS HERE, and if you want to stay in the game, you need to start planning right now!

Here is a link to the Federal Register Notice

New Mentor Protege Program
Federal Register Notice

About the Author

David Rose

David A. Rose, Esq., is a senior member of the firm practicing throughout the United States and internationally based in Duluth (Atlanta) Georgia. In addition to Federal Contracts and Procurement law, he assists companies and corporations with business formation issues (LLCs, Domestic Corporations, Joint Ventures, Teaming Arrangements, 8(a) and Small Disadvantaged Applications to SBA, MentorProtégé, Affiliation and Ostensible Subcontractor Issues, etc.) and with the establishment of subsidiary entities in foreign locations from the Caribbean to the Mid and Far East. With more than 20 years of experience, the former Deputy General Counsel (Deputy Staff Judge Advocate) of the Air Force Center for Engineering and Environmental Excellence, oversaw the legal program for execution of over $4 Billion in Federal contracts each year. Dave has served at senior positions in Korea, Japan, Germany, Great Britain and the Pentagon and now brings that breadth of knowledge and experience to the commercial sector. His background is complemented by degrees in chemistry, mathematics, a jurisdoctorate, and post doctoral degrees in environmental law and procurement law from George Washington University. He was most recently selected as the 2011 SAME National Industry Small Business Advocate. He is active in the State Bar of Georgia, US Court of Federal Claims, US Tax Court, Armed Services Board of Contract Appeals, Fulton County Bar Association, the Society of American Military Engineers, the American Society of Civil Engineers, and the Judge Advocates Association. He currently holds the active rank of Lt Col in the United States Air Force Reserves and the position of Deputy Staff Judge Advocate (Cat A) to the Headquarters, United States Air Force Reserves where he is one of the primary legal advisers to the Commanding Officer of the Air Force Reserves, Lt General Jackson.

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