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Is the SBA Mentor-Protégé Program Right for your Business?

Is the SBA Mentor-Protégé Program Right for your Business?

The U.S. Small Business Administration’s (SBA) Mentor-Protégé Program can be a great way for small businesses to obtain developmental assistance from larger mentors and form joint ventures with those mentors to pursue set-aside contracts. While the benefits are many, is your business a right fit?

Overview of the Program

Six years after Congress directed the SBA to update the Mentor-Protégé Program, the SBA issued its final rule providing new guidelines that will permit all types of small businesses, not only participants in the 8(a) Business Development Program, to qualify as protégé firms. The final rule was published on July 25, 2015, and became effective on Aug. 24, 2016 (30 days following publication of the final rule). The new Mentor-Protégé Program is set forth in a new section of the regulations – 13 CFR 125.9.

The following is the SBA’s summary of the program:

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 the Program Works

Formal Agreement

The mentor-protégé relationship must be in writing and approved by the SBA Associate Administrator for Business Development (AA/BD) or his or her designee. The written agreement must include:

  • an assessment of the protégé’s needs, as well as a detailed description and timeline for delivery of the assistance the mentor commits to provide
  • a description as to how the assistance will be provided to enable the protégé to meet its goals as defined in its business plan
  • identification of a single point of contact in the mentor entity that is responsible for managing and implementing the agreement
  • a statement that the mentor will provide such assistance for at least one year
  • a provision that allows either party to terminate on 30 days’ notice
  • a provision that the term may not exceed three years, but may be extended for a second three years

The SBA will review the relationship annually to determine whether it should continue for another year. Provided no rescission is issued by the SBA, the relationship will continue automatically for the next year. A second agreement may be entered, either with the same mentor or with a second mentor, also limited to a three-year period, with potential extension. Any revisions or amendments to the agreement must be pre-approved by the SBA. If either of the parties make any changes to the relationship in the agreement without approval, the SBA will terminate the relationship and may propose suspension or debarment for one or both parties.

The protégé must file an annual report with the SBA, including the following:

  • all technical and/or management assistance provided by the mentor to the protégé
  • all loans to and/or equity investments made by the mentor in the protégé
  • all subcontracts awarded to the protégé by the mentor and the value of each subcontract
  • all federal contracts awarded to the mentor-protégé relationship as a joint venture, the value of each contract, and the percentage of work performed and percentage of revenue accruing to each party of the joint venture
  • a narrative describing the success such assistance has had in addressing the developmental needs of the protégé and addressing any problems encountered
  • the mentoring services the protégé receives by category and hours
  • certification as to whether there have been any changes in the terms of the agreement

The SBA may terminate a non-performing mentor, which will render the mentor ineligible to serve as a mentor for two years. The SBA may also recommend a stop-work order on any joint venture contracts and, finally, the SBA may use the mentor’s non-performance as a basis for suspension or debarment.

Joint Venture Agreement

Once approved by the SBA (takes two to three weeks), a mentor and protégé may form joint ventures to qualify for set-aside contracts for which the protégé is eligible. For example, if the protégé qualifies as an SDVO small business, a joint venture between that firm and its SBA-approved mentor would be eligible for a contract set aside for SDVO firms, provided the protégé meets the size standard assigned to the contract. The SBA has prescribed the terms of any such joint venture relationship that must be set forth in a written agreement and have included a template on their website.

The following are requirements for the joint venture:

  • The protégé must be the managing venturer of the joint venture, and a protégé employee must be the project manager for any contracts entered into. The project manager need not be an employee of the protégé at the time the joint venture submits an offer, but there must be a signed letter of intent to become an employee if the joint venture is successful. The project manager may not, however, be an employee of the mentor and become an employee of the protégé for purposes of performance of the contract.
  • The protégé must own at least 51 percent of the joint venture ownership interests and receive a commensurate share of the profit.
  • The joint venture must perform the percentage of work on a set-aside contract required by the applicable Federal Acquisition Regulation (FAR) and SBA limitation on subcontracting rules (i.e., 50 percent for services and manufacturing contracts, and 15-25 percent for construction and specialty trade construction).
  • The joint venture must establish a separate bank account.
  • The joint venture agreement must itemize all major equipment, facilities and other resources to be furnished by each party.
  • The joint venture agreement must specify the responsibilities of the parties with respect to contract negotiation, source of labor and contract performance.
  • The joint venture agreement must provide that each partner will ensure performance of the contract if the other member withdraws or fails to perform.
  • Each party to the joint venture will be required to sign a “certificate of compliance” attesting to compliance with the provisions of the joint venture agreement and that the parties will perform in compliance with the performance of work requirements. The certificate must be provided by the protégé to both the SBA and contracting officer prior to performance of any set-aside contract.
  • Each joint venture party must allow the SBA, including the SBA’s Office of Inspector General, “to inspect and copy all records and documents.”
Work Share

The protégé must perform at least 40 percent of the work performed by the joint venture partners, including the affiliates of the non-small business partner through subcontracts at any tier. The work performed by the protégé must be more than administrative and ministerial tasks.

Mentor Role

To be eligible to serve as a mentor, an entity must demonstrate that it:

  • is capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement
  • possesses good character
  • demonstrate that it be in good financial condition
  • does not appear on the federal list of debarred or suspended contractors
  • can impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting.

These requirements apply to any entity, including those other-than-small businesses, that can show “a commitment and the ability to asses small business concerns.” Mentors must also be for-profit entities.

Approved mentors will be required to recertify as to their good character and favorable financial position on an annual basis and will have to provide evidence of good financial condition.

A mentor generally will have no more than one protégé at a time. The SBA may, however, allow a mentor to add an additional protégé if it can demonstrate doing so “will not adversely affect the development of either protégé firm (e.g., the second firm may not be a competitor of the first firm).” Under no circumstances would the SBA allow a mentor to have more than three protégés at one time.

The SBA may also authorize that a small business act as both a protégé and a mentor simultaneously, but only where the entity can demonstrate that “the second relationship will not compete or otherwise conflict with the first mentor-protégé relationship.” This represents an about-face from the proposed rule.

Protégé’s Role

To qualify as a protégé, a firm must be small under the size standard corresponding to its “primary North American Industry Classification System (NAICS) code” or demonstrate that it is seeking mentoring assistance in relation to its “secondary NAICS code” and qualifies as small under that standard.

A formal size determination from an SBA area office is not required, but instead will rely on self-certification of size status (as in the 8(a) program) and let the size protest procedures address such issues. In the preamble to the final rule, the SBA commented that so long as it is understood that any SBA approval of a mentor-protégé relationship does not constitute a formal size determination, then the size protest procedures will be sufficient.

The final rule permits protégé firms to have a second mentor relationship, provided that the second mentor operates primarily in an “unrelated” NAICS code or involves a different type of experience/assistance than is being provided by the first mentor.

Benefits

Upon SBA approval of a mentor-protégé agreement, the mentor and protégé would be eligible to submit offers as joint ventures on set-aside procurements for which the protégé is otherwise eligible.

A mentor and protégé approved will not be deemed affiliates for size purposes simply because of the mentor-protégé agreement. The mentor-protégé relationship does not, however, create a blanket exclusion from affiliation; for example, mentors and protégés could still be found to be affiliated under the ostensible subcontractor rule. Consistent with current practice in the 8(a) program, the SBA’s approval of the mentor-protégé agreement (but not necessarily the joint venture agreement) must be received before any joint venture proposal may be submitted on a set-aside contract in order to receive the exclusion from affiliation.

The protégé may sell up to a 40 percent ownership interest to the mentor for the purpose of raising capital.

Government agencies may provide incentives as a part of the contract evaluation process where a mentor provides significant subcontracting work to its SBA-approved protégé.

The mentor can perform up to 60 percent of the work performed by the joint venture partners, including the affiliates of the non-small business partner through subcontracts at any tier.

Summary

There are approximately 350 active SBA Mentor-Protégé Programs in place. With the recent changes in the law making it easier to gain approval and expand to all small businesses the number will only grow. To learn more about how MGO’s dedicated Government Contractor practice can help, let’s talk.




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