As an attorney who advises clients on obtaining and maintaining certifications such as Disadvantaged Business Enterprise (DBE), Minority Business Enterprise (MBE) and Women’s Business Enterprise (WBE), I wanted to share some thoughts on what your business can expect from the certification process should you chose to pursue it. The certification process is time consuming and can feel very invasive. However, for many businesses, the advantages of having a certification are well worth the headache.
Time to Clean Up Your Business Paperwork
I receive referrals of business that have run into a corporate paperwork problem during the certification process. Depending on the legal structure of your business, your certification application must include copies of your corporate documents, such as your LLC operating agreement, corporate bylaws, meeting minutes, etc.
The certifying agency is going to scrutinize this paperwork. Their goal is ensure that the woman, minority or disadvantaged individuals applying actually own and control the business.
Many businesses take the “do it yourself” path to starting up their business, downloading or creating their own corporate documentation. Or, perhaps the business used an attorney, but the certification process wasn’t on the radar or the attorney was not knowledgeable about the process. Often, some “standard” language in these documents can be problematic during the certification process. For example, clauses that require supermajority vote often become a roadblock. Another common trouble area is when ownership transactions are not properly documented.
In order to have the best chance of success at a certification, your business should clean up these issues.
Certifiers Leave No Stone Unturned
Clients often tell me, “oh, they couldn’t possible care about that!” Yes, they will care. In counseling my clients on their certification applications, I must bring many issues to their attention. I am not trying to be a pain, I promise. In my experience, the certifying agencies can and will look at every nugget of information. There is no wiggle room or overlooking of minor details. They will look at everything.
They Will Closely Examine Your Relationships
Are any of your family members involved in your business? Or in another business? Maybe your business frequently works for another business. Do you ever borrow employees? Rent equipment? Use someone else’s space? You can expect to have to provide information and documentation about these relationships. Again, the goal of the certifying agency is to make sure that you really run the business, not someone else. They also want to make sure that your business is independent- that it does not rely on another organization to keep it in business.
Office Work Is Not Rewarded
Sales, human resources, accounting, public relations and payroll are all necessary functions in any business. However, if the women, minority or disadvantaged individual does all of those functions, but not the work of the business itself (for example, water heater installation), the business may not be eligible for certification. Time and time again, businesses have been denied when the woman/minority/disadvantaged owner does not do and has not ever done the actual “work” of the business. The U.S. Department of Transportation has upheld countless denials on this basis. The reasoning is that the owner must have enough education, knowledge or experience about the technical work of the company to enable them to effectively evaluate information presented to them about the business and make decisions based on that information. Whether you agree or disagree with that rationale, the chances of getting DBE certification when the owner does not have any experience with the underlying work of the business are poor.
Sweat Equity Is Not Rewarded
Often, we see situations where one owner contributes sweat equity to the startup of the business, while the other owner contributes the necessary capital. Certifying agencies are looking for the woman/minority/disadvantaged individual to have a substantial financial investment in the company. Please see my previous blog on this subject: https://www.smgglaw.com/blog/do-owners-have-to-contribute-money-to-their-company-in-order-to-get-dbe-certification.
Expect Uncomfortable Conversations
Often the woman/minority/disadvantaged individual is in business with a spouse, parent, sibling or close friend. Perhaps they were 50-50 partners who decided to become 51-49 partners in order to obtain certification. In that case, the owners are used to making decisions together. However, the shift from a 50-50 split to a 51-49 split are more than just a transfer of one percent of a share in the company. For certification purposes, it also requires a shift in control. Sometimes egos don’t handle these changes well, and it can cause some bumps in the road for the business and require uncomfortable conversations. Telling a former equal partner that you now must be the boss and have total control of the business can be difficult. Having an attorney involved can help with that- let the attorney be the villain and steer this conversation.
It Will Feel Personal
My clients have given their blood, sweat, tears and money to build a business. Any question of that business, or question as to whether the client owns and controls the business may feel like a personal afront. You may feel like you are under a microscope. You will be required to provide personal tax returns, personal net worth statements, proof of citizenship and other bits of personal information. Please keep in mind that the difficultness of the certification process only serves to increase the value of the certification itself. It is to make sure that your business is really and truly controlled by someone who is a woman, minority or disadvantaged individual.