When Your Disadvantaged Business Enterprise is No Longer Considered Economically Disadvantaged

November 13, 2020
By Danielle Dietrich
Posted in Business Services, Women and Diverse-Owned Businesses

If you are a woman (WBE) or minority (MBE) owned business, you may have obtained Disadvantaged Business Enterprise (DBE) certification as a way to boost your business through access to federally-funded projects with requirements and/or goals to include a certain percentage of DBE work in the projects.

If your business is successful, it is possible that at some point, the owner or owners of the company may no longer be considered economically disadvantaged regardless of their sex or minority status.  This may be worrisome for DBE owners, as their certification may have greatly assisted the company in obtaining work.  On the other hand, for a company to lose its DBE certification on this basis, it means that the owner has grown their personal wealth significantly.

Members of the classes eligible for DBE certification (women and minorities, generally) are presumed to be economically disadvantaged.  However, under the regulations, that presumption can be rebutted.

Under 49 C.F.R. §26.67(b), there are two ways that an individual’s presumed economic disadvantage may be rebutted.  The first is if the individual’s personal net worth statement and supporting documentation show that their personal net worth exceeds $1.32 million (with certain exclusions).

The second, and lesser known way is if the owner’s statement of personal net worth and supporting documentation show the owner is “able to accumulate substantial wealth.”  The agency may consider the following factors in making this determination:

  • Whether the average adjusted gross income of the owner over the past three years exceeded $350,000;
  • Whether the income was unusual and not likely to occur in the future;
  • Whether the earnings were offset by losses;
  • Whether the income was reinvested in the firm or used to pay taxes arising in the normal course of operations by the firm;
  • Other evidence that income is not indicative of lack of economic disadvantage; and
  • Whether the total fair market value of the owner’s assets exceed $6 million.

The certifying agency will also look at transfers that the owner made during the past two years to immediate family members, trusts benefiting family members, or to the firm for less than fair market value.  They do not include customary gifts for weddings, birthdays, graduations.

If your disadvantaged owner’s personal net worth is approaching $1.32 million, it may be beneficial for them to work with their accountant and attorney on appropriate strategies to try to stay under that threshold.

If a certifying agency has begun to ask for additional information about a disadvantaged owner’s finances, or if the company receives notice that its status is under review, the business should consider engaging a knowledgeable attorney to help guide them to try to preserve the DBE certification.

Additionally, a DBE is entitled to a hearing regarding the rebuttal of the presumption of economic disadvantage under 49 C.F.R. §26.67 before the certification can be revoked.  It is important to know your rights, and the requirements necessary to revoke your certification.

If your company needs advice regarding DBE certification, please contact Danielle Dietrich at 412-227-0284 or ddietrich@smgglaw.com.