Given the substantial benefits small businesses enrolled in the 8(a) Business Development Program receive, the Small Business Administration (SBA) has strict eligibility standards. To qualify for admission into the Program, a small business must be “unconditionally owned and controlled by one or more socially and economically disadvantaged individuals…” 13 C.F.R §124.10. While disadvantaged entities can have business relationships with non-disadvantaged entities they must be wary of not crossing the line from independence to dependence. When a relationship between a disadvantaged and non-disadvantaged entity becomes so close that independent business judgment by the disadvantaged entity is compromised, it can result in the disadvantaged entity’s termination from the 8(a) program. A recent case decided by the SBA serves as a friendly reminder of this important limitation.
In The Desa Group, Inc., SBA No. BDPT-543 (2015), the SBA terminated from the 8(a) program The Desa Group Inc., owned by a socially and economically disadvantaged individual, Ms. Dionne Fleshman. Her termination from the Program arose from an investigation by the SBA based on a tip that Ms. Fleshman worked for DESA Inc., a non-disadvantaged company owned by her mother, Ms. Diane Sumpter. On appeal, the Office of Hearings and Appeals (OHA) found that although two grounds for terminating the firm from the 8(a) program were erroneous, SBA had a valid basis for concluding the firm was unduly reliant on a non-disadvantaged business under 13 C.F.R. §124.106(g)(4). Here, both companies had acted as subcontractors for one another, the disadvantaged corporation relied on the non-disadvantaged entity for office space, Ms. Fleshman had an office at the non-disadvantaged entity’s headquarters, and meetings were held in that same building where Ms. Sumpter was a “vocal participant.” Furthermore, it was conceded that DESA Inc. was responsible for more than 40% of the disadvantaged entity’s revenues in 2010 and the disadvantaged entity was being paid $7,000 to $10,000 per month from 2010 to 2012 from DESA Inc. Based on these facts, OHA found that there was evidence of “significant interconnectedness between the two companies” such that The Desa Group Inc. could not risk its relationship with Ms. Sumpter and DESA Inc. without substantial harm to its own health, and the termination was upheld.
While every determination depends on the specific facts of the case, it is important to understand the factors the SBA will consider when deciding reliance. Overall, small businesses need to be cautious of their interactions with non-disadvantaged entities or risk being terminated from participation in special small business programs such as the 8(a) program.