Many companies seeking to keep pace and remain competitive in the rapidly changing marketplace are adapting by growing in size and revenue through the use of acquisition, mergers, and strategic partnerships. Other ways to grow in size and revenue include taking on investors and transitioning ownership to the next generation of owners, a frequent occurrence in family-owned businesses. This article focuses on these final two types of restructuring with emphasis on issues that commonly arise when firms seek to restructure and maintain or obtain certification eligibility.
While each WBE certification process differs, this article provides general guidelines that apply to most WBE applicants that seek certification with with federal, state, and local government agencies and/or certification with the Women’s Business Enterprise National Council (WBENC), a not-for-profit certifying agency.
- Legal Structure
The firm, after taking on investors or after being passed to the next generation of owners, must remain or become at least 51% owned by one or more women who control the firm’s management and daily operations. It must be clear that women share in the firm’s risks and profits commensurate with their ownership interests and that they enjoy all customary incidents of ownership. In other words, women cannot be owners in name only. Ownership means different things for things for different business structures such as corporations, partnerships, and limited liability companies. It is important to review the applicable certification rules of the certifying agency for ownership requirements.
It is not uncommon that transitioning family-owned firms to their next generation of owners is done in conjunction with larger estate planning efforts. It is important to keep in mind that special ownership rules apply to securities held in trust. Generally, the beneficial owner and all trustees of securities held in an irrevocable trust must be a women. For a revocable trust, the beneficial owner, all grantors, and trustees must be women.
When a firm restructures, issues regarding contributions to obtain ownership interests often arise. The women investors or the next generation of women owners must make real and substantial contributions of capital or expertise to acquire their ownership interests. The contributions must also be in proportion to the ownership interests acquired. What this means is that women owners must pay fair market value for their ownership interests. The firm should document the methods and principles used to value the firm’s worth.
If expertise will serve as contributions, the women whose expertise is relied upon should also have significant financial investments in the firm. If expertise is relied upon as a portion of the contribution, additional rules generally apply. For example, the expertise must be in a specialized field, of outstanding quality, in areas critical to the firm’s operations, indispensable to the firm’s potential success, specific to the type of work the firm performs, and documented in the records of the firm so that the value of the expertise is clearly shown. In other words, general business experience, such as management or administrative experience, cannot be relied upon as expertise.
Women owners must control the firm or possess the primary power to direct the firm’s daily operations and overall management. Evidence of control must be reflected in the firm’s organizational and governing documents (e.g. Operating Agreement, Articles of Incorporation, and Bylaws).
The firm’s organizational and governing documents must not contain any provision which restricts the ability of the women owners to exercise managerial control and possess operational authority over the business.
- Common restrictions to managerial control and operational authority include requiring unanimous consent of owners to take certain actions such as amending organizational and governing documents, raising capital, and selling, transferring, exchanging, or disposing of all or a portion of the firm’s property or assets.
- A woman owner must hold the highest officer position.
- It must be clear that women have the authority to make management and operational decisions including those regarding if and when to make distributions and allocations of profits and losses.
- Operation and Management
The women owners must possess the power to direct or cause the direction of the management and policies of the business and to make the daily as well as major decisions on matters of management, policy and operations.
- The women owners must have the ability to control the firm’s management.
- The women owners must have the education, demonstrable working knowledge, and/or experience in the firm’s area of specialty or industry as well as the technical competence and/or a working knowledge of the technical requirements of the business sufficient enough to critically evaluate the work of subordinates.
- The women owners should be compensated at a higher rate than any male owner or employee. This does not necessarily mean that the women owners’ salaries must be the highest.
- The women owners must document and exercise control over the basic business functions, including the authority to sign payroll checks and letters of credit, signature responsibility for insurance and/or bonds, authority to negotiate contracts and financial services.
The firm must be independent. Often, in the case of small businesses, owners seek infusions of capital from friends, family, and former business associates. When individuals such as these contribute capital to certified WBEs or firms seeking certification, the women owners’ relationships with these investors are scrutinized. Independence issues also arise when family-owned businesses are transitioned to a new generation. Independence is especially scrutinized when male owners pass a business to women owners. In these cases, whether the women owners can manage the business without reliance on the former or current male owners will be carefully examined.
An independent firm is one in which the women owners’ expertise is indispensable to the firm’s potential success. An independent firm is also one in which the women owners have the ability to perform in the firm’s area of specialty and expertise without substantial reliance upon the finances and resources of males or non-woman firms.
In particular, the firm will be examined to determine whether the restructuring has created:
- Interlocking ownership between the firm and a non-woman firm in the same industry;
- Common directors/officers/members between the applicant and non-woman firm; and/or
- The firm’s use of employees, equipment, expertise and/or facilities that are shared with or obtained from a non-woman firm.
While none of these issues alone may be cause for certification denial, they are potential hurdles to continued certification eligibility. If taking on investors or other restructuring efforts create one or more of these issues, the firm may be required to explain why the firm’s independence is not compromised.
As discussed, restructuring a WBE or a firm seeking WBE certification can raise certification issues regarding ownership, contributions, control, and independence. Each situation is unique. It is important to keep in mind that if the firm restructuring is currently certified, it must notify the certifying agency of any change in ownership and/or control that affects certification eligibility.