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Pros and Cons: Running a Service-Disabled Veteran Owned Small Business

Business meeting with chart.

Sir: 

I have a rating of 100% permanent disability from the U.S. Government. My question is this:

Both of my step sons are in the contracting business – one works for a contractor, the other owns his own business. Would it be beneficial for me to become the sole contractor of the latter son's business, which would therefore qualify me to become eligible for bidding on small business contracts for Government work?

Regards, 
Roger

Dear Roger,

I am also a military retiree (USMC). Thank you for your military service.

As such, I also own and run two veteran-owned small business (VOSB) companies.

There are some pros and cons that should be considered carefully before deciding to take control and ownership of your son's business. It requires some deep soul-searching and honest discussions with all parties concerned.

The Cons

1. Your Son's Satisfaction and Confidence

 Currently, the company is owned and (presumably) run by your son. The success or failure of a small business hinges almost entirely on the efforts and decisions of the president or owner. If the business is successful, it will generate a sense of pride in your son for his accomplishments. Seeing the fruit of his personal labors and management inspires high morale and drives him forward. If you take control and ownership of your son's company, he may feel like he's just another employee and lose his feelings of accomplishment.

2. Your Son's Work Ethic

If your son feels that the business is not really his anymore, he may start to disown the effort and will start acting just like a paid employee. He may not work long hours to ensure business success; he may expect a different set of perquisites that an owner would otherwise forgo to grow the business.

3. Business and Management Disagreements

It is very common for parents and their children to disagree about the management and decision-making within a family-run business. At this moment, your son makes all the decisions. However, if you assume ownership of the company, then your son may feel disenfranchised from the decision-making process in his own company. Thus, it is supremely important to have a binding and written process for all decision-making going forward. Further, the process and dispute resolution must be worked-out and agreed upon in writing before the ownership transfer.

4.  Inheritance Conflicts

Each state has different inheritance laws. If you own and control the company, when you die your wife may automatically inherit 50% of your son's business and have to pay tax on that inheritance. If your wife inherits 50% of your business, she would transfer 50% of that ownership to the non-participating son upon her death. If that doesn't happen, he might still expect to be given 25% of the company as an inheritance.

Further potential strife my strike between your sons over who will assume health and welfare care of you and your wife when you get too old to care for yourselves. One brother may assume that because he is taking care of you, the former business owner, that he is entitled to a bigger inheritance (or recoupment of expenses).

In many States, it does not matter what the written will states, the courts may overturn a will and grant spreading the inherited company to all relatives. Furthermore, in many states if there is a dispute over inheritance, the courts may order that the company should be sold off at market value and the money divided up. In such a case, the company ownership would pass out of family to an outside owner.

Thus, the lawyer and accountant should be consulted to determine exactly how best to set up the ownership and taxation.

5. Limited Government Contract Opportunities

 If you own the company then it would most likely qualify as a service disabled veteran-owned small business (SDVOSB) entity. However, many agencies within the federal government do not routinely make contract set-asides for SDVOSB companies. Acting as the prime contractor, such distinctions may only net you another 5%-7% of new business opportunities (of which you will win a smaller percentage).

The rest of the contract set-asides would be reserved for other small business categories (e.g. small business; WOSB / EDWOSB; 8(a); etc.). If the contracts are small business set-asides, your son's company would already qualify for participation as prime contractor, and having SDVOSB would not hold dramatically better chances. While it is true that state and local governments may expand their contract opportunities for SDVOSB set-asides, they will not be significantly higher than the local small business reserves.

The Pros

1. Priority for VA Contracts

There is one federal government agency that sets aside almost all (or at least the majority of) its contracts for service disabled veteran-owned small business (SDVOSB). That is the Department of Veterans Affairs (VA). The Department of Veterans Affairs (VA) has special authority for Service-Disabled Veteran-Owned Small Business and Veteran-Owned Small Business (SDVOSB/VOSB) set-aside and sole source contracts.

Public Law (P.L.) 109-461 entitled "Veterans Benefits, Health Care, and Information Technology Act of 2006" provides VA with unique authority for contracting with SDVOSB and VOSB. A new procurement hierarchy within VA for open market procurements was created which places our highest priority with SDVOB followed by VOSB. 

If your company had an SDVOSB Certification, and your company was in a line-of-business NAICS code that was highly sought-after by the VA, then having this certification would dramatically improve your chances of competing and capturing such contracts. There are many small businesses that cater their entire lives towards capturing VA contracts as their single best customer. Thus, you should investigate at http://www.FBO.gov what the VA is procuring, and decide if your company offers that type of goods and services.

2. Government Contract Quotas for SDVOSBs

The Veterans Entrepreneurship and Small Business Development Act of 1999 (Public Law 106-50, download Adobe Reader to read this link content) established an annual government-wide goal of no less than 3% of the total value of all prime contract and subcontract awards go to small business concerns owned and controlled by service-disabled veterans. 

On December 16, 2003, the Veterans Benefits Act of 2003 (Public Law 108-183Download Adobe Reader to read this link content) was passed by Congress. Section 308 of the Act (Public Law 108-183) established a procurement program for Service-Disabled Veteran-Owned Small Business Concerns (SDVOSBC). This procurement program provides that federal contracting officers may restrict competition to SDVOSBCs and award a sole source or set-aside contract where certain criteria are met.

However, to capitalize on these regulations (frequently not fulfilled quotas by Federal Agencies), then your company must still get out to the pre-bidding conferences and site visits to champion your SDVOSB rights before the contracting officer makes his procurement decision. And you must proactively convince the contracting officers to change their procurement plan to be SDVOSB set-asides. If you do not accomplish these meet-n-greet opportunities with the contracting office, then it will be too late to champion a justification for set-aside later after the solicitation is officially published for bidding.

3. Joining Prime Contractors on Large Jobs

 If your company has a SDVOSB classification, then many larger companies will seek out your company to act as sub-contractor for their larger projects. This is because large contracts typically mandate that the prime contractorship, the large company who originally takes the contract, must meet a small business participation goal (e.g. SDVOSB) as a percentage of its overall contract. Within the construction industry and several other NAICS codes, this can result in dramatically improved chances to be a sub-contractor on large projects and gain some meaningful workshare. However, in some industries (e.g. IT; Personnel Staffing) the large companies just abuse the small business entities by including them in the team (to capture the contract) and promising them lots of future opportunities, but then refuse to give them any true or meaningful workshare after the contract is awarded.

Thus, entering into large contracts with prime contractors requires the deft negotiation skills of a small company before the contract award to ensure that their 'boatspace' is sufficiently identified such that future opportunities actually come. If not, it will be an exercise in pissing in a dark suit (gives you a warm feeling, but no one notices) and you will feel good about being on a team contract, but won't expand your revenues.

4. Federal Agency SDVOSB Set-Asides

There are some federal agencies that make SDVOSB set-aside contracts. This may add some small growth in business opportunities to your current business.

5. DoD Contract Officers Know the Value of Veterans

There are many DoD-sector contracting officers who place intrinsic value on a company that is headed by a SDVOSB because they understand how the military veteran's experience will be leveraged towards programmatic risk reduction and unique knowledge of military goals, resolve in settling obligations (work-ethic), and reduction of security risk.  

If the proposal drafter is deft at highlighting the SDVOSB benefits in the proposals, they can help the company gain dramatically increased capture rate on contracts. This may be the most dramatic PRO for SDVOSB status; a good marketing manager becomes a key to success.

6. Possible State Tax Benefits

There may be some state tax benefits that come to companies declared SDVOSB status.

7. Flexible Subcontracting Limitations

 Changes to the FAR "50% Rule":

  • Limitations on Subcontracting
    • Currently, a small business prime must incur 50% of the cost of contract performance with its own personnel which helps limit small businesses acting as "fronts" for large business primes.
  • There are no limits on costs for materials or other direct costs.
    • Changes to the rule, yet to be finalized by SBA, now limit the application to no more than 50% of the amount paid to the prime.
  • The 50% obligation is spread across all contract costs, including materials and other direct costs.
    • Also specifies it does not apply to payments to "similarly situated entities." Thus, for example, a service-disabled veteran owned small business may subcontract to another SDVOSB , and will not be affected by the 50% rule.

8. Alternative to the Benefits of Running a SDVOSB

Your son that owns the company could achieve most of these same benefits through participation in a military reserve program. For example, if he served one weekend each month, and 2-weeks during summer in the military reserve, then he could honestly call his business a veteran-owned small business (VOSB) even without participation or ownership by you. The trick is to enlist in the military reserve when there are no upcoming wars with foreign powers.

Although VOSB-status is not as valuable as SDVOSB overall, the differences in opportunities are not dramatic. It boils down to marketing the company to larger corporations.

SDVOSB Certification will not (entirely) outweigh the need for real-world contract experience. Thus, it is my recommendation that all these issues should be comprehensively considered, and then collaboratively decided-upon as a family.

Sorry if this does directly answer your question. Hope this helps you a little. Please send me your further questions.

Michael J. Erickson, USMC-Retired President, Aviation Management Inc., LLC (AMI) President, Drone Co-Habitation Services, LLC (DCS) 2110 Raven Tower Court, #301 Herndon, Virginia 20170 Tel: 571-216-3245

Author of: 'So You Want To Be A Government Contractor' (http://youtu.be/zYTu73t7LiA) Available at: https://www.amazon.com/author/michaelerickson or https://www.smashwords.com/books/view/149406

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