Life Beyond the SBA 8(a) Business Development Program

SARAH TUCKER: Welcome to Cherry Bekaert's Government Contracting Podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward. I'm Sarah Tucker, Senior Manager with Cherry Bekaert, and with me today is Susan Moser, leader of Cherry Bekaert's Government Contracting Services Group. Today, we are doing another part of our 8(a) series, taking a look at life beyond the 8(a) program. Thanks for joining me, Susan.

SUSAN MOSER: Happy to be here. To start off and set the base for this discussion, when does graduation occur? What period of time are we looking at?

SUSAN MOSER: The SBA 8(a) program does have a definite life. It is generally a nine-year program; it was ten years during COVID, but it's typically nine years. Some companies do graduate early, and graduation can occur for a number of reasons.

SUSAN MOSER: The goal of the SBA with the 8(a) program is business development. The SBA's objective is that companies will successfully graduate when they are sustainable and can have success outside of the 8(a) program. Sometimes companies graduate early because they have completed that mission and are capable of performing outside of the program.

SUSAN MOSER: That is a somewhat subjective determination. It could be based on substantial profitability, sales trends where much of the revenue is not 8(a)-based, financial metrics such as net worth and working capital, comparisons to non-8(a) businesses, strength of management experience, or demonstrated ability to compete. The SBA generally does not seek to graduate companies early unless they believe the company no longer needs the program.

SUSAN MOSER: Some companies graduate early because they exceed size standards. Each government contract has a NAICS code, and revenue-based size standards are based on a five-year revenue average, so rapid growth can lead to early graduation.

SUSAN MOSER: Companies can also lose eligibility if they fail to adhere to eligibility tests. Several metrics need close monitoring, including excessive withdrawals, adjusted income for the owner, and the personal net worth test. Unfortunately, some companies do not pay adequate attention and may unknowingly exceed limitations.

SUSAN MOSER: We encourage companies to understand those eligibility tests and to work with their accounting teams, because many determinations are based on tax returns. Some companies voluntarily choose to graduate because they no longer need the program or prefer to avoid the compliance requirements. They should notify the SBA if they voluntarily graduate.

SUSAN MOSER: Generally, if a company is still eligible, I do not recommend voluntary early graduation because the 8(a) program has significant benefits throughout the nine years. For example, we generally do not recommend companies pursue an ESOP while they still have time left in the 8(a) program; that's something better evaluated after graduation.

SARAH TUCKER: As Susan mentioned, the 8(a) program has a definite life, and the transition out of the program is something all companies will experience. It is important to plan for that transition to be successful outside of the 8(a) program.

SARAH TUCKER: Organizations can prepare in several ways. First, seek to understand what changes will occur, such as moving from set-aside opportunities to competitive bidding. Consider contract backlog length, indirect rate implications, and the increased business development and administrative efforts associated with competitive procurement.

SARAH TUCKER: Next, develop and implement a change plan covering people and processes. Collaborate with experienced professionals and advisors who have guided other organizations through the transition. Also evaluate exit strategies, whether a sale, merger, or choosing to remain small and specialize in a niche.

SARAH TUCKER: If you choose to stay small and specialize, focus on the quality of opportunities and develop deep expertise in that niche. You can still qualify as a small business after graduating the 8(a) program, and some companies spin off divisions or contracts to maintain small-business status.

SUSAN MOSER: That approach used to be less commonly discussed, but for some companies it is the right decision. If a company plans to remain small after graduation, it should be intentional about choosing the right niche, profitable contracts, and growth strategy.

SARAH TUCKER: Intentionality is key. Businesses that succeed after graduation typically have strong relationships with advisors, bankers, and business coaches who can guide the transition. They reduce dependence on 8(a) contracts and demonstrate an ability to compete and win in the open market.

SARAH TUCKER: Successful companies also have a repertoire of solid past performance to rely on and an infrastructure that can handle growth. Many companies rely on systems that were adequate when small but are insufficient as they scale. Relationships with large prime contractors and use of mentor-protege and joint venture programs are important.

SARAH TUCKER: Having the right staff, hiring and retaining key people, and understanding the finances of the business are critical. There are a number of things Cherry Bekaert can help with during that transition.

SUSAN MOSER: A few items I want to emphasize: the mentor-protege program is valuable when done right, and we see many successful arrangements for both large and small businesses. As you near graduation, consider flipping roles—if you were previously a protege, look to become a mentor, potentially to another 8(a) firm.

SUSAN MOSER: M&A is a key growth strategy. It used to be something companies considered only at higher revenue levels, but increasingly companies pursue acquisitions or seek outside investment earlier. A tuck-in acquisition or accepting minority investment can accelerate growth.

SUSAN MOSER: From day one in the 8(a) program, build relationships with other 8(a) firms to position for future teaming or subcontracting. Think about post-graduation strategy: how much of your business will subcontract versus how much 8(a) revenue you need to replace with full-and-open revenue?

SUSAN MOSER: Bidding on full-and-open vehicles is more expensive and rigorous. It takes longer and often requires investment in outside business development resources for proposal writing, oral presentations, and complex pricing strategies. Many companies do not budget sufficiently for these costs.

SUSAN MOSER: Competing as a large business differs from competing as a small business. Review your cost structure, pricing, and system requirements needed to compete full and open. Beyond accounting systems, consider estimating and purchasing systems. Determine when costs will be covered and when additional business-system investments are necessary.

SUSAN MOSER: While in the 8(a) program, there is often limited change in ownership because eligibility requires individuals to retain more than 51 percent ownership. As companies prepare to graduate, plan for executive compensation and incentive structures to retain key talent, since ownership restrictions relax after graduation.

SUSAN MOSER: Tax planning is also important when monetizing success after the 8(a) program. Personal net worth requirements and withdrawal limitations during the program can result in accumulated wealth that you may want to monetize after graduation. Planning ahead is essential for a successful exit.

SUSAN MOSER: Exiting the 8(a) program can mean competing as a large business, remaining focused on small-business contracts, pursuing an employee stock ownership plan, or selling to a minority, strategic, or financial buyer. These outcomes require pre-planning to be successful.

SUSAN MOSER: Life beyond the 8(a) program can be positive. We have many clients who have done well after graduation.

SARAH TUCKER: Taking the time to plan for the future is beneficial. I encourage you to check the Cherry Bekaert website for additional guidance regarding the 8(a) program; there are several podcasts and articles.

SARAH TUCKER: If you have questions, please reach out via email at smoser@cbh.com for Susan and sctucker@cbh.com for me. Please join us again for our next podcast.

SUSAN MOSER: All right, thanks, Sarah. Bye-bye.