SBA Mentor-Protégé & Joint Venture Arrangements – Important Elements of the Agreement

BRYN MCNEILL: Good afternoon or morning, depending on where you are listening from. Welcome to the Cherry Bekaert podcast.

My name is Bryn McNeill, and I am an audit partner with a focus on Government Contracting. Joining me today is Eric Poppy, a senior manager in our Government Contractor Services Group.

Today, we are recording the second podcast in our series regarding the SBA Small Business Mentor-Protegé Program and joint ventures. In our previous podcast, we gave an overview of the program and discussed the goals and benefits of participating, as well as eligibility requirements for both mentors and protégés.

If you haven't had a chance to listen to that, we highly encourage you to do so. You can find that recording on our website at cbh.com.

Today, we will focus on the important elements of the agreement, including what needs to be included and the duration of the agreement itself. In future podcasts, we will highlight annual evaluations and touch on compliance issues, including limitations on subcontracting.

We will also dedicate an episode to accounting, financial reporting, and pricing considerations. With that, let’s jump in.

Eric, do you want to kick us off with some broad principles related to the agreement? Then we will shift to the specific requirements that need to be included.

ERIC POPPY: Happy to, Bryn. Thank you for having me.

We have noticed with many of our clients and companies in the GovCon industry that the Small Business Mentor-Protegé Program is an excellent program for both protégés and mentors. It is one of those programs that truly helps both sides.

As a quick recap, for a protégé, it helps with competition and past performance. It also provides technical and developmental assistance, helps secure investments, and enhances company growth through the mentor’s experience.

From a mentor perspective, it helps develop and increase the supply chain through small business programs. It also creates potential M&A opportunities when vetting partners and provides extra credit for working through your small business plan.

From the government’s standpoint, they value the program because it creates a more stable and viable supply base. However, we often get questions from clients about whether this is the right program for a specific large small business solicitation.

Bryn and I both work at Cherry Bekaert, which is an accounting firm. We are not legal experts, so we suggest that when you find a company to partner with, you consult with legal counsel.

Overall, some basic principles to consider include both the regulatory requirements of the Small Business Administration and your contractual protections. There may be best practices to consider, such as establishing subcontract agreements when creating the joint venture agreement.

Another principle is that compliance with the Mentor-Protegé joint venture agreement is assessed at the time the proposal is submitted. With large RFPs, there may be a long runway between identifying a partner and submitting the proposal, but the assessment only happens at the point of submission.

Other considerations include how much control the mentor may have in the joint venture and who will manage those terms. These agreements often last for six years or more, so you must ensure you are contractually protected in the event of a dispute.

BRYN MCNEILL: Those are all great points. Getting legal counsel involved is always encouraged because of the specifics related to regulatory and compliance requirements.

Regarding regulatory requirements, there are specific items that must be included in these agreements. First, you must include the purpose of the joint venture, detailing the goals and intent of the partnership.

You must designate a small business as the managing venturer. An employee of that small business must be designated as the manager with ultimate responsibility for the performance of the contract.

The managing venturer is responsible for controlling the day-to-day management and administration of the contract performance. While others can participate in governance and decisions, the responsible manager must be clearly identified.

That manager does not have to be an employee of the small business at the time of the offer, but there must be a signed letter of intent stating they are committed to the role if the award is successful. The responsible manager cannot be a mentor employee who joins the small business solely for the performance of the joint venture.

The agreement must state that for a separate legal entity, the small business must own at least 51% of the joint venture. It must also state that small business participants receive profits commensurate with the work performed.

There must be an agreement on profit percentages relative to the work being performed. This ensures that when the joint venture is dissolved, the distribution of funds is handled according to the agreed-upon ownership or work performance terms.

Finally, the agreement must provide for a bank account in the name of the joint venture. This account must require the signature or consent of all involved parties.

This account should be used for all services performed. All receipts should be deposited into it, and all expenses incurred from the performance of the work should be paid from this special account.

ERIC POPPY: Those are good points regarding the bank account and the joint venture structure. We will dive deeper into the accounting pieces in a future podcast.

Other items for the joint venture agreement include itemizing major equipment, facilities, and resources furnished by each party. You must also provide a detailed schedule of costs and values for estimating purposes.

You must define the responsibilities of each party, including who is handling contract negotiations, sourcing labor, and performing specific items in the statement of work. For large IDIQ contracts, there is an exception, but you must still provide a general description of anticipated responsibilities for each party.

The agreement must obligate all parties to ensure the performance of the 8(a) contract. This obligation remains even if a member withdraws, providing critical contractual protection.

BRYN MCNEILL: The agreement must also designate where the accounting and administrative records are kept. Typically, these records should be maintained by the small business managing venturer.

You must also retain all records and submit performance reports. Annual performance of work statements must be submitted to the SBA and the Contracting Officer no later than 45 days after each operating year.

Project-end performance statements must be submitted no later than 90 days after the completion of the contract. It is vital to ensure these reports are submitted within these specific timeframes.

ERIC POPPY: To wrap up, the SBA has specific rules regarding the performance of work. We will touch on these later in more detail, but remember the 50% rule on limitations on subcontracting.

The joint venture may not pay more than 50% of the amount paid by the government to firms that are not similarly situated. Additionally, under the 40% rule, protégés must perform at least 40% of the work, and that work must be more than just administrative in nature.

Other considerations include overall governance, capital contributions, and loans. You should also discuss taxes and distributions with your CPAs and accounting firms.

Finally, remember that these joint venture agreements last a long time. You must plan for potential disputes, withdrawals, and indemnification to handle resolutions if the partnership encounters issues.

BRYN MCNEILL: Those are all excellent points. Hopefully, this provides clarity on the agreement itself and the various requirements to consider.

This is the second episode in our series, and we hope you will continue to join us for future podcasts. If you have any questions, please do not hesitate to reach out.

Thanks again, and we will see you next time.