Peckar & Abramson, P.C.
SBA Expands Its Mentor-Protégé Program
To All Types of Small Businesses
By Lori Ann Lange, Esq.
Peckar & Abramson
In determining whether a company qualifies as a small business, the U.S. Small Business Administration (SBA)
considers not only the size of the company but also the size of its affiliates. There are a number of ways in
which companies can be considered to be affiliated. One way is by joint venturing together; parties to a joint
venture are considered to be affiliates for purposes of the procurement on which they are joint venturing.
Because of the affiliation rule, it can be difficult for a small business and a large business to work together on
federal government contracts set-aside for small businesses.
Almost 20 years ago, SBA created an exception to the joint venture affiliation rule for small businesses that are
enrolled in SBA’s 8(a) Business Development program and that enter into an SBA approved mentor-protégé
relationship with another company. While the 8(a) mentor-protégé program provides the ability for small
business protégés to joint venture with their mentors, a significant drawback of the program is that it is restricted to 8(a) small businesses. All other types of small businesses (that is, HUBZone small businesses, women-owned small businesses, and service-disabled veteran-owned small businesses) are not eligible to participate in the 8(a) mentor-protégé program.
Although the federal government created a number of other mentor-protégé programs in the years that followed, none of those programs contained the joint venture affiliation exception. On July 25, 2016, however,
SBA issued its long awaited final rule establishing a new small business mentor-protégé program. The new
small business mentor-protégé program is open to all categories of small businesses. SBA will continue to
maintain its existing 8(a) mentor-protégé program. SBA estimates that as a result of the final rule approximately 2,000 small businesses will become active in the small business mentor-protégé program and that
protégés may obtain federal contracts totaling possibly as much as $2 billion per year. The final rule is effective
August 24, 2016.
Both the new small business mentor-protégé program and the existing 8(a) small business program are designed to enhance the capabilities of small business protégés and to improve their ability to successfully compete for government contracts through a relationship with a mentor, which can be either a large business or
a small business. The types of assistance that a protégé can receive from the mentor include: (1) technical and
management assistance; (2) financial assistance in the form of equity investments and/or loans; and (3) contracting assistance. A protégé is not an affiliate of its mentor solely because the protégé receives assistance
from the mentor under the program.
To enroll in either mentor-protégé program, the small business protégé and its mentor enter into a written
agreement setting forth an assessment of the protégé’s needs and describing the assistance the mentor commits to provide to the protégé. The agreement is submitted to SBA for approval. SBA will not approve the
agreement if it determines that the mentor’s assistance is not sufficient to promote any real developmental
gains to the protégé. SBA also will not approve the agreement if it determines that the agreement is merely a
vehicle to enable a large business to receive small business set-aside contracts through its protégé.
One of the main benefits of both mentor-protégé programs is the ability of a small business protégé to joint
venture with its large business mentor on federal government contracts set aside for small businesses as long
as the mentor and protégé comply with SBA’s regulations. SBA has detailed regulations on what must be contained in the joint venture agreement, including the requirements that: (1) the small business be the managing partner of the joint venture; (2) an employee of the small business be the project manager responsible for
contract performance and not previously been employed by the mentor; (3) the small business own at least
51% of the joint venture for a joint venture that is a separate legal entity; and (4) the small business receive
profits commensurate with the work it performs or, in the case of a joint venture that is a separate legal entity,
commensurate with its ownership interest in the joint venture.
SBA also requires that the small business partner of the joint venture must perform at least 40% of the work to
be performed by the joint venture. That work must be more than administrative or ministerial functions, as the
intent is for the small business to gain substantive experience. Further, for 8(a) set-asides, SBA must approve
the joint venture agreement itself before the award of the contract. Failure to comply with SBA’s joint venture
regulations may result in a determination that the small business protégé and its mentor do not qualify for the
affiliation exception and that the joint venture is not small for purposes of the procurement.
As well as creating a small business mentor-protégé program, SBA’s final rule makes some changes to the
existing 8(a) mentor-protégé program that also will apply to the small business mentor-protégé program,
including the following:
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Clarifying that there must be a written joint venture agreement, although that agreement need not establish the joint venture as a limited liability company or other formal separate legal entity.
Prohibiting a joint venture from being “populated” with the individuals intended to perform the contract.
In other words, the joint venture cannot employ its own separate employees to perform the contract. SBA
explained that it was concerned that allowing populated joint ventures would not ensure that the protégé
and its employees benefit by developing new expertise, experience, and past performance.
Increasing the size limit for 8(a) protégés to the size limit to the applicable NAICS code for the procurement at issue. Previously, the 8(a) protégé had to be less than half the size standard for a small business
based on its primary NAICS code or be in the developmental stage of its 8(a) program participation in
order to joint venture with its mentor.
With the creation of the new small business mentor-protégé program, it can be expected that there will be
a flood of new applications, with a potential back log of processing time as it is unclear how many resources
SBA has dedicated to reviewing new mentor-protégé agreements. While both large and small businesses will
be tempted to hop on board and enter into a mentor-protégé relationship, they should be cautious. Before
entering into such an agreement, it is important that both parties understand their obligations under the
program, that the mentor be willing to provide the type of assistance needed by the protégé, and that neither
party attempt to use the program to circumvent the SBA’s affiliation rules to chase set-aside contracts.
Lori Ann Lange, a partner in the Washington, D.C. office of the law firm of Peckar & Abramson, specializes in government contract law, bid protests, and corporate compliance counseling. Lange represents a range of government
contractors, including construction contractors, major defense contractors, informational technology contractors
and service contractors. She has written and lectured on significant issues facing the government contracts and
construction industry.