What Happens to My Certifications If I Sell or Exit My Business?
You must consider several factors to maintain WBE, WOSB and other diversity certifications when there is a change of ownership in your company.
There are multitudes of federal, local government and private sector diversity certifications available to business owners that can help to maximize revenue sources. Because obtaining these WBE, DBE, MBE, WOSB, 8(a) and/or veteran-owned business certifications can be a monumental task, the last thing you want to do is compromise them. However, any corporate changes can do just that.
There are numerous situations in which a change in ownership of a business can occur. You may want to infuse additional capital into your company in order to add services or a product line to increase sales. You may want to retire or go in a new direction. Or, you may just want to sell outright. In yet another scenario, you may be considering the purchase of an existing WBE, DBE, MBE or veteran firm.
It is important to understand that any ownership change will trigger a possible certification suspension or de-certification, even if you believe that such ownership changes are insignificant.
Issues to Consider in Family Succession Planning
Family succession planning is crucial, particularly as it relates to your diversity status, if you intend to leave your business legacy to family members upon retirement, death or incapacity. Preparation should begin well in advance. Critical issues to consider in determining your succession plan include timing of ownership transfer, remaining eligible under the WBE rules and understanding the gift and estate tax consequences of lifetime transfers. It is important to seek advice from knowledgeable attorneys and accountants to achieve your goals while also complying with continued certification eligibility criteria.
WBE Certification Criteria to Keep In Mind When You Consider Corporate Changes
Simply transferring majority ownership to another woman does not equate to continued eligibility to remain WBE-certified. This same rule applies to DBE, MBE and veteran-owned firms. Any change of ownership or control can trigger a de-certification. Therefore, as you consider any corporate changes, keep in mind that the woman must not only own at least 51 percent of the firm, but must also meet other crucial eligibility criteria.
- Ownership must be real and substantial. // In a change of ownership, the new women business owners must demonstrate that there was adequate consideration paid for her ownership interest in the firm, unless the interest arose from death of a prior owner, and there can be no restrictions on her rights to ownership or the ability to transfer ownership.
- Women business owners must legally control the firm. // Legal control is demonstrated by corporate structure and operating documents of the firm. For instance, does the woman owner have the legal authority to make the ultimate, final decisions for the company, ranging from the ability to hire and fire everyone to incurring debt or selling the company? This is particularly tricky when there are other male owners who want a voice and vote in the overall control of the firm. The scenarios are numerous, but rest assured that if the woman who owns the firm does not have legal control of the firm, WBE certification will be a non-starter.
- Women business owners must have operational control of the firm. // It is not enough that a woman purchased a majority interest in her firm. That woman must have the expertise to control the daily operations of the firm. For example, a woman business owner with extensive experience as a marketing consultant, but no experience in the daily operations of a construction industry, would not be deemed eligible to be WBE-certified as a construction contractor. This is so because certifications are only granted in the type of work that the women can demonstrate she has experience and industry knowledge in and that she is not reliant upon males to operate her company. Without satisfying this criterion, agencies simply view ownership as a “front company” taking advantage of WBE certification opportunities while relying upon men or other male-owned companies. On the other hand, a woman that personally holds engineering licenses is certainly capable of controlling the technical operations of her engineering firm.
Once there is any type of change in ownership or control of a company, it is crucial to provide all applicable certification agencies a notification in the event of a change of ownership. Failing to comply with notification deadlines for disclosure may mean a nightmare trip to suspension and de-certification proceedings.
Preparation for any change in ownership should begin well in advance. Working with legal advisors knowledgeable in this area is recommended as it could mean the difference between continued certification or de-certification. In addition, the Women’s Business Development Center (WBDC), which has a full-time staff member in Kansas City available to help local WBEs, is an excellent resource for helping you to plan changes. Their professional team understands the needs of women business owners and can guide you in taking the right direction in your planning needs.