adam zuwerink aptac presentation

How Change in Ownership Impacts Already Certified Small

Businesses

Attorney Adam ZuwerinkGovCon Legal Services

adam@govconlawyer.com

Road Map:

We are going to begin at the end:

• Certifications are already in place

• Proposals are already written

• Contracts are already awarded

But then what?...

Road Map:Life happens, and companies change over time from:

• Death of Owner

• Estate Planning Changes

• Sale of Business

Our goal: Spot Common Issues

Why is this important?

• Civil and Criminal Penalties for Misrepresentation of Status

Case Study:Owner: Wilma

Background: Native of Bedrock, which makes her eligible for 8(a) status, and she received a disability rating from the VA for her previous service with the Army.

Business: Flintstone Construction Company, which is 100% owned by Wilma, and has active federal contracts that were awarded as set-asides.

Family: Husband Fred, who owns a quarry that mines Wilma’s construction materials, and daughter, Pebbles.

Death of Owner:

Facts: Wilma fell off a brontosaurus and passed away without any estate plan in place. Fred is now the 100% owner of Flintstone Construction Co. and needs advice on what to do next with the company.

Death of Owner:During the Contract:

Question: Can Fred, as the new owner, finish any of Flintstone Construction Company’s existing 8(a) contracts?

Death of Owner:During the Contract:

8(a) – Contract is terminated for the convenience of the government immediately upon Wilma’s death, unless a waiver is obtained.

In order for the SBA to waive the termination requirement, Fred must inform the SBA of Wilma’s death within 60 days.

Source: 13 CFR § 124.105(i)(2) and 124.515

Death of Owner:During the Contract:

Question: Can Fred, as the new owner, finish any of Flintstone Construction Company’s existing SBA SDVOSB contracts?

Death of Owner:During the Contract:

SBA SDVOSB – Flintstone Construction Co. is considered a SDVOSB through the life of any existing contracts.

But does Fred have to notify the procuring agency within 30 days of Wilma’s death?

Source: 13 CFR § 125.15(e) and Neie, Inc. v United States, 13-164C (Fed. Cl. 2013)

Death of Owner:During the Contract:

Question: Can Fred, as the new owner, finish any of Flintstone Construction Company’s existing WOSB contracts?

Death of Owner:During the Contract:

WOSB – ummm….

Death of Owner:During the Contract:

Question: Can Fred, as the new owner, finish any of Flintstone Construction Company’s existing VA VOSB contracts?

Death of Owner:During the Contract:

VA VOSB: If Wilma was 100% disabled or died as a result of a service-connected disability, Fred can step in as owner and maintain certified status until the earliest of the following:

1. He remarries2. The date he sells the business,3. The date the business no longer qualifies as small, or4. 10 years after Wilma’s death.

But if Wilma was not 100% disabled, the brontosaurus accident would only allow Fred to perform existing contracts to the end of their term, and not exercise any options.

Source: 38 CFR § 74.1 and 74.3(e)

Death of Owner:After Offer, Before Contract Award:

Facts: Flintstone Construction Co. submits an offer for construction of a new scientific lab for the EPA. Before the project is awarded, Wilma passes away and Fred is the new owner. The EPA subsequently awards the contract to Flintstone Construction Co.

Death of Owner:After Offer, Before Contract Award:

Question: Was Fred obligated to tell the SBA or EPA of Wilma’s death?

Death of Owner:After Offer, Before Contract Award:

Question: Was Fred obligated to tell the SBA or EPA of Wilma’s death?

SDVOSB: No?

Source: Neie, Inc. v United States, 13-164C (Fed. Cl. 2013)

Estate Planning:Situation: Fred and Wilma are finally getting around to thinking about Pebble’s future, and they visit an estate planning attorney to review their options.

Estate Planning:Joint Trusts:

Facts: Fred and Wilma have a current net worth of $2,000,000, with another $1,000,000 in life insurance policies. They do not want Pebbles receiving all of the money when she turns age 18, so their attorney recommends setting up a joint trust to delay Pebble’s distribution past age 18 if something happens to Fred and Wilma.

Background: What’s a joint trust, and why does it matter?

Estate Planning:Joint Trusts:

Question: Can Wilma transfer her stock in Flintstone Construction Company to the joint Flintstone Family Trust?

Estate Planning:Joint Trusts:

SBA 8a and WOSB / VA VOSB: No.

Wilma must be the sole grantor and present beneficiary of a revocable trust.

(Note: The trust can be irrevocable for WBE certification)

Source: 13 CFR § 124.105 (8a) 13 CFR § 127.201 (WOSB) 38 CFR § 74.3 (VA)

Estate Planning:Joint Trusts:

SBA SDVOSB: Depends if Fred is also a service-disabled veteran, because different wording!

“Ownership by a trust, such as a living trust, may be treated as the functional equivalent of ownership by service-disabled veterans where the trust is revocable, and service-disabled veterans are the grantors, trustees, and the current beneficiaries of the trust.”

Source: 13 CFR § 125.9

Estate Planning:Powers of Attorney:

Facts: Fred and Wilma’s estate planning attorney recommends they sign a financial power of attorney for each other, effective immediately upon signing.

Background: What’s a financial power of attorney, and when does it become effective?

Estate Planning:Powers of Attorney:

Question: Can Wilma give Fred power of attorney to act for her business?

Probably Not.

Sale of Business:To Family Member:

Facts: Wilma is starting to think about retirement, but isn’t ready to completely walk away. Pebbles has been involved with the business, and Wilma wants to bring her on as an equal 50/50 partner.

[Assumption: Pebbles is also a service-disabled female veteran and 8a eligible.]

Sale of Business:To Family Member:

Question: Is Wilma allowed to bring Pebbles in as a 50/50 partner?

If so, what is the process to notify the contracting agency?

Sale of Business:To Family Member:

8(a) – Yes, with prior notification

“A Participant may change its ownership or business structure so long as one or more disadvantaged individuals own and control it after the change and SBA approves the transaction in writing prior to the change.”

Source: 13 CFR § 124.105(i)

Sale of Business:To Family Member:

SBA SDVOSB – Yes

“A concern may change its ownership or business structure so long as one or more service-disabled veterans own and control it after the change.”

Source: 13 CFR § 125.9(f)

Sale of Business:To Family Member:

WOSB – Yes(?)

“To qualify as a WOSB, one or more women must unconditionally and directly own at least 51 percent of the concern.”

Source: 13 CFR § 127.201(a)

Sale of Business:To Family Member:

VA VOSB – Yes, with notification

“A participant may remain eligible after a change in its ownership or business structure, so long as one or more veterans or service-disabled veterans own and control it after the change and the participant files a new application identifying the new veteran owners or their new business interest.”

Source: 38 CFR § 74.3(e)

Sale of Business:To Family Member:

Question: Would any of the answers be different if Wilma gifts 100% of the business to Pebbles?

Sale of Business:To Another Company:

Facts: Pebbles ran off with Bam Bam years ago, and has no interest in the business. Wilma is ready to cash out and sail off into the sunset with Fred, and she has finally found someone to buy Flintstone Construction Co.

[Assumption: The buyer has no ability to obtain any of the certifications.]

Sale of Business:To Another Company:

Question: What happens to the existing set-aside contracts if Wilma were to sell the company?

Sale of Business:To Another Company:

8(a) – Contract is terminated, unless SBA issues a waiver that was requested prior to the change in ownership.

Waiver can only be granted to non-8(a) purchaser if:

“The head of the procuring agency, or an official with delegated authority from the agency head, certifies that termination of the contract would severely impair attainment of the agency's program objectives or missions”

Source: 13 CFR § 124.515

Sale of Business:To Another Company:

SBA SDVOSB – If the contract is novated, the purchaser must notify the procuring agency within 30 days whether or not the purchaser is also an SDVOSB.

If novation is not required, the purchaser must notify within 30 days of the sale becoming final.

Source: 13 CFR § 125.15(e)

Sale of Business:To Another Company:

WOSB and VA VOSB – hmmm…. nothing in the regulations?

Can the purchaser finish the term of existing contracts?

Sale of Business:Valuation Issues:

How does the existence of set-aside contracts impact the valuation of a company to a potential purchaser?

Miscellaneous Questions:• What if there is a change order to existing contract after Wilma

passes away?

• What if Fred starts bidding on new set-aside contracts after Wilma’s death, and he is not certified?

Takeaways:

1. Estate Planning Documents Matter

2. Death is Not Treated Equally

3. Voluntary Change in Ownership can be Really Messy

How Change in Ownership Impacts Already Certified Small

Businesses

Attorney Adam ZuwerinkGovCon Legal Services

adam@govconlawyer.com