Dissecting the Changes to SBA’s Mentor-Protégé Program: Will Former 8(a) Proteges be Eligible to Become Proteges Once Again?

In the U.S. Small Business Administration (SBA) Office of Business Development’s most recent report to Congress, SBA’s statistics reflect that approximately 23 percent of companies that complete the 8(a) program either cease to exist, substantially curtail operations, or have no available information within three years of graduation from the program.  Some of these recent graduates were previously protégés in the 8(a) mentor-protégé program, and many could certainly benefit from becoming protégés again under SBA’s new small business mentor-protégé program.  But will former protégés be eligible to become protégés again under the new program?  In theory, the answer is yes.  However, there are restrictions in the new program that former 8(a) protégés will need to keep in mind when applying to be protégés in SBA’s new small business mentor-protégé program.

Restrictions on the Number and Duration of Mentor-Protégé Relationships

One of the challenges for SBA in crafting the new regulations was creating a maximum duration and number of mentor-protégé relationships under the new program, as well as making corresponding changes to the 8(a) program.  This was not an issue in the past under SBA’s 8(a) mentor-protégé program because mentor-protégé relationships would terminate as a result of the protégé graduating from the 8(a) program (except for on already awarded contracts).  But, since contractors do not “graduate” after a set time from the other small business and socio-economic programs, SBA felt it was necessary to set term-limits on mentor-protégé relationships.

SBA determined that the appropriate term-limit for a mentor-protégé relationship was three years, but that same relationship could be extended once for an additional three years (New §125.9(e)(5)).  SBA also determined that no protégé could have more than two mentors.[i]  The SBA also set rules for transferring 8(a) mentor-protégé relationships over to the new small business program once the protégé graduates from the 8(a) program (New §124.520(d)(1)(iii)).  If a relationship is transferred over, it would count as one of the two mentors a protégé could have, and one of the two terms with that mentor.

But, the new regulations do not address whether mentor-protégé relationships under the old program, which could last more than three years would count against a firm’s two-mentor limit or two three-year terms per relationship.  Until this issue is clarified by SBA, former protégés should keep this is mind when selecting a mentor and applying to the new program.  If a firm applies to be a protégé with a firm that formerly served as its mentor under the old program, it’s possible SBA will limit that mentor-protégé agreement to a single three-year term.  In addition, if the firm was already a protégé under the old program with two different mentors, it’s possible SBA will not approve the firm for a mentor-protégé agreement under the new program if the firm applies with a new mentor, as that may represent the firm’s third mentor.  It’s also possible that SBA will not count relationships under the old 8(a) mentor-protégé program towards these limits.

Proposed Business Development Assistance Provided by the Mentor Must be Distinct from Assistance Provided by Past Mentors to that Protege

Just as under the old program, as a pre-requisite to SBA approval, a mentor-protégé agreement under the the new program must spell out the protégé’s needs, and provide a detailed description of the assistance the mentor commits to provide to address those needs.  A nuance in the regulations for the new program is that the agreement can not be based on the same assistance provided to a protégé under another mentor-protégé agreement (New §125.9(e)(2)(ii)).  This may add an additional hurdle to a former 8(a) protégé looking to enter the new program as a protégé.

Lack of Age Limit and Loosened Size Requirement in the New Program

While some restriction in the new regulations make becoming a protégé, once again, harder, the lack of other restrictions in the new regulations makes becoming a protégé again easier.  Some small business size threshold are as high as $38.5 million in annual average receipts or 1,500 employees, and some “small businesses” have been in business for dozens of years.  These companies do not inherently need guidance and assistance with business development, but because SBA did not set age limits on firms applying to be a protégé they can still qualify to be protégés under the new program.

In addition, SBA loosened the basic size requirement to be a protégé.  Formally, the basic requirement was that a protégé had to be less than half the size of the applicable size standard.  Under the new regulation a protégé simply needs to be small under the corresponding size standard (New §125.9(c)(1)) .  This too makes it easier for long standing small businesses to become proteges under the new mentor-protégé program.

Ability to Qualify Under a Secondary NAICS Code

Another part of the new regulation making it easier for long-standing firms to enter the new program as protégés, is the provisions regarding qualifying in a firm’s secondary NAICS code industry.  Even if a firm is not small in its primary NAICS code industry, it may still qualify as a protégé under the new program if “it is seeking business development assistance with respect to a secondary NAICS code and qualify as small for the size standard corresponding to that NAICS code.” (New §125.9(c)(1))  While this is not exactly a blank check — as the protégé firm must have some prior experience in its secondary NAICS code and “demonstrate how the mentor-protégé relationship is a logical business progression for the firm and will further develop or expand current capabilities” (New §125.9(c)(1)(ii)) — it is not exactly a high hurdle either.  Long standing businesses commonly expand into a second sector, and if that second sector has a higher size standard threshold a firm could enter the new mentor-protégé program even if it is not small under its primary NAICS code.

Take for example, a firm with average annual receipts of $10 million that’s primary NAICS code is 114112 (Shellfish Fishing), which has a $5.5 million size standard.  If that firm also does some work in NAICS code 114111 (Finfish Fishing), which has a size standard of $20.5 million, it should be able to apply to the new program as a protégé, even though it is not small under its primary NAICS code, if it can show that its proposed mentor will provide the firm needed business development assistance in Finfish Fishing.

Bottom Line

While there are hurdles that may make entry into the new program as a protégé more difficult for firms that were previously protégé under the old 8(a) program, these hurdles can be overcome through a well-thought-out and drafted mentor-protégé agreement, even if the firm is no longer qualified as small in its primary NAICS code.

[i] While there is some ambiguity in the regulation as to whether this restriction means two mentors at a time (see New §125.9(c)(2)), or two mentors over the firm’s lifetime (see New §125.9(e)(5)), it appears from the SBA’s commentary to the regulation that SBA most likely intended to mean the later.

Image courtesy of Flickr (licensed) by University of Liverpool Faculty of Health & Life Sciences