AE Valuation & Ownership Transition Advisor: Volume 7 Issue 2

valuation 101

An Uncertain Future for Set-Asides: Protect Your Firm

Whatever you think of June’s landmark decision by the Supreme Court striking down the use of race in college admissions, the implications for M/WBE firms could be cataclysmic. Already, a federal judge in Tennessee has ruled that the U.S. Small Business Administration (SBA) could no longer automatically equate race with social disadvantage in its 8(a) Business Development program, the five-decade-old initiative designed to provide minority-owned businesses with access to billions of federal government contracting dollars. Other such set-asides in state and federal law are similarly in jeopardy, and firms dependent on this type of work need to plan now to minimize the potential impact.

Additional Set-Aside Programs in Peril

The court decision not only clouds the future for the SBA 8(a) program but raises the prospect that similar federal and state government programs designed to benefit historically disadvantaged groups—such as the U.S. Department of Transportation’s Disadvantaged Business Enterprise program and the SBA’s Women-Owned Small Business Federal Contract program—could also be ruled unconstitutional. 

The potentially broad implications of the Supreme Court’s decision mean that firms relying on race- or gender-based set-asides must prioritize how to minimize the impact on their businesses. Understanding how much of your business truly depends on federal set-aside work can be a tough task, but it’s important not only for the sustainability of your business but to enhance your ownership transition options by widening the pool of potential buyers—whether internal or external.

Start Gathering Client Feedback Now

A good place to start is by asking clients how important the set-aside designation is in their decisions to award you work. With your most trusted clients, you may be able to do this directly and get honest feedback. However, not all clients may be forthcoming on this delicate topic, so a better option may be to do an anonymous outreach—either by a trusted third party or an electronic survey.

If you can stomach the risk, you might consider bidding for some selected projects without disclosing your set-aside status. You can also try to stand in your clients’ shoes and assess the issue as objectively as you can from their point of view to validate what you are hearing.

When you do reach out, the important questions to answer are:

• How do your qualifications compare with those of non-set-aside competitors as well as other set-aside firms?
• How would the bidding process or required qualifications change if you lost your set-aside designation? 
• Who would be your new competitors if you lost your set-aside designation?
• How would the client’s process change if minority set-asides were to be struck down?
• What percentage of your work would you still win without your set-aside designation? (It might help to put individual contracts into a yes/no/maybe categorization.)
• Would the loss of the set-aside designation change your pricing power (either up or down)?

The answers to these questions should give you a sense of just how big a challenge you may face. They’ll give you a jumping-off point for a strategic plan to win work without these designations.

Implications for Ownership Transition

Whatever the legal fate of set-aside programs, having a plan to win work without your designations will pay dividends when it comes time for ownership transition. The demonstrated ability to do so will broaden your pool of potential buyers—whether internal or external. More buyers mean more options, higher valuations, and the ability to take full advantage of the talents and financial needs of non-qualifying firm leaders.

If you have any questions about how the recent court rulings could impact your valuation and ownership transition options, contact Alexander Tepper at [email protected].