Do you have all your eggs in one basket? Economic Dependence is a significant obstacle to the eligibility of many applicants desiring to gain 8(a) Certification for their business. In fact, it is currently the #1 issue for which we have to turn the greatest number of potential 8(a) applicants away, until the issue is resolved.
Businesses frequently start with a single client. The application of this rule, and the time frame for calculating this percentage, makes this an issue that must be examined closely.
You should be able to display to the SBA that your business does not have economic dependence.
The SBA may presume an identity of interest based upon economic dependence if the concern in question derived 70% or more of its receipts from another concern over the previous three fiscal years.
This presumption may be rebutted by a showing that despite the contractual relations with another concern, the concern at issue is not solely dependent on that other concern, such as where the concern has been in business for a short amount of time and has only been able to secure a limited number of contracts or where the contractual relations do not restrict the concern in question from selling the same type of products or services to another purchaser.
Please note, the 70% rule does not apply if your direct billable client is a federal government agency.
Here are some examples that might help:
Example 1: Firm A has been in business for 9 months and has two contracts. Contract 1 is with Firm B and is valued at $900,000 and Contract 2 is with Firm C and is valued at $200,000. Thus, Firm B accounts for over 70% of Firm A’s receipts. Absent other connections between A and B, the presumption of affiliation between A and B is rebutted because A is a new firm.
Example 2: Firm A has been in business for five years and has approximately 200 contracts. Of those contracts, 195 are with Firm B. The value of Firm A’s contracts with Firm B is greater than 70% of its revenue over the previous three years. Unless Firm A can show that its contractual relations with Firm B do not restrict it from selling the same type of products or services to another purchaser, SBA would most likely find the two firms affiliated.
If you would like to know if you have economic dependency, please take our questionnaire below:
You are also welcome to review the requirements below.
In the 8(a) Application portal (certify.sba.gov), the SBA only requests for you to provide the last twelve (12) months of revenue breakdown by client. This may make you think they only look at the last twelve (12) months however the SBA can ask for any information they deem necessary to determine your overall 8(a) eligibility.
Don’t be surprised if the SBA analyst comes back and requests a breakdown over the last three (3) years and through the current year to date. To be 100% sure you won’t be found to be economically dependent, you should ensure that none of the above exists before you apply for the 8(a) Program.
Additionally, the risks are greater than merely a denial of your 8(a) Application. If a business is found to be economically dependent upon another entity, and a resulting size determination concludes that they are other than small, that would exclude the business from being recognized as a small business for the purposes of contract awards.