VIEWPOINT DEFENSE CONTRACTING
Viewpoint: Mentor-Protégé Agreements: Benefits for Big and Small
During the last three fiscal years, the Defense Department awarded more than $77 billion to small businesses through set-asides under programs generally managed by the Small Business Administration. Consequently, large businesses are precluded from competing for these contracts.
But the SBA’s All Small Mentor Protégé Program offers opportunities for large businesses to mentor small businesses where the two entities may pursue these set-aside contracts together. The intent of the program is to encourage large businesses to work with small businesses to increase and expand the small firms’ capabilities. In doing so, the large businesses may compete for this pool of previously inaccessible contracts.
While contract awards are the most sought-after prize, the program offers many other benefits for both mentor and protégé.
The regulatory purpose of the program is to “enhance the capabilities of protégé firms” and improve their “ability to successfully compete for federal contracts.” That being said, a recent SBA report also recognized that the program is intended to benefit both mentors and protégés. This same report indicated that as of April 2019 there were 759 active mentor-protégé agreements.
The real benefit of this program comes from the mentor and protégé being able to enter a joint venture and compete for federal small business set-aside contracts without being found affiliated. While eligibility for these set-aside contracts usually requires a company to be small under SBA’s size standards, one exception to this rule is when two firms are “approved by SBA to be a mentor and protégé,” according to the rule.
Qualification for this exception requires SBA’s approval of the proposed mentor-protégé agreement. Once the agreement is approved, the mentor and protégé may form joint ventures to pursue small business opportunities without worrying about the size of the mentor. Equally beneficial is that the agreement itself is not the basis to find affiliation between the mentor and protégé, as that would undermine the purpose of the program.
As one can deduce, mentors are usually large businesses and protégés are usually small businesses. While mentors can also be small businesses, the regulatory context infers that mentors are primarily large firms. As with most government programs, however, it is not so simple as mentors being large and protégés being small.
Each mentor must satisfy four SBA-mandated requirements. First, a mentor must be “capable of carrying out its responsibilities to assist the protégé firm under the proposed mentor-protégé agreement.” Second, mentors must possess good character. Third, the mentor must not be on the federal list of debarred or suspended contractors. Finally, the mentor must be able to “impart value to a protégé firm due to lessons learned and practical experience gained or through its knowledge of general business operations and government contracting,” the regulations state.
While not a prerequisite, it is worth noting that SBA regulations generally require that mentors have no more than one protégé at a time. There is not an outright ban on multiple protégés. Instead, SBA has capped the number of protégés one mentor can have at the same time to three to limit any negative impact one mentor-protégé relationship may have on another.
Protégés, meanwhile, must qualify as small under its primary North American Industry Classification System code. If the protégé is looking to expand into a second code, it must identify this code as one where it is seeking business development assistance. This is not, however, carte blanche approval to enter into a new market as “SBA will not approve a mentor-protégé relationship in a secondary code in which the firm has no prior experience,” the rules state.
As with mentors, protégés are also restricted in the number of mentors allowed at one time. While the general cap is for one mentor at a time, SBA may approve a second so long as the additional mentor will provide unique forms of assistance. The agency places a lifetime cap of two mentors for each protégé.
Even if a company qualifies as a mentor or protégé, why would it want to enter a mentor-protégé agreement? More specifically, with the program “designed to enhance the capabilities of protégé firms” why would a mentor want to participate? There are four distinct benefits derived from a mentor-protégé agreement.
Money is likely the most obvious reason for mentors to participate in the program. The Defense Department set aside more than $77 billion in small business contracts in the last three fiscal years. That is $77 billion that large businesses have no way of touching — unless they are part of a mentor-protégé agreement. And that is just defense. SBA’s agency-specific prime contract goals for the 2019 fiscal year ranged from 11.65 percent to 71 percent of total procurement dollars going to small businesses.
The mentor-protégé agreement is just the first step, however. To further protect small businesses, the SBA only allows the mentor to compete for set-aside contracts through a joint venture with its protégé. Each joint venture agreement must contain provisions stating that the small business owns at least 51 percent of the joint venture entity.
Additionally, profits of the joint venture must be commensurate to the work performed. Equally important, “the small business partner . . . must perform at least 40 percent of the work performed by the joint venture.” While this precludes the large business from reaping all the profit, it can still be on the receiving end of a significant portion of any set-aside contract value.
Money aside, there are several other benefits that may come with being a mentor. First, mentors gain a valuable opportunity to directly engage with possible acquisition targets.
SBA regulations allow mentors to obtain up to a 40 percent equity interest in the protégé firm. Even if a mentor does not make this investment up front, there is nothing precluding investments occurring a year or more into the mentor-protégé agreement. During that time, mentor employees may gain valuable information from working side-by-side with the protégé. This knowledge not only facilitates other due diligence efforts, but it could also help smooth any post-acquisition transitions.
Second, the mentor-protégé arrangement allows dedicated professional development opportunities for mentor employees. The program regulations identify the following as areas of mentor-provided assistance: technical and/or management assistance; financial assistance; trade education; business development; and general administrative assistance. These are just the overarching categories; with a wide range of assistance opportunities within each category.
The Roman philosopher Seneca is often attributed with the translated phrase: “While we teach, we learn.” Each of the identified assistance categories provide opportunities for a rising star in an organization to teach the protégé, and therefore learn. Whether it is an engineer ready to cut their teeth on managing a project, an accountant looking for practical experience before their next exam, or a localized trade expert looking to become a regional or international expert, the opportunities for professional growth are myriad in a mentor-protégé relationship.
Third, mentors can stimulate internal growth or ideas through the insights of a protégé. Startups traditionally thrive by bringing new and innovative products or services to a market. As a mentor, a company will gain first-hand knowledge and access of the protégé’s innovative products and services. Not only does this help a company gauge the pulse of new business activity, but it also fosters internal growth and development through interactions with these innovative products and services.
The benefits to a protégé are often, but not always, the flip side of the mentor benefits. Where a mentor invests, a protégé gets cash infusions. Where a mentor offers training, the protégé’s knowledge base increases. Where a mentor sees what new ideas a protégé brings to the industry, the protégé gains immeasurable insight that comes from the challenges and experiences of the mentor’s own path to success. But these are not the only benefits.
Many protégés do not have in-depth corporate policies, procedures or systems. One form of mentor assistance is drafting, compiling or providing corporate documents such as record retention policies, annual review forms or proposal templates. Mentors can also provide guidance on procedures or systems best suited for the protégé. What should an internal audit process look like? What system should be used to adequately document and track contract deadlines? Each of these, and others, are areas where the mentor’s experience will help a protégé avoid some of the traditional growing pains of a small business.
Protégés, like many small businesses, experience the conundrum of needing financial resources but not having the experience, history, credit, or any other prerequisite to access those resources. Mentors can help alleviate many of these concerns. For example, a mentor’s contracting history may help an otherwise unqualified protégé obtain higher bonding limits. A mentor’s financial history may also help mentors receive more favorable credit limits or lending terms. Not only does the mentor’s presence provide immediate assistance to the protégé, but it also helps the protégé establish a trend line demonstrating its capability of handling larger financial responsibilities.
Even with a mentor’s systems and financial backing, a protégé will not get very far if cannot win a contract. Here, mentors can provide lessons learned as well as best practices for pursuing contract opportunities. Whether through participation in industry days, responding to a sources sought notice, or changing the content, format or method of proposal submission, mentors can impart significant wisdom on the protégé. As with other forms of assistance, this help will benefit the protégé for quite some time.
Many protégés view business development as the biggest obstacle to success. Mentors, by regulatory definition, have found a way to conquer this challenge. Whether it is entering a new region, breaking into a new market, or becoming familiar with government contracting, the mentors have valuable knowledge they can pass on to the protégés. As with each other area of assistance, the scope of business development training should be customized to the protégé’s needs.
Mentors and protégés each uniquely benefit from the All Small Mentor Protégé Program. Not only does it allow mentors to pursue small business set-asides through joint venture agreements, but mentors can also evaluate acquisition targets, develop their employees, and gain insight on industry innovations. Hundreds of mentors have already benefited from the program. Protégés may gain access to a mentor’s policies, programs, personnel and financial resources, plus increase their experience in contract proposals and business development.
Most importantly, mentors and protégé’s can embrace their inner Rod Tidwell and shout for the agencies to “show me the money!”
Rob Kampen is an experienced government contracting attorney based in Kansas City. He can be reached via linkedin.com/in/robertkampen.