ESOP Small Business Certification on the horizon?

Congress has included language in the Nation Defense Authorization Act for Fiscal Year 2021 language opening the door to potentially allowing more recognition for Employee Owned Companies.

 

From page 253 for the Act:


Contracting for non-traditional defense contractors

The committee recognizes that certain categories of non-traditional businesses face barriers to working with the Department of Defense. These businesses include, but are not limited to, veteran owned, disabled-veteran-owned, and minority-owned businesses. The committee further recognizes that other categories of non-traditional businesses face obstacles to contracting with the Department, including entities that are owned entirely by employee stock ownership plans (ESOPs). The committee directs the Secretary of Defense to provide a briefing to the congressional defense committees by December 31, 2020, on the advantages of working with ESOPs and the barriers ESOPs face in contracting with the Department. For the purposes of this briefing, an ESOP shall mean an entity that is owned entirely by an employee stock ownership plan (as defined in section 4975(e)(7) of the Internal Revenue Code of 1986 (title 26 of United States Code)).

 

What the heck does this mean and what are the implications? Let's step through this. First, the Federal government and most States have small business objectives. Certain categories receive additional discounting or preferential consideration in the acquisition process. Minority, Veteran, Women, HUBZones, etc. A major requirement to receive these certifications is based on ownership and control. The Small Business Administration and the Department of Veterans Affairs are extremely protective and deliberate to confirm and verify the 51% owner (or greater) meets the criteria for the set aside category for their application. Those certifications are highly sought due to the value in streamlining the acquisition process. This can equate to millions of dollars for the certified company.


ESOPs are disadvantaged here. Ownership is dispersed across the employee share holders. Ownership to receive the certification must be by an individual or group of individuals meeting the same qualification. For example, a company may qualify for Woman Owned Small Business if an individual woman owns 51% of the company. Another company may also qualify if a woman owns 26% and another woman owns 25%. Total ownership by women is 51% or greater. Demonstrating "like" ownership across ESOP companies has pretty much excluded companies structured in this manner.


This is NOT a decision, simply a question. Congress is directing the Secretary of Defense to provide a report back to Congress by the end of calendar year 2021. DoD drives a huge percentage of Federal contracting. It would not be a far stretch to see dominos fall across other agencies and then other states. That is NOT a done deal. Certainly on the radar now. More to follow...

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