8(a) Two Year Waiver Rule Information

SBA 8(a) Business Development Program regulations state that “an applicant concern”—a business applying for 8(a) status—must possess reasonable prospects for success competing in the private sector before it can be admitted into the 8(a) federal contracting program.

In order to demonstrate that the company possesses the required “potential for success”, an applicant firm must meet several basic criteria:

A. Two-Year Rule

The SBA uses an applicant’s length of time in business as one means of measuring its potential for success. Because many young businesses fail before they reach 2 years of age, the SBA uses the “2 or more years in business” metric as an indicator that an 8(a) applicant firm will continue to survive and succeed within the 8(a) program if they have already survived 2 years in business.

B. Revenues over past two years

A firm must show it has been conducting business within its primary industry for at least two full years. An applicant firm can satisfy this requirement by submitting copies of federal tax returns to prove it generated revenues within its primary industry during the two most recent years prior to the date of its 8(a) application. If you only possess one year of business tax returns, you must submit a waiver request.

C. Contracts within primary industry

A firm must prove to the SBA that it has generated revenues through multiple contracts (typically 3 or more contracts from different customers, none of which should account for 70% or more of total revenue), within its primary industry / primary line of business. The SBA will want to see signed and executed copies of contracts, as well as invoices and bank records, check copies or other documentation proving customer payments have been received. The SBA wants to see a successful record of performance before granting a company 8(a) status.

D. Expertise within primary industry

The SBA will examine the technical and managerial experience of the firm’s owners and managers to ensure that the individuals in control of the company are capable of running it successfully. The SBA will place the most weight upon the technical and management experience of the socially and economically disadvantaged applicant(s).

E. Finances

The SBA will assess the firm’s financial condition by taking a look at its current and recent financial statements, including its balance sheet, profit and loss statement (sometimes referred to as the “income statement”), Aging of Accounts Payable and Aging of Accounts Receivable. The SBA will also take into account the company’s access to future credit and capital. In other words, the SBA will ask about the firm’s loans, lines of credit, cash reserves and any other financial assets it might have. The SBA understands how hard it is for disadvantaged companies to access credit and capital, but the SBA still wants to assess any resources you might have available to help ensure the success and viability of your company over the long term.

F. Licensing

The SBA will want to examine all of your company and employee licenses to make sure you are in compliance with state and federal laws for licensing. Before submitting your 8(a) application or waiver request, check online at http://www.business.qov to determine all of the licenses your company needs to operate legally in its state.

If your firm has not been in business for two or more years, it can still satisfy the SBA’s “potential for success” requirement and gain entry into the SBA 8(a) program if it qualifies for a waiver of the Two-Year Rule. The Small Business Administration, unfortunately, does not provide extensive written guidance regarding how a length of time in business waiver request should be written.

The five waiver criteria—as specifically stated by the SBA, using their own language—are as follows:

  • The individual or individuals upon whom eligibility is based must have substantial business management experience.
  • The applicant firm must demonstrate the technical experience to carry out its business plan with a substantial likelihood for success.
  • The applicant firm must have adequate capital to sustain its operations and carry out its business plan.
  • The applicant firm must have a record of successful performance on contracts from governmental or non-governmental sources in its primary industry category.
  • The applicant firm must have, or must be able to demonstrate that it has, the ability to timely obtain the personnel, facilities, equipment and any other requirements needed to perform on contracts if it is admitted to the 8(a) program.

Describe your Business Management Experience

According to the SBA, a length of time in business waiver request can only be granted to a firm in which “the individual or individuals upon whom eligibility is based have substantial business management experience.”

In other words, the socially and economically disadvantaged owner or owners of the firm must possess substantial business management experience, both in their current role as a business owner, as well as in prior jobs or leadership roles (such as during a stint in the military, clergy, a trade group, an academic institution, a non-profit group or another organization.)

The SBA does not quantify what it means by “substantial”. We have found that a good general rule of thumb is that the more detailed information you can provide to the SBA to prove the disadvantaged owner’s management expertise, the better.

Many of the waiver requests typically provide about one and a half pages or more of detail about management experience.

Business Management Functions

In your waiver request document, address each of the following business management topics to prove to the SBA that each disadvantaged owner (or owner) is completely capable of successfully running and growing the business over the long term:

Current Responsibilities: Discuss or list all of the current business management functions and responsibilities handled by each disadvantaged owner of the company.

Past Experience: Discuss all relevant experience in management stemming from previous employment, activity within the military and/or involvement in other leadership organizations (such as the clergy, non-profit charities or industry trade groups, among others.)

Degrees: List any and all academic degrees earned, regardless of the subject matter. Graduation from a community college, university or other academic institution demonstrates to the SBA your ability to manage projects and deadlines, successfully complete tasks and deliverables, and continuously expand your knowledge, skills and abilities.

Licenses and Certifications: List all relevant professional and technical licenses and certifications held by the company and its employees.

Other academic accomplishments: Even if you have not graduated from a college, list any relevant academic or business training coursework you have completed. For example, perhaps you took a “Business 101” course in college or completed a Dale Carnegie public speaking class sponsored by your previous employer.

Professional Certifications: List any relevant professional certifications you have attained in your career and explain how possession of each certification makes you a more skilled, educated business owner. You should also provide the SBA with detail on when and where each certification was earned.

Awards and commendations: If you have ever received any business or leadership awards or commendations from an industry trade group, a past employer, the military or any other organization, be sure to list them all. Attach copies if possible.

Publications: If you have ever been published in a business magazine, an industry trade group publication, a prominent online blog or any other significant public forum, mention this experience because it shows that you are a respected expert in your field. Attach copies if possible.

Specific Project Experience: Have you ever managed an extremely large, complicated or highly technical project? Provide a paragraph or two about the challenges you faced during the project and detail the tools, techniques and/or strategies you used to overcome each challenge. Even if you experienced a failure or struggles along the way, you learned valuable lessons from the experience that made you a stronger, more effective manager. If you feel comfortable doing so, take a negative project management experience and describe to the SBA how this negative experience taught you more about how to successfully manage and operate a business.

Address any and all knowledge, skills, and abilities you possess in the areas of leadership and management; fiscal responsibility and budgeting; supervision of staff and human resources; scheduling, execution and management of projects; customer relationship building and customer service; sales, marketing, and business development; inventory control and logistics; and any related disciplines. Provide the SBA with any and all evidence of expertise you possess that will positively affect the growth and development of your business.

As proof of your abilities, include any relevant attachments such as a detailed chronological resume; copies of any training certificates, professional licenses or other documents evidencing your past performance; reference letters from happy clients that specifically refer to you by name; copies of positive performance reviews from past jobs; copies of any awards or commendations you received; copies of articles or studies you have published; or any other documentation that illustrates your business management acumen.

Sell Yourself

Many hardworking business owners are modest and often embarrassed about “selling themselves,” but in this case that is exactly what they are looking for. You need to “sell yourself” to the SBA and provide them with convincing evidence that you are an excellent business manager, despite any adversity you might have faced. Even if your business is very small or has experienced difficulty growing, the SBA still wants to hear that you are managing the business in a logical and competent way, and that the business is under control. In other words, the SBA wants to know that an experienced captain is steering the ship and setting its course.

Although the 8(a) Business Development Program is intended to assist socially and economically disadvantaged individuals who have diminished financial resources as compared to advantaged business owners, an applicant firm must nonetheless demonstrate to the SBA in its waiver request document that it possesses sufficient access to capital and credit to maintain its business operations. In other words, the SBA wants to know that your company has enough cash and credit available to survive for a long period of time. The SBA does not want to admit unstable, badly managed or collapsing companies into the 8(a) program. Even if your company is a small micro-business with transactions of less than $100,000 of business per year, you still want to prove to the SBA that you have enough capital, cash and credit to remain stable.

Cash flow is often the most difficult management challenge for any small business owner, but careful cash flow management is absolutely essential for any 8(a) applicant that wants a waiver to join the 8(a) program early. Because you are asking the SBA to waive its two years in business rule for you, it is important to emphasize your ability to manage your cash flow carefully, while reliably meeting your routine payroll and operating expense obligations.

You should also explain to the SBA in your waiver request how your business will cope should it encounter unexpected delayed or inconsistent payments from customers. Even if you don’t need one—or cannot imagine a future scenario under which you might need one—try to obtain a business line of credit from your local bank now. This will demonstrate to the SBA that you have access to credit in case of a delayed or contested payment from a customer. Even a small credit line of $5,000 or $10,000 will help. Under the current economic climate, it is far easier to obtain a credit line in advance of needing it than it is to obtain one when you are “cash poor”. You do not need to use this line of credit, just hold it in reserve in case of a business emergency.

The Small Business Administration will closely examine your company’s past performance history on contracts within its primary North American Industrial Classification System, or NAICS, code (sometimes pronounced “nix code”)—its primary industry category—as well as the personal work history of each owner and principal of the firm.

If you are uncertain about which NAICS code best represents your primary industry or primary line of business, go to the main NAICS website, which is: http://www.census.gov/eos/www/naics/.

The NAICS website contains various tools to help you narrow down and identify which code best represents the majority of your business transactions. The SBA will primarily evaluate your performance on contracts within your primary industry from the most recent year, however, you can make reference to contracts performed at any point during your company’s time in operation. The SBA allows you to conduct business within any NAICS code, however, when evaluating your company for a length of time in business waiver, the SBA will only assess your company’s performance within its primary NAICS code.

Inside your waiver request document, provide the SBA with either a table that summarizes your company’s contract experience, or a series of paragraphs providing a detailed summary of each major project your firm has executed. You can also provide (as attachments) full copies of signed, executed contracts and/or reference letters from satisfied clients as examples of your previous work. Be sure to list and highlight your most notable clients, including your biggest and/or most profitable client, the client you have worked with the longest, any federal, state or local governments you have performed work for, as well as any other prominent customers.