Regulations lay traps for unsuspecting women seeking certification as a DBE or WBE.
The traps even ensnare women seeking re-certification years after operating successfully as a WBE and relying on the certification as the cornerstone of their business plan.
Take Jane Doe, for instance, she and her husband John (or father or male business partner as the case may be) got their business WBE-certified ten years ago. A nice gentleman from the Government came and knocked on Jane’s office door, interviewed her, asked questions about her business—the work she did, her market, her education and work experience and her plan for the future of her business. This gentleman reviewed a pile of Jane’s documents. Apparently the interview went well and he found the documents in good order, because a few months later Jane received a letter congratulating her on the new certification.
Immediately Jane dove into government contract work and out-bid her competitors, first as a subcontractor and then as a prime. She was mentored and gained valuable knowledge and skills. She hired more employees and her business grew.
Nobody ever told Jane about the trap lurking under every application for re-certification, one that would pull the rug out from under Jane and jeopardize everything that she had worked so hard to build and achieve.
Don’t learn about this trap the hard way—by having your certification revoked for failing to comply with regulations no one seemed to care about when you’re WBE certification was initially granted.
Be ready. Regulatory officers will knock on your door again, ask you questions aimed at determining who really controls your business—again—review your active contracts, finances and organizational documents—again—and if they don’t like what they read, see and hear, even if everything had been disclosed to them years ago, they’ll find you at fault and try to revoke—we’ll talk more about that process in a later article.
One of the most important questions they may ask is this:
“Is your capital contribution in proportion to your ownership or equity interest?”
You don’t know?
Better read this article and learn more. Because virtually every one of the businesses in the decisions linked below who lost their certifications, lost it because their capital contribution—of money, equipment, other property and expertise was out of proportion to their ownership percentage.
Jane owns 51% of Doe Corp but can’t prove that she contributed a commensurate percentage of the start-up capital. And she never quantified her expertise. Think she has a problem? Yes, she does.
Jane argues that the company didn’t need a lot of startup capital, and what she has contributed in uncompensated labor and expertise since those difficult early days eclipses what her partner put in. But Jane’s records are sparse. No time sheets, no acknowledgment in the corporate documents of the expertise she brings to the table. And to make matters worse, her partner took out a $20,000 loan in his name to get the business going.
The eligibility criteria specifically require a business seeking certification to demonstrate that the contribution of the woman owner is “proportionate to [her] equity interest in the business enterprise, as demonstrated by, but not limited to, contributions of money, property, equipment or expertise”
The “capital contribution test” in 5 NYCRR §144.2(a)(1) requires the applicant to demonstrate that the woman owner(s)’s contribution of “money, property, equipment or expertise” is proportionate to her equity interest. The purpose of this test is to guard against the installation of minority or women owners as majority shareholders in a business enterprise for the purpose of certification of the business as an MWBE.
A woman-owner must be able to demonstrate that she made a contribution in proportion to her equity interest, as required by §144.2(a)(1).
With respect to contributions of expertise, a woman-owner shouldn’t state vaguely that it’s “valuable.” She needs to quantify it, empirically. Unfortunately, Jane falls short in this regard.
She’s not alone. Every month more WBE and MWBE contractors fall victim to this trap, which could have been avoided with proper planning.
The numerous administrative decisions that revoke certifications for businesses like Jane’s can be viewed at: https://esd.ny.gov/doing-business-ny/mwbe/mwbe-certification-appeal-hearings.
Simply reading a couple of these decisions could teach WBE-applicants so much about the how to avoid the pitfalls that could lead to denial of their application or revocation of their certification, even years later, especially how to avoid this one particularly nasty trap that seems to trip-up the most experienced business people.