Passing On a MBE or WBE Certification in a Sale
A minority-owned business enterprise (MBE) or woman-owned business enterprise (WBE) is a powerful certification to have in certain industries. They can connect you with larger corporations and government agencies (at the federal, state, and local level) that set spending goals and targets for businesses owned by minorities and/or women. But what happens when it’s time for those businesses to sell?
Before we talk about exits, let’s review what it might take to get one of these certifications in the first place.
These are for-profit businesses, regardless of size, physically located in the US or one of its territories, that are owned, operated, and controlled by minority group members. Those members are US citizens who are:
- Hispanic-American (includes Puerto Rico, Mexico, Cuba, Central and South America)
- Native American (includes those who are Eskimo, Aleut, native Hawaiian)
- Asian-Pacific American (includes Japan, China, the Philippines, Vietnam, Korea, Laos, Cambodia, Taiwan, the Indian subcontinent, Samoa, Guam, and other US trust territories of the Pacific)
Ownership is defined as at least 51% owned by such individuals. In the case of a publicly-traded company, that means 51% of the stock must be owned by one or more such individuals.
Like MBEs, these are for-profit businesses physically located in the US or one of its territories, that are owned, operated, and controlled by women who are US citizens or Legal Resident Aliens. The same ownership, operation, and control rules are in place.
There are a couple more business designations worth knowing:
- DBE (Disadvantaged Business Enterprise): aimed at those that have disabilities or residents of economically depressed areas
- VOSB (Veteran-Owned Small Business): at least 51% owned by one or more veterans
There are two clear strategies for exiting a business with one or more of these certifications.
If the majority of the business of the firm comes through contracts that are tied to these certifications, you will probably want to find buyers that can retain this certification. That means if you have a WBE, you’re going to have to sell to women only, or find a buying group that will make sure that magical 51% threshold is occupied by women. Same for an MBE.
You’ve heard us talk before about the importance of having as wide of a buyer pool as possible. More buyers means more interest means more offers means more leverage. But this path is only worth pursuing if you’re willing to take a valuation haircut.
You can prepare two financial projections leading to two different sale prices, a higher one that a buyer that can qualify for one of the certifications would pay (because he/she would hold on to the business/contracts that are tied to that certification), and a lower one that assumes the certification will be lost and the business will have to continue on without it.
We would go for “continuity” if more than 20% of the business is tied to a certification and for “break” if 20% or less of the business is tied to a certification. The “break” option is nice in that it still offers continuity should such a buyer show up.
Do you have a MBE or WBE or other certification and have been procrastinating on an exit because you don’t know what to do? We can help (because we’ve helped in these cases in the past). Give us a call.