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The U.S. Small Business Administration (SBA) published a final rule on July 25, 2016, significantly expanding its mentor-protégé program to now include all small businesses. The purpose of the mentor-protégé program is "to enhance the capabilities of protégé firms by requiring approved mentors to provide business development assistance to protégé firms and to improve the protégé firms' ability to successfully compete for federal contracts." The business development assistance available to protégé small business concerns includes technical and management assistance, financial assistance through loans and investments, trade education, help in performing prime contracts through joint venture arrangements, and subcontracts that serve as developmental assistance.

Until now, SBA limited the mentor-protégé program to 8(a) small business concerns only. However, the SBA's expansion of the mentor-protégé program extends its benefits to all categories of small business concerns, thus opening the door of expanded contracting activities to women-owned small businesses, to non-disadvantaged small businesses, to service-disabled veteran-owned small businesses, and to HUBZone small businesses (while the programs are nearly identical in substance, the SBA's 8(a) mentor-protégé program will remain separate from the new mentor-protégé program). Further, the new rule now permits all small business concerns to create a joint venture ("JV") with any larger, for-profit mentor business and allows the JV to compete for all small business contracts permitted by the status of the protégés. This is a substantial benefit for both parties to the mentor-protégé relationship.

The new rule establishes specific criteria for companies seeking to be mentors, for protégés and for JVs comprising both. For mentors, the new rule provides that a mentor may be a large or small "for-profit" business. This "for-profit" requirement represents one notable change from the 8(a) mentor-protégé program. Mentors must also demonstrate that they: (1) are capable of carrying out their responsibilities to assist the protégé firm under the proposed mentor-protégé agreement; (2) possess good character; (3) do not appear on the federal list of debarred or suspended contractors; and (4) can impart value to a protégé firm through their knowledge of general business operations and government contracting. The new rule allows a mentor to retain up to a 40 percent ownership interest in its small business protégé after expiration of the mentor-protégé arrangement.

To qualify as a protégé, the new rule provides small business concerns two potential avenues: a concern may qualify as small under the size standard corresponding to its primary NAICS code, or alternatively, a concern may qualify as small under a secondary NAICS code for which it is seeking business development assistance, if the concern demonstrates that the mentor-protégé relationship makes business sense and would further develop the concern’s capabilities. Under the new rule, a protégé is not required to obtain a size status determination prior to participating in the small business mentor-protégé program. Further, the new rule states that changes in size status of a protégé will generally not affect contracts already awarded to a mentor-protégé JV.

Under the new rule, the SBA will not consider parties to a joint venture to be affiliated for purposes of size if the protégé (to the JV) qualifies as small for purposes of the procurement. However, the new rule requires that both the potential mentor, and the protégé, be approved by SBA prior to filing for approval as a JV. Further, the small business protégé to a JV must perform at least 40 percent of the substantive work. The new rule also requires that all mentor-protégé JV agreements be in writing and limited to an initial term of three years, with an option to extend for three additional years.

As the summary above suggests, SBA's expansion of the mentor-protégé program to all small business contractors has significant implications within the government contracting community. From the protégés' perspective, one obvious benefit is that now any small business that is eligible for a federal set-aside contract can seek a mentor that will provide access to resources, industry expertise and financial assistance. At the same time, the new rule incentivizes companies to be mentors by permitting them to own up to 40 percent of their small business protégés and by providing them with expanded opportunities to bid on small-business set-aside contracts as members of a JV with their protégés.

SBA estimates that close to 2,000 new concerns will seek to take advantage of the expanded mentor-protégé program. Given this potential explosion of new businesses into the government contracts market, we can expect an already competitive market to become even more so. Furthermore, concerns not taking advantage of the mentor-protégé program may find themselves at a competitive disadvantage given the benefits available to small business concerns under the new program. Thus, businesses should begin taking steps to establish their mentor-protégé relationships and preparing their mentor-protégé agreements now, to be ready to submit them for approval after the new program goes into effect.

SBA's newly expanded mentor-protégé program is set to go into effect on August 24. If you have any questions regarding the topics discussed in this article, please contact Marques O.  Peterson at +1 (202) 312 3038, Kirsten W. Konar at +1 (312) 609 7588 or your Vedder Price attorney with whom you have worked.