The SBA’s recent final rule on Mentor-Protégé Program consolidation included a number of important updates and clarifications. Among these was an explanation of the rules involving a mentor owning part of a protégé while also being part of a joint venture with the same protégé. It’s something I’ve always wanted SBA to confirm, so I’m glad they did.
The mentor-protégé rule has allowed for a mentor to take up to a 40% equity stake in the protégé. That rule states that “[i]n order to raise capital, the protégé firm may agree to sell or otherwise convey to the mentor an equity interest of up to 40% in the protégé firm.”
In addition, the mentor-protégé joint venture rule allows the mentor in a joint venture to perform up to 60% of the work that the joint venture performs. That rule requires “the small business partner to the joint venture must perform at least 40% of the work performed by the joint venture.”
Seeing as how a mentor and protégé can set up multiple joint ventures, the duo could theoretically be performing multiple contracts under each joint venture. For all of these contracts, the mentor could receive compensation from the joint venture for performing up to 60% of the work done by the joint venture. But, if the mentor acquired 40% of the protégé, the mentor could also get a 40% profit share from operating of the protégé.
This could be a major benefit for a mentor and the rules always seemed to allow it, although not explicitly. Now, SBA has confirmed this is the correct reading of the regulations.
“The rules allow a mentor . . . to perform 60 percent of whatever work the joint venture performs. Moreover, a mentor can also own an equity interest of up to 40 percent in the protégé firm.” So, a mentor can have multiple protégés at one time and the mentor “could have a joint venture with each of those protégés and perform 60 percent of every small business contract awarded to the joint venture. It also could (though unlikely) have a 40 percent equity interest in each of those small protégé firms.”
SBA made this comment in the context of the limitation on how many protégés each mentor can have. SBA is keeping the limit on the number of simultaneous protégés at three (aside from an exception for Puerto Rican small businesses). Above that number, “SBA believes that it would appear that the large business mentor is unduly benefitting from contracting programs intended to be reserved for small businesses. As such, this rule does not increase the number of protégé firms that one mentor can have.”
There you have it, SBA has confirmed that a mentor can get quite a benefit from the mentor-protégé program if it takes advantage of both the 40% equity ownership and the 60% workshare in a joint venture. Of course, the protégé should also be a getting substantial benefit from any such relationship, or else the the SBA may question whether the mentor-protégé relationship is a good deal.
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