In August, the Small Business Administration issued a proposed rule that was packed to the brim with changes to many of the SBA’s small business contracting programs. We’ve mentioned a few of the changes in prior blog posts. Gregory Weber, discussed potential changes to the SBA’s 8(a) Business Development Program that may result in more relaxed requirements. While Shane McCall, recently took a deep dive into proposed changes to past performance requirements for joint ventures. Today, we will focus on two additional proposed changes to the SBA’s Small Business Mentor-Protégé Program.
Can a non-profit entity be a mentor?
The first proposed revision addressed by this particular blog post looks at whether a non-profit entity is permitted to be the mentor in an SBA-approved mentor-protégé agreement. As the proposed rule states, the introductory language to 13 C.F.R. § 125.9(b) provides that a mentor only needs to be a concern that can demonstrate a commitment and the ability to assist small business concerns. But there has been some confusion. Reading the rule, it doesn’t seem to explicitly rule out non-profit entities as mentors. At least, not clearly. However, if you are familiar with other SBA rules, a “concern” is specifically “a business entity organized for profit per 13 C.F.R. § 121.105(a)(1). Therefore, a mentor must be for-profit because a mentor must be a “concern.”
Following that reasoning, the proposed rule update will ensure that the definition for “mentor,” found at 13 C.F.R. § 125.9(b) explicitly states that a mentor must be a for-profit business. If the proposed rule goes into effect, 13 C.F.R. § 125.9(b) will then state:
Mentors. Any for-profit business concern that demonstrates a commitment and the ability to assist small business concerns may act as a mentor and receive benefits as set forth in this section. This includes other than small businesses.
How long can a protégé be a protégé?
The next change proposes that the rule regarding the time limit for a protégé to be in a mentor-protégé relationship be relocated within 13 C.F.R. § 125.9 and helps to clarify a misunderstanding regarding the time that a protégé may be a protégé.
Currently, 13 C.F.R. § 125.9(e)(6) states:
A protégé may generally have a total of two mentor-protégé agreements with different mentors.
(i) Each mentor-protégé agreement may last for no more than six years, as set forth in paragraph (e)(5) of this section.
…
(iv) Instead of having a six-year mentor-protégé relationship with two separate mentors, a protégé may elect to extend or renew a mentor-protégé relationship with the same mentor for a second six-year term. In order for SBA to approve an extension or renewal of a mentor-protégé relationship with the same mentor, the mentor must commit to providing additional business development assistance to the protégé.
As mentioned, the SBA proposes that 13 C.F.R. § 125.9(e)(6) be redesignated to be located in the protégé-specific provisions as 13 C.F.R. § 125.9(c)(4).
Further, the SBA believes that there has been some confusion regarding the time limit that protégé firms may be the protégé in an SBA-approved mentor-protégé arrangement. The proposed rule would add clarifying language to the new 13 C.F.R. § 125.9(c)(4)(iv) to make clear that a concern cannot be a protégé for a total of more than 12 years. The SBA stated:
There has been some confusion that if a protégé elects to extend its mentor-protégé relationship with the same mentor for an additional six-year period that the protégé could somehow be able to participate in the mentor-protégé program as a protégé for more than 12 years. To dispel any possible contrary interpretation, the proposed rule would specify that a firm could be a protégé for up to 12 years, whether the concern has a mentor-protégé relationship with two different mentors or the same mentor for second six-year period.
Therefore, the proposed new 13 C.F.R. § 125.9(c)(4)(iv) will state:
Instead of having a six-year mentor-protégé relationship with two separate mentors, a protégé may seek to extend or renew a mentor-protégé relationship with the same mentor for a second six-year term. In order for SBA to approve an extension or renewal of a mentor-protégé relationship with the same mentor, the mentor must commit to providing additional business development assistance to the protégé. Whether a protégé has a mentor-protégé relationship with two different mentors or the same mentor for a second six-year period, a concern cannot be a protégé for a total of more than 12 years.
Thus, a protégé can only be a protégé for a total of 12 years, regardless of whether all 12 years are with the same mentor, or if there are two six-year terms with different mentors.
What rights does a protégé have if its mentor is acquired?
Currently, the rules allow a mentor to have more than three protégés when it purchases another mentor and commits to honoring the obligations under the seller’s mentor-protégé relationship. But there is no avenue that allows the protégé of that relationship to have any recourse, or even choice, in that same situation. As SBA notes in the proposed rule, sometimes things just don’t work out for a number of reasons, and the protégé of the acquired firm should not be required to continue the mentor-protégé relationship with the “new” mentor if it will not benefit the protégé. After all, the primary benefactor of the Mentor-Protégé Program is intended to be the protégé.
This rule proposes that a new provision be created to allow the protégé to have a voice in whether it wants to continue the mentor-protégé relationship. If the “new” mentor does not have the capability to fulfill the requirements of the existing mentor-protégé agreement, and the protégé does not want to continue that relationship, the protégé would be permitted to either negotiate a revised mentor-protégé agreement with the purchasing firm or terminate the relationship if the protégé believes the purchasing firm is not a good fit.
However, SBA emphasizes that this new rule would only be applicable where the “new” mentor cannot fulfill the existing mentor-protégé agreement. And, when the mentor-protégé relationship will continue after the acquisition, any revisions made to the existing mentor-protégé agreement must be approved of by the SBA. The rule allows the protégé to enter into a new mentor-protégé relationship if the agreement is terminated, but that relationship will be limited to a duration “not to exceed six years minus the length of the mentor-protégé relationship with the former mentor.”
SBA notes the possibility of a situation where “the initial or selling mentor may be a contract holder as a joint venture with a protégé on the same multiple award contract where the acquiring mentor is also a contract holder as a joint venture with its protégé.” And, as you may or may not know, 13 C.F.R. § 125.9(b)(3)(i) states that “a mentor with more than one protégé cannot submit competing offers in response to a solicitation for a specific procurement through separate joint ventures with different protégés.” But what happens if the acquiring firm’s mentor-protégé joint venture and the acquired firm’s mentor-protégé joint venture are both awardees on the same multiple award contract?
In a situation like the one directly above, the mentor would have the ability to dictate which mentor-protégé joint venture would pursue which solicitation, in opposition to the benefit of a protégé. Therefore, the proposed rule would require the mentor to exit one of the conflicting joint venture relationships.
SBA recognizes that this may harm the protégé from the joint venture that the mentor exits. To alleviate any harm, the new rule would provide a couple of options for the protégé.
- Permit the protégé to seek to acquire the new mentor’s interest in the underlying multiple award contract and work with the contracting officer to determine whether novation of such contract to itself would be appropriate; or
- The protégé may seek to replace the new mentor with another business in the joint venture such that the revised joint venture continues to qualify as small.
Finally, the proposed rule would add a new § 125.9(d)(1)(iv) which would “give a protégé firm a right of first refusal to purchase a mentor’s interest in a mentor-protégé joint venture where the mentor seeks to sell its interest in the joint venture.
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To sum things up:
- A non-profit entity may not be a mentor in an SBA-approved mentor-protégé agreement; and
- Protégés are limited to 12 years as a protégé and one 12-year long mentor-protégé relationship counts just like two six-year mentor-protégé relationships, so choose your mentor wisely.
- Protégés of acquired mentors will be permitted to terminate the mentor-protégé relationship when the acquiring mentor cannot fulfill the terms of the mentor-protégé agreement.
- If a mentor ends up with two mentor-protégé joint ventures that are both awardees on the same multiple award contract, the mentor will be required to terminate one of the relationships.
Remember: These rules are only proposed at this point in time. If you would like to submit comments to the SBA regarding these changes, or any others in this proposed rule, you can do so until October 7, 2024.
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