A Privilege, Not a Right: Pitfalls and Misconceptions Regarding MBE and WBE Certification
Pamela Mitchell Belyn is an Associate in the firm’s Business & Finance group, where she counsels entrepreneurs and privately held companies, as well as women- and minority-owned businesses, on a wide range of legal, policy and business issues. Pamela has particular experience in helping clients obtain certification as a women-owned business enterprise (WBE) or minority-owned business enterprise (MBE). She also serves as Co-Chair of the Much Shelist Women’s Initiative. Pamela can be reached at 312.521.2783 or pbelyn@muchshelist.com.
By Pamela Mitchell Belyn
We’ve all heard the terms minority-owned business enterprise (MBE) and women-owned business enterprise (WBE), but do you really understand what this type of certification entails or the benefits it conveys on a business?
On the most basic level, certification gives minority- and women-owned businesses access to supply chains and capital that have been traditionally reserved for large, majority-owned businesses. (For purposes of certification, minority status constitutes anyone belonging to one of following ethnic groups: African American, Asian-Indian, Asian-Pacific, Hispanic or Native American.) Given the nation’s rapidly changing demographics, corporate America and government entities are seeking ways to ensure that their employee and supplier ranks reflect the population at large. MBE/WBE certification is one means to achieve that goal.
Navigating the Process
Certification as an MBE or WBE can be a confusing, contradictory and lengthy process. In fact, a large number of applicants drop out due to the seemingly endless paperwork required, the difficult questions a business must answer and unfounded fears regarding site visits. Through their local affiliates, however, the Women’s Business Enterprise National Council (WBENC) and the National Minority Supplier Development Council (NMSDC) have streamlined the process by implementing online applications, along with transparent rules and regulations.
Before beginning the actual application process, you must first determine if certification is even right for your business. Is your product or service targeted toward large corporations and government agencies? Do you have the working capital and infrastructure to service such large accounts? If the answer is yes, these types of entities often seek out MBE- or WBE-certified vendors in order to diversify their supplier base. But make no mistake: MBE/WBE certifications are not entitlement programs. However, certification does give your business immediate exposure to supplier diversity initiatives that may lead to significant contract awards. MBE/WBE certification is also an inexpensive and effective marketing tool that can help distinguish your business from other potential suppliers. In order to obtain this marketing advantage, you must be prepared to remit confidential information such as capital structure, financials, customer data, contracts and other non-public information. If you determine that your business has the tolerance for this level of disclosure, you should take adequate steps to protect your confidential business information—including servicemarks, trademarks and copyrights—before beginning the application process.
The actual certification process entails completing an application and submitting it with a fee and requested documentation. From there, the certifying organization will review the application for completeness and schedule a site visit. Following the site visit, the certification committee will undertake a final evaluation and board vote. Once the vote has occurred, a letter of approval or denial will be sent to your business. Insufficient application information, as well as incorrect or missing documentation, can delay or derail the certification of an otherwise qualifying business. Although appeals are generally allowed, they can take months to process and may not lead to a reversal of the initial certification denial. Further, if your business is denied certification, you must disclose that fact when reapplying or when submitting an application to a different certifying body.
The application process is intended to eliminate businesses that do not meet certain minimum qualifications, including being 51% women or minority owned. However, the ethnic or gender makeup of the majority shareholders is not the only—or the most important—qualification. Both certifying agencies consider a minimum of four additional criteria: personal investment of the minority or women shareholders, actual control and authority over the daily and strategic decisions of the enterprise by the minority or women shareholders, independence of the minority or women shareholders, and type of business. These criteria, while seemingly clear-cut, can lead to traps for the unwary.
Personal Investment
Certifying bodies look for personal investment in the business, including cash, expertise and contribution of assets. As an important part of the equation, they also want to ensure that the qualifying owner, as well as each qualifying shareholder, has a “real financial risk” associated with his or her investment. The theory is that an owner or shareholder with that level of commitment will actively work in the business to mitigate the attendant risk.
Cash is king in proving a personal investment; therefore, owners or shareholders who contribute cash to a business must disclose the origin. The WBENC requires a copy of the check that the qualifying female owner used to make her investment, while the NMSDC requires proof of stock or membership interest purchase. It is important to note that shares of stock or membership interest certificates issued in the name of the qualifying owner are insufficient without a financial paper trail. If certification is part of your business plan, these documents should be maintained with the corporate record book.
Non-cash contributions, such as expertise or a customer list, receive serious consideration, but only if they can be valued independently and conservatively. Therefore, it is best to provide appropriate documentation with the application package. For example, if you are using your project management expertise for your own company, consider consulting a third-party employment website to determine the going rate for a project manager in your geographic area. Alternatively, if you are submitting a customer list you developed, approximate the revenues that you have previously generated or expect to generate from this type of list.
Actual Control and Authority
Certifying bodies also look for actual control and ultimate authority over the business by the qualifying shareholders. This is a true “substance over form” examination that considers, among other things, whether the qualifying owner signs contracts, has check-writing authority and participates in corporate meetings. Both certifying bodies require that the qualifying owners unilaterally control day-to-day operations, as well as any other major decisions affecting the management, control or operations of the business. Specifically, the NMSDC stipulates that applicants must not be subject to formal or informal restrictions through by-laws, operating agreements, partnership agreements, charter requirements or other arrangements that prevent the minority owners from making a decision for the business “without the cooperation or vote of any owner who is not a minority.”
Independence
Of all the criteria reviewed for certification, independence is subject to the most scrutiny since it is the area most often abused by those seeking certification under false pretenses. The examination of independence is multifaceted and can encompass all aspects of a business’ operations. Generally, certifying bodies expect the minority or women owners to perform the operations of the business without substantial reliance on financing or other resources of non-qualifying persons or business enterprises. However, banks and other traditional financing sources are generally considered exceptions.
Companies with substantial ownership by non-qualifying persons are subject to an additional layer of examination. The rationale behind such scrutiny is to prevent non-minority and/or ineligible male business owners from reaping financial rewards or other benefits for giving a qualifying owner majority ownership on paper only.
Scenario 1
Ian Maxwell owns I.M. Building Materials, Inc. (IM), a successful supplier of building materials to the construction industry. CeCe Ment, Ian’s daughter, founds C. Ment, Inc. (CM) to supply cement to the construction industry. The two companies enter into a non-exclusive agreement whereby CM will supply cement to IM below cost for two years, a departure from industry standards. Additionally, CM rents IM’s customer list to solicit sales. IM is CM’s largest customer by a wide margin.
Because CM is dependent on IM’s customer list to solicit sales, the supply agreement goes against industry standards, and both companies are in the same industry, CM will likely fail the independence test for WBE certification. The certifying body wants the certification to benefit the women-owned business and not a non-qualifying affiliate.
Scenario 2
The City of Diversityville strives, but is not required, to award city contracts to qualified suppliers that reflect the community’s diverse population. Robert Blanc, who is white, supplies traffic light maintenance services through Rouge Jaune Vert, Inc. (RJV), the only supplier of its kind for 200 miles. Fearing a loss of his exclusive relationship with Diversityville, Robert forms StopLightsRUs, LLC, a manager-run limited liability company, with his best friends Phillip Martin (a male member of the Choctaw Nation), Garrett Morgan (an African-American man) and Deidra Perez Connolly (a Hispanic woman). Though all four individuals are equal members, Robert is the sole manager having day-to-day decision-making authority. The composition of StopLightsRUs may perfectly reflect the diverse population of Diversityville, but the services the company provides are subcontracted to and wholly performed by RJV, Robert’s corporation.
Because the minority members of StopLightsRUs have no apparent decision-making authority and the company is completely dependent on a majority-owned corporation as its sole means of providing the services it sells, this arrangement will probably fail the independence test for MBE certification. The City of Diversityville’s goals in awarding contracts would have had no impact on Robert since there was no formal requirement for diversity contract awards and there were no other qualified suppliers within the Diversityville population.
Type of Business
Certain types of businesses are excluded from certification. For example, the NMSDC will only certify for-profit minority-owned enterprises that are operating entities. Holding companies, certain real estate investment firms and other non-operating entities are excluded from MBE certification. Similarly, the WBENC will not certify women-owned businesses that are agents, brokers, nonprofit organizations, manufacturer’s representatives or strategic alliances unless such arrangements are standard in the industry in which certification is sought. Moreover, if a franchisee seeks WBE certification, the WBENC will scrutinize the franchise agreement to ensure that the female shareholder has managerial control and operational authority that is not unreasonably restricted.
Success Begins with the Application
Large corporations and government entities have taken the lead in leveling the playing field for minorities and women, who have been historically overlooked in corporate America. However, supplier diversity initiatives do not excuse substandard performance. Qualifying businesses seeking the advantages of MBE/WBE certification are still held to rigorous service and quality standards, and you should make every effort to demonstrate your commitment to excellence from the beginning. Careful attention to the application process and all related requirements is the first step in getting your business certified and becoming a player on the national supplier stage.
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