Over the years, I’ve guided upwards of a hundred businesses in obtaining their certifications as a “veteran-owned small business” or “service-disabled veteran-owned small business” from the federal government–first, via the VA’s Veterans First Contracting Program (VetBiz); and now, the SBA’s Veteran Small Business Certification Program (“VetCert”). One mantra I’ve adopted is that of tradeoff: as the non-veteran owner, if you want to pursue the benefits of the program, you have to be comfortable with relinquishing power. The veteran has to have ultimate control over the firm.
In some scenarios, this doesn’t even matter. The veteran majority owner wants what is best for the firm–which is also best for him–and he includes his majority partners in the decisions towards that end. The business is a true partnership.
In these instances, this means the corporate paperwork is just paperwork. The bylaws or operating agreement might establish the veteran as king and tyrant, but that only matters if he wants to act like one.
The question for the minority owners becomes . . . are you comfortable with the risk that he one day might want to?
In the VSBC Appeal of Snowfensive, LLC, the minority owner of a small company out of Utah was uncomfortable with that risk when applying to VetCert. Their application was denied by the SBA due to the inclusion of the following language:
“Amendments to this Operating Agreement. . . that are of an inconsequential nature. . . and that do not affect the rights of the other Members in any material respect. . . may be made by that person through the exercise of his or her power of attorney. Any other amendment to this Operating Agreement requires the unanimous consent of the Members. . .”
Via other terms in the operating agreement, the veteran (and managing member) had the power of attorney. Accordingly, this provided that while the veteran owner could unilaterally amend the operating agreement with respect to “inconsequential” changes, both members were needed for all others. In denying Snowfensive’s application to VetCert, the SBA found that this provision interfered with the veteran’s right to “fully control” Snowfensive.
Snowfensive was unsuccessful in challenging this before SBA OHA, which hears appeals of such denials. SBA OHA held that the veteran not being able to unilaterally amend the operating agreement was a dealbreaker, as this prevented him from exercising control over the firm. VSBC-368-A (2024). SBA OHA further noted the provision (13 C.F.R. 128.203(j)) listing those “extraordinary circumstances” where it is permissible to require consent of all owners does not include the amendment of corporate documents.
As an attorney who has been in this game for years, I empathize with Snowfensive’s minority owner. If you’re putting your money and sweat equity into a business, you should have control when it comes to major decisions. What if the veteran wants to pivot the business to an entirely different field? Or make a major expenditure? If it affects you, you should have a say over it.
When it comes to the Veteran Small Business Certification Program, however, the reality is that you have to be willing to abdicate control. A set of rules apply to ensure that the firm is the veteran’s firm, and while you might be a team in practice, the corporate documents must be drafted in a certain way–and be enforceable as such–in order to qualify for the Program.
With this in mind, the question becomes whether the benefits of the program are worth the risk it presents to a minority owner. If the veteran owner is a qualified, responsible, trustworthy business partner whose status can be used to leverage opportunities in the federal sphere, it should be. If you chose to be in business with him in the first place, it would appear your risk is minimal.
As such, when your firm is considering applying to VetCert, do your homework. Understand the eligibility requirements and any calibration required to qualify. Assess your risk and your degree of comfort with taking it. Chances are, it’s worth it; but all owners to the firm should know exactly what they’re getting into (and giving up) when making changes for purposes of entering the federal sphere.
*Sarah Reida’s practice is focused on assisting veteran firms in the federal marketplace. This includes: pursuing certifications, pursuing and defending status and bid protests, assisting with teaming documents, dispute resolution, and filing claims and appeals.
