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Business Certification: Good Business for Small Business

Thompson Hine LLP

USA November 30 2021

Business certification can play a crucial role for businesses that are looking to gain access to supplier diversity programs and compete for government contracts set aside for historically underrepresented groups. Yet, few owners and founders know about the process, or truly understand the value it can bring to their business.

Business certification is verification of the diverse status of the owner or owners of a business. This includes women, minorities, LGBTQ+ individuals, veterans, those with disabilities, and individuals living and operating in areas that are separated from mainstream society. Federal, state and local authorities, such as the Small Business Administration (SBA), as well as national organizations, such as the National Minority Supplier Diversity Council (NMSDC), review the eligibility of businesses in order to award certification to those that qualify. Depending on the certification, a business may retain its status for the lifetime of the business (provided it remains in compliance). Other certifications may lapse after a certain period of time, particularly those certifications with eligibility requirements tied to economic thresholds. In addition to awarding certifications, certifying authorities like the SBA and NMSDC provide support to business owners and founders in the form of education, access to grants and other sources of capital, notification of bidding opportunities, business matchmaking events, and inclusion in business listings.

While requirements may vary slightly among the certifying authorities, one key element remains the same: an eligible business must be 51% owned and controlled by a diverse owner or owners. This requirement may present a problem for certain businesses, particularly startups seeking funding. Adding non-diverse investors to the cap table may dilute both ownership and control of the diverse founders to the point that the business is no longer eligible to seek or maintain certification.

The traditional advice for founders contemplating certification has always been to “pick a path”: certification or investment. However, the landscape is changing, giving founders more options to continue to pursue or maintain certification. There has been a notable increase over the last decade in venture capital firms not only focused on diverse founders, but also owned by diverse founders. Further, NMSDC provides a “Minority-Controlled Business” certification for those previously certified businesses that may no longer meet the ownership requirement.

Regardless of whether a business has been operating for a year or many years, business certification presents a worthwhile opportunity for growth. Please see our quick reference resource, “Diversity Certification: Good Business for Small Business,” which outlines a number of certification authorities and programs and provides links to access more information.

Thompson Hine LLP – Lindsay Karas Stencel and Jasmin Hurley

Article Courtesy of LEXOLOGY: