AN IN-DEPTH LOOK AT THE DBE APPLICATION REVIEW PROCESS.
The DBE application review process
Clients are often surprised when the DBE application they prepared themselves comes back denied. Often, denials can be prevented by understanding the DBE application process and what information is being reviewed and how that information will be used. Understand that there may be actions that you take as a business owner that, while good for business, may hurt your chances of getting DBE application approved.
The rules governing the DBE program place a burden on participants in the program to ensure that only socially and economically disadvantaged individuals take advantage of the program. Therefore, the primary objective of the DBE application review process is to determine whether a socially and economically disadvantaged individual, independently owns and controls the company.
The review of your DBE Application
The individual reviewing your DBE application must not only review your DBE application but dozens, if not hundreds of other DBE applications. The only way to perform this daunting task is to utilize checklists. For the most part, reviewers try very hard to maintain objectivity and not draw conclusions during the file review. However, reviewers are not necessarily attorneys or CPAs so complex business and financial arrangements that fall outside of the checklist can cause problems.
After receiving the DBE application packet, the information contained is reviewed and compared against a checklist. Particular attention is given to names appearing in the documents. Same names in different documents may indicate a relationship that affects the DBE applicant’s control over the company.
Conflicting information raises questions that may be addressed at the on-site review. Comparing changes in financial position may provide an insight into problem areas dealing with managerial control.
Reviewers will often create flow charts to track organizational changes and/or where the firm is connected with other firms by means of interlocking directors and/or officers.
Tracing dates through the DBE application is an often used review technique. Conflicting dates and information can also raise questions at the on-site interview.
Information related to your dbe application that the reviewer considers:
1. The firm must be a small business concern as defined by the Small Business Act and relevant regulations. The reviewer will seek to determine whether your firm is a “small business” as defined by the SBA. For general contractors the limit is average annual gross receipts over $17,420,000 over the prior three fiscal years. For engineering firms the limit is $4 million and for specialty contractors the limit is $7.5 million.
2. The majority (51% or greater) owner(s) must be socially disadvantaged. This means:
a. African American
b. Hispanic American
c. Native American
d. Asian-Pacific American
e. Subcontinent-Asian American
g. Others certified as disadvantaged
3. The majority (51% or greater) owner(s) must be economically disadvantaged. This means a Personal Net Worth of less than $750,000 (this was recently changed $1.3 million to adjust for inflation), excluding equity in one personal residence and the value of the DBE firm ownership.
4. Control: The reviewer will closely scrutinize the applicant firm whose ownership or control has recently changed. True control of the firm by the disadvantaged owner is critical to the certification process. Business entity control is divided into two segments:
a. Operational Control: The disadvantaged owner must be actively involved in all aspects of the business. The individual must show that basic decisions pertaining to the daily operations are made independently. The individuals seeking certification must demonstrate experience and technical competence in the field in which certification is sought. Firms that utilize a qualifier who is not the socially and economically disadvantaged owner need to pay particular attention to this requirement.
b. Managerial Control: The disadvantaged owner must have demonstrated ability to make independent and unilateral business decisions to guide the future and destiny of the business.
5. Financial Data: All financial items will be systematically reviewed and analyzed to determine the control of a business.
a. Company Financial Statement: A careful review of the financial statements will be used to determine possible intercompany transactions or loans/or loans payable which dilute the applicant’s effectiveness in controlling the business.
1.) The Balance Sheet shows:
a.) Equipment Account
b.) Accounts Payable
c.) Notes Payable
d.) Capital Stock Account
e.) Notes and Loans Receivable from Officers or Stockholders
f.) Notes and Loans Payable to Officers and Stockholders
g.) Equipment Loans
h.) Accrued Expenses
2.) Footnotes to the statements will be critically reviewed.
3.) Statement of changes in financial position
4.) The Income Statement Shows:
a.) Payments to Subcontractors
b.) Rent Expense
c.) Lease Expense
b. Licenses To Do Business: These are needed as proof that the applicant can legally do business in the state. The review will look at:
1.) Type of licenses.
2.) Dates that licenses expire.
3.) Who holds the license?
c. Prior Two Years Federal Tax Returns: These documents will be used to compare information reported on the financial statements such as:
1.) Salaries paid to officers.
2.) Names of officers and amount of stock ownership.
3.) Dividends paid.
d. Resumes’ of Applicant: Resumes indicate the applicant’s experience in a particular field of work. They can indicate the applicant’s technical competence based on experience in the industry and the degree of operational and managerial control exercised by the principals. Reviewers will look for: 1.) Previous employers, common to two or more principals of the company.
2.) Present occupation.
3.) Previous employers who subcontract work to or from the applicant’s company.
e. Third-Party Agreements: Rent and lease agreements are reviewed to determine if the applicant’s control of the company is limited and affected by a third party. Items of importance are:
1.) What is the purpose of the agreement?
2.) Who are the parties to the agreement?
3.) What are the terms of the agreement?
4.) Who benefits by the terms of the agreement?
5.) Does the agreement contain any language or conditions that restrict the applicant’s power to control the destiny of the company?
The above is only a partially list of the items that a reviewer will scrutinize. For a full evaluation of your DBE application prior to submission, contact the DBE program specialists at DBE Direct at (786) 390-5709.