Supplier Diversity Certification Is More Art Than Science

Supplier diversity certification is an opportunity for businesses to grow their customer base, increase sales opportunities and establish new markets and suppliers. In this era of supply chain interruption and workforce challenges, developing relationships with more suppliers is good business.  If you have a product or service to sell, becoming a certified diverse supplier can open the door to new markets and provide you with a source of new opportunities.

Some manufacturers might dismiss the idea of supplier diversity certification because a snapshot of their company today doesn’t match the two basic diverse supplier requirements:

  • Ownership: At least 51% of your company must be held by owners who will qualify in your diverse supplier category (for example, if you’re seeking Women Business Enterprise [WBE] certification, 51% of your company must be owned by one or more women), and
  • Control: You must be able to demonstrate the qualifying owners have the requisite management expertise, operational independence, and governance control of the company. 

If certification would benefit your company but you don’t meet the ownership and control requirements today, taking a few key steps now might make tomorrow’s snapshot look different enough for you to achieve supplier diversity certification. Companies certified as minority-, woman-, or veteran-owned businesses (M/W/VBEs) have increased opportunities to sell their products and services not only to governmental buyers, but also to corporations seeking the economic benefits and social responsibility that working with certified diverse suppliers provides. There are supplier-diversity goals being set in a wide variety of industries, and the goals are being missed because there aren’t enough certified suppliers to meet the needs. If certification as an M/W/VBE is within your reach, pursuing certification can position you to benefit from these opportunities.  

How, then, do you get certified?  The process is more art than science. 

Simple Math? Not Exactly

It’s simple math to count up the owners who hold 51% of the ownership interests. However, if your ownership includes other business entities or trusts, the ownership of those entities becomes part of the calculation. If, after you find your way back to all of the individual owners, you determine that your company isn’t owned by enough qualifying owners, consider transferring some ownership interests. Ownership and control are very different things in supplier diversity certification. If certification makes sense in the big picture, making changes to the ownership structure to meet the certification requirements can be done. 

The key to making ownership changes is to document them properly. If you’re selling an ownership interest, be sure to have an agreement documenting the sale. Include the purchase price (a sale needs to reflect an accurate price) and details of how the purchase price will be paid. But it’s not enough to write the purchase agreement down. You have to actually do what the agreement says you will do. If the purchase price is to be paid in cash, be sure to document where the money came from, and where it was deposited. If the buyer needs to borrow money to pay for the interest, check the certification rules first so that the buyer picks the correct lender. Some certifying agencies will disqualify loans to purchase an ownership interest if the lender is the company that the buyer is buying into. 

The alternative to selling the ownership interest would be giving it as a gift to a qualifying person. Gifts may be an attractive option, but be very careful with gifting ownership interest to qualify for certification. Without a good reason for the gift (and sometimes in spite of the good reason), a gift of ownership interest will not be sufficient to demonstrate a recognized transfer of ownership. 

As you consider your options to transfer ownership of your company to meet the 51% ownership rule, don’t forget one of the most important requirements of supplier diversity certification: experience. Your new 51% owner must be able to demonstrate relevant experience in the business or industry that they are taking over. 

The Real Meaning of ‘Control’ 

Control is the key to any supplier diversity certification. Moving ownership interests around to meet the requirement can be done with some well-drafted documents and a few key steps, but demonstrating control is much more involved.

Control means so much more than Webster’s definition of “to direct the actions or function of.” In certification terms, it also means to have authority to act independently, to have operational control of the business functions, and to lead the management of the business. Now that you’ve changed your ownership interest around, your new majority owners must also control the company. The long document list required for almost every certification application is designed to dig deep into the requirement of control.

One of the most common areas to look for control, and the area that causes more technical denials of certification applications, is in the company operating agreement (or bylaws for a corporation). It’s common for any company with two or more owners to require decision-making to be done by a majority of the holders of the ownership interest or a majority of the members of a board of directors (if there is one). If your operational documents require the owners to make key business decisions and you met the ownership requirement for certification, you will probably satisfy the control test at this level. You can move on in your analysis of control. However, if control of your company is delegated to a board of directors, check the language carefully. Boards are often vested with the power to make the majority of the business decisions, and those boards typically must act by majority. Officers usually report to the board, which means the board, not the president, controls the company. If your qualifying owners aren’t in the right place to control the business decisions, a change needs to be made before applying for certification.

After you’ve reviewed your operational documents, review your minutes. Operational documents require them, and you’ll need them to reflect what you and your board have been discussing recently. The most important minutes for certification will be those that spell out who has control of the company. Does the qualifying owner hold the highest defined office in the company? If you’re seeking certification, they should. How about compensation? Is the qualifying owner the highest-paid person in the business? If not, why not? Can you demonstrate the qualifying owner’s involvement in obligating the company for loans or contracts? A yes to all of the above has you well on your way to demonstrating that your qualifying owner has the requisite control of the company to get certified.

Paula Finch is counsel at Greensfelder, Hemker & Gale, P.C.

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