M&A Insights: Inequity in Sales of Minority, Woman and Veteran Owned Businesses

In order to level set the playing field for minority, woman and veteran owned businesses (“MWVOBs”), those businesses can “check the box” to be given preferential designations to bid for contracts to provide goods or services to the government or large corporations. This has helped MWVOBs drive sales growth they may have otherwise struggled to compete to land.

However, as issue arises when MWVOBs want to sell their business. Often, a significant portion of a MWVOB is derived from them “checking the box.” The dilemma is that most poential buyers of MWVOBs cannot check the same box and, therefore, are legitimately concerned that the revenues derived from “checking the box” will go away after closing. Consequently, most potential buyers either offer lower than market valuations (i.e., lower than market prices) or do not bid at all. A handful of minority and woman owned private equity funds have been formed, but they are capitalists aware of this market phenomenon and try to simply bid slightly higher than already low bids thereby not really providing a better market for these businesses.

My solution is twofold. First, legislatively allow the buyer of a MWVOB to continuing “checking the box” just as the prior owner did, thereby allowing the buyer to pay a more fulsome purchase price at closing to that minority, woman or veteran owner. This solution allows these designations to give more complete value to the owners of MWVOBs and creates more long-term capital for investment by prior MWVOB owners.

Second, any MWVOB owner who sells, mergers, liquidates or otherwise disposed of her or his business, whether by selling a majority of the shares or assets, can no longer use that designation. The purpose of this provision is to minimize shams and persons who are using this system meant to level the playing field as a new playground for inequity.

This solution is not perfect. This solution is a practical approach to solving a market inequity for owners of MWVOBs without creating additional inequities in the system.