Back Away from the 8A Cliff and Walk Toward New, Sustainable Business Horizons

Graduating from 8a status is a big step — it will be a culture shock — and without a plan, you’ll be flying blind. You need a solid strategic plan for a full & open future that defines your goals and establishes a roadmap.

A small business owned by a socially or economically disadvantaged individual (an 8a firm) has outgrown several of its NAICS codes and is soon expecting to compete for full, open, government-wide acquisition contracts (GWAC).  It has determined that there will be larger profit margins and opportunities if it broadens its service offerings, but it needs an infusion of capital to establish these capabilities and to service larger and more complex contracts.  

Does this scenario sound familiar? While the challenge seems straightforward, the fact is that many businesses fail to make this transition successfully, despite having healthy prior earnings. There’s a reason it’s called the “8a cliff.”

If you’re looking over this precipice, I know from experience that a successful transition is possible. But it requires a cold, hard-headed look at your business and comprehensive planning. (And many of the issues that need to be addressed to transition apply equally to selling a business.)

Graduating from 8a status is a big step — it will be a culture shock — and without a plan, you’ll be flying blind. You need a solid strategic plan for a full & open future that defines your goals and establishes a roadmap. Otherwise, your management team may become frustrated by conflicting or unclear goals and decide to exit rather than risk an uncertain future (leaving you unable to service and retain existing customers).

Proactively Planning

The life cycles of 8a businesses typically unfold in the following way: They launch and get a contract, or three, under their belts as part of the privileges that come with 8a status. Then, for the next several years, they are so busy chasing and servicing 8a contracts they don’t take the time to prepare for graduation out of that status.

Too late it dawns on the CEOs that they need to transition. This is the “aha” moment.

At this point, they start to wonder, “Do I sell the business or try to sell my contracts?” or “Do I try to hold on and transition through?”

Selling may not be the easier option. The value of 8a contracts is much less than full and open contracts. 8a businesses are rarely as secure as their balance sheets suggest, and past performance is even less of a guide to the future. Nearly 80% of the time, buyers take a pass at buying them.

If you expect to transition to full and open, the answer to the question, “When should I begin planning a transition from 8a status?” should be obvious: the sooner you start planning to graduate, the more successful your transition is likely to be.

Assessing Management Capability

Perhaps the most painful part of self-examination for the CEOs I advise is assessing the strength of their management teams. Do they have the experience and capability to pursue and win full and open contracts? Do they have deep penetration and customer intimacy at the account level? Are they familiar with managing a large subcontractor or several subcontractors? Do they have the depth of connections across the sector and industry necessary to wade into a much larger pool of competitors? If you need to diversify your product offering, does your senior team have the experience to operate in a new product market?

Often management teams grow up in their businesses and the sad truth is that the businesses can outgrow individuals and positions. One of the reasons I advise starting with a strategic plan is that it helps to define what experience you need going forward, and whether your current team can get you from point A to point B.

Reexamining Back Office and Infrastructure

As you contemplate growing, it’s also necessary to ask yourself questions like, “Do I have the right systems and tools in place for more complex financial controls and budgeting? Do I have the right task order management systems for contracts and business development resources?”

If you are looking to move into new markets, you will need the right contracting team and knowledge to create the right pricing structure. Similarly, if you are looking to diversify your product offering, ask, “Do I have all the right certifications in place?”

These are just a few of the issues you will need to assess to determine the success of your transition. 

Understanding Your Financials and Lenders

So, your 8a business just realized it needs to raise capital to diversify its product offerings and to ramp up to win and service contracts in the full and open market…now what?

There is more to raising capital than just strategic planning. First, you need the right lender in place, someone who understands your business and marketplace. And, you must prove to the lender you have the right team, financial acumen and discipline to manage larger contracts with more responsibility and a greater demand for capital.

You will need to show that you understand your profit margins, capital expenditure, timeframes, sales cycles, and resource requirements in the new markets you propose to operate in. Likewise, you will need to defend your contract backlog's relative strengths and weaknesses and their types, the diversity of your contracts and customers, and your capabilities.

Thinking Strategically

Taking the time to develop your strategic plan will help ensure you’re making the right investment decisions, based on your existing work backlog and sales pipeline as well as your ability to retain your base of business while scaling to meet future opportunities.

Graduating from 8a status is not for the faint-hearted; it can be fraught with more risk than the initial start-up.  Among the keys to success are plenty of time for planning and implementation, a comprehensive assessment of capabilities (preferably done by an impartial third party) and a management team with members who have experience competing in the full and open market.

About The Author

Tom Springer has over 20 years of experience providing strategic planning, business development, interim management and technical advisory services for private equity firms, portfolio companies and public and private enterprises. Tom is skilled at growing enterprise value by creating highly productive sales and service teams, developing new lines of business and fostering client relationships. He is known for solving complex business problems by aligning technology with business and operations.

You can contact Tom at [email protected].

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